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Is Australia a poor country and can it afford to spend money on social infrastructure?

PRU GOWARD: The Deputy Prime Minister, Paul Keating, says we are a poor country - forget massive spending on social infrastructure. This morning we are being joined by Bain's chief economist, Don Stammer; Julian Disney, and Professor Peter Swan.

PAUL KEATING: We can't have the non-traded-goods part of the economy kicking along again because if you have a structural weakness and you're relying on someone else's savings, that is you are savings poor and you are relying on someone else, you can't have brand new cities, every two or three years. Say well, look, Brisbane is looking a bit .. you know .. maybe we need a few more towers, change the cityscape, and the same with Melbourne and Sydney. And why not have a few more $500 million resorts up and down the coast. The fact is, if you're savings poor, you can't have it. It's like the people who say, we want a super highway from here to there. I mean, we've all been through Third World countries - you say, this is pretty bad, the roads are bad and the housing is bad. And people say, that's because they are poor. But we've got poor, but people here believe they can have brand new roads, brand new buildings, brand new everything. Well, they can't, and the non-traded-goods sector can't be preferred. So I have the developers in there crying, getting their hankies out, with me. Now I tell you, if there's ever a guy in public life who has the measure of the property developers, I am it.

PRU GOWARD: Paul Keating. The Treasurer, as you heard, saying we are a poor country, too poor in fact, to spend a great amount of money on improving our infrastructure, or anything else, for that matter. Well, it's a bit like his banana republic comment, a strong line which will probably pursue him for a long while to come. But is he right? Is he right when he says that there is `no prospect of massive increases in public spending, full stop'? Well, this morning I am joined by three people with something to say on that one: economist, Don Stammer from Bain and Company; Julian Disney, economics spokesperson from the Australian Council of Social Services; and Professor Peter Swan, from the Australian Graduate School of Management at the University of New South Wales. Thank you all three, for joining me, and first Julian Disney - Julian Disney, is it your reading that we are too poor to cope with infrastructure, and what do you think the Treasurer means by poor?

JULIAN DISNEY: Well, I think he is quite wrong if he takes the view that we must continue to restrain our, or slash our public sector investments in the way that we have been, in recent years. We are in fact, now at the lowest level that we've been for at least forty years, and it's 20 percent or more below what it was ten or twenty years ago. Now, that measure in itself, doesn't prove we need more infrastructure but one of the main problems is that if you're trying to restructure your economy and improve your ability to trade, particularly overseas, then you do need to provide some of the basic infrastructure - for example, good rail systems, good airports and things like that, good education systems and research systems - in order to improve your ability. And I think the thing I find most disturbing in what he said is that he speaks as if the only way of improving our overseas trade performance is to pour money directly into the tradeable sector, but you need to put it into the infrastructure - into the schools to help people to become creative and innovative, and into the rail systems to get the products economically to the ports and to the markets.

PRU GOWARD: Yes, but isn't his point, that we've saved so little over the years, we are a savings poor country, and we don't have any surplus to go spending on improving the infrastructure, in big dollops?

JULIAN DISNEY: Well, one of the main problems is that he's putting an enormous amount of faith in the private sector. He's basically freeing up our savings. Our savings are actually not especially bad, by overseas standards. That really isn't our major problem. The major problem is that we're wasting them and one of the reasons for wasting them, not the only one, is that the private sector is pushing them in the wrong directions. That's partly because we've got tax distortions which push them into, for example, central business district offices, and the Treasurer referred to that yesterday. Now that's the result of a tax distortion, and we've got pricing errors. For example, we give road freight a huge unfair advantage over rail, and that's one of the reasons why our roads are deteriorating, because they're excessively used by road freight transport.

PRU GOWARD: Over-used.

JULIAN DISNEY: We do have the money there and I am not suggesting a huge swing to just pumping all this money into the public sector, but putting it at the disposal of the private sector has not improved our position and in fact, our level of investment in tradeable activities has fallen in the last few years.

PRU GOWARD: And the source of the money to spend on infrastructure, as far as people like Richardson and Brian Howe are concerned, would be the asset sales. Now, it's my impression that Paul Keating would rather retire more debt with it.

JULIAN DISNEY: Well, I think we need to pursue both courses. I think one of the things that bedevils our discussion at the moment and which worries me about the line being pushed so much by the Treasurer and I must say, even more so by Treasury, is that it's an extraordinarily simplistic doctrinaire, black and white line. Now they quite rightly, turned away from the approach that was taken in the '70s, of thinking that the public sector could do everything and that was the answer to all our prayers. We are now pursuing an equally silly and excessive line on the other side, thinking that the private sector must do everything. But I think the source for the funds is a mixture of things. One is some of the .. some measure of sale of some of these public enterprises, but we also need to increase our revenue. We've cut our taxes now to the level where we're the third lowest in the OECD, and that frankly, is just silly. We need the money to help recovery. We also need taxes to restrain excessive consumption, and we can use some of our surplus - not the whole lot. Again, one doesn't want to talk in extremes but there's at least $1 billion and probably $2 billion a year that could be used from that surplus, to assist our economic recovery. The government really seems to be, or the Treasurer, at least, seems to be devoid of ideas at the moment, other than just to keep slashing public sector expenditure. We need to get on the front foot and help the private sector. I think there is some scope for joint public private infrastructure exercises.

PRU GOWARD: For example?

JULIAN DISNEY: Well, the Very Fast Train, I think, if we are to go ahead, should definitely be a joint enterprise. I mean, in fact it would be joint anyway, because an enormous part of the cost will be borne by the public purse anyway, but they should have a fair measure of control over it. I think in the rail area, one of the most important things about Brian Howe's speech the other other day, was the emphasis he put on rail, and I think there's some scope for private sector involvement there. For example, what's really important to keep in public hands is the permanent way, the actual tracks, but I think there may be some scope for allowing some private sector operation of rolling stock on those tracks.

PRU GOWARD: Yes, because I was going to say, I don't think the electorate is confident enough in the efficiency of the public sector, to be happy to see it spending huge slabs of money again.

JULIAN DISNEY: Well, I am not talking at least, about a massive huge turnaround. I am suggesting a co-ordinated program of rebuilding our infrastructure investment, over time. It doesn't need to be significant but I must say that one of the problems is that public debate has been conditioned in such a way that we think that the only people who have problems in being efficient and in working out what enterprises will work and what won't, is the public sector. The private sector has a very bad record over the last five or ten years. Now my answer to that is not to say, throw out the private sector, they've made so many mistakes, they're beyond redemption. But similarly, the fact that the public sector has made some mistakes, doesn't mean that they should be regarded as beyond redemption. In fact, as is widely recognised in the Asian countries to which we should be looking, that government assistance and involvement in these things is crucial to a strong, free enterprise society. They shouldn't be seen as antithetical.

PRU GOWARD: Julian Disney, thank you for your time this morning. Julian Disney from the Australian Council of Social Services. I am now being joined by Professor Peter Swan from the Australian Graduate School of Management at the University of New South Wales. Professor Swan, you might have heard Julian Disney referring there to what he thinks is potential for joint ventures. Now, is that on? Can you expect joint venturers, private companies, to be interested in building roads and hospitals?

PETER SWAN: Yes, I think we can. I think for once, perhaps I have some agreement with Julian Disney. There is great scope for example, for using the existing rail beds and having private trains running on them, or at least operated by the private sector, operated much more efficiently, without the sort of sheltered workshop mentality that pervades all the State railway systems at the moment.

PRU GOWARD: So you think what the public sector is good at is putting up the money for the infrastructure for the basics, and you think what the private sector is good at is running it.

PETER SWAN: Well certainly, the private sector is a lot better at running it than the public sector and I think, as a half way house, and given that most of these assets couldn't be sold for anything at the moment, you'd probably have to pay to have them taken off the hands of many of these rail authorities. I think there is a lot to be said for such an approach and I think, too, that freeways and hospitals and so on, can be provided part in public and part in the private sector. For example, we can have toll roads or electronic road pricing which would tax vehicles at congested periods of the day ... the efficiency of our road system.

PRU GOWARD: How would that work?

PETER SWAN: Well, there would be rather like bar codes on the check-out counter. Each car would have a bar code which would be automatically read when it crossed a point on the roadway or a congested artery or bridge, in or out of the city at particular times of the day, and each month they would be sent a bill, according to the amount of peak hour congestion and costs they had imposed on others at that time. And the roads could then become self financing and much less traffic congestion - people would be encouraged to use public transport if it were more efficient than private vehicles.

PRU GOWARD: And would you say overall, that Australia's public infrastructure is good or bad?

PETER SWAN: I would say, contrary to many reports we are hearing, that Australia has made enormous investments in public infrastructure. In many areas there's far too much of it, where there has been massive over-investment in parts of the electricity sector, for example, in recent years. But where we fall down is the fact that it's been captured by the public sector unions who treat it as a sheltered workshop, as I said, and the very low efficiency in productivity in the use of our public assets, and generally speaking, very low or negative returns. You only have to think about many of our wharves, rails and parts of the electricity sector, and so on, to realise that.

PRU GOWARD: But not telecommunications?

PETER SWAN: Yes, telecommunications, I am afraid is in fact, one of the worst areas of very low productivity, by international standards and perhaps 20 to 30, even 40,000 employees who could perhaps be better employed more productively, in that sector or elsewhere, but are earning very very low returns at the moment.

PRU GOWARD: So the infrastructure, Telecom's infrastructure is fine but you are saying that it's not being used wisely.

PETER SWAN: That's right, yes, and I think that's generally the case. We have very good infrastructure, very good power stations, very good wharves and facilities at the wharves, very technically quite a good telecommunications system. It's just the way that they're operated for the benefit of the providers, rather than the benefit of the users.

PRU GOWARD: But we do have infrastructure problems. I mean, I don't think there's been a major public hospital built in Australia for a decade or so; Sydney's road are falling to bits; the sewerage system wasn't ever meant to take the load that it is, and it just pumps it out to sea. What would you do about those problems?

PETER SWAN: Well, very very similar kinds of measures. The taxpayer is subsidising the health sector to the tune of about $18 billion at the moment, and I think if the user pays principle is adopted by reforming Medicare, and better use made of the very large investments that have been made in private sector hospitals, those problems there can be solved. I agree that the public sector has been very remiss in pumping all the sewerage out to sea, and a lot worse, that a lot of heavy metals and things that should never be in the sewerage system in the first place ...

PRU GOWARD: But seriously, how would you involve the private sector in running those better?

PETER SWAN: Well, I think any kind of pricing which is even handed between the public and private sector, will encourage the private hospitals to improve their act. There are obviously, there are faults in the private as well as in the public sector and the same in the sewerage area. I don't see why private sector companies can't be contracted to improve and run our sewerage system, for example.

PRU GOWARD: Very interesting. Thank you for your time this morning, Professor Peter Swan from the New South Wales University's School of Graduate Management. And joining me now is chief economist with Bain and Company, Don Stammer. Well, Don Stammer, are we a poor country?

DON STAMMER: Well, we are a poor country in some ways and not in others. We are a poor country in the sense that we must keep down the growth of spending, over the next couple of years. As a nation, we have been spending too much over recent years. We've been spending much more than we produce, therefore we have a balance of payments deficit and too big a level of international debt. And that's not the conventional definition of a poor country but we have been spending too much. We've been borrowing too much, and there's still some belt tightening to do over the next couple of years.

PRU GOWARD: So we might be asset rich but we're very income poor?

DON STAMMER: Yes, well we've got a lot of things going for us. Australia has made enormous strides in recent years in employment growth, that's a real achievement. We've got a community, I think, that is far more austere in its attitudes, willing to accept tougher measures. We now have in Australia, the beginnings of quite a powerful surge in national saving and that's a very good thing. So there are a number of things we are doing well. However, we still have a bad balance of payments, a bad level of international debts, and we're not a poor country as that is normally understood, but the mood in Australia must remain austere. We can't afford to pay ourselves too much and we can't afford to spend too much.

PRU GOWARD: But Don Stammer, as our earlier commentators said, if we are going to be a clever country, if we're going to get out of our economic bind, then we do have to spend more on infrastructure - things like education infrastructure and improving the rail and transport systems. Now, are we in a condition, are we in a position to be able to do so?

DON STAMMER: It's very much a matter of priorities. To be fair to the present government, it has improved the priorities in many forms of government spending. The one I think that stands out best is within social security. In the last seven or eight years, we have gone from a universal system of social security where everyone got a pension when they turned 60 or 65, to one where social security spending is far more targeted at areas of greatest need, and that's basically a good thing. I mean, it hurts us all as we get close to 65, that we can't rely on the old age pension, but for taxpayers ........ government, it's a good thing. But throughout the rest of government, there is still need for much greater priorities. Governments in Australia still spend a huge amount on recurrent spending and less on capital spending than governments in say, Western Europe or Japan, and there's still a great opportunity in Australia to reorient the budget to find better priorities - that's point one. Point two, within the existing instrumentalities, as Professor Swan said, there are good opportunities for productivity increases. If you take New South Wales railways, Pru, the number of people working on the railways has fallen by 15 to 20 percent in recent years, and we have the same lack of service that we used to have, so clearly, there's some increases in productivity been achieved there.

PRU GOWARD: Don, how desperate is Australia's financial position? Must we use every cent to retire our overseas debt, or as Julian Disney suggested, and obviously as a number of Ministers believe, it's possible to use some of the asset sale money, for example, to improve our hospitals and roads and railway systems?

DON STAMMER: I think there is opportunity for Australia to allocate more funds towards infrastructure, and as I read Australia at present, there are some areas, particularly transport, where infrastructure is not as good as it should be, and as you mentioned earlier, sewerage. There are some areas which are desperately calling out for additional funding of infrastructure. I think in fact, a lot of that can come from a reorientation of the priorities within the existing amount of money spent by government, but I must say I have no trouble if provided overall policies remain tight, Australian Governments do find additional funding for infrastructure. Most of that additional funding of infrastructure I believe, should come from reorienting existing government spending, less recurrent spending, less .. smaller public service - because Australia's public service, given all three levels of government, is horrendously large on a world scale.

PRU GOWARD: Is it?

DON STAMMER: In fact, compare Australia with America. The level of government spending relative to GDP, is exactly the same in Australia as in America, but America has that enormous defence allocations we don't have. We match their huge defence allocations by a huge public service.

PRU GOWARD: Right, and that's true of European countries, compared with ourselves?

DON STAMMER: Correct, and our basic problem there, Pru, are the three levels of government we have, where despite all the efforts over the years, to cut back on duplication, there still is a lot. So we, on a world scale, we have a relatively small government sector and that's a good thing, but the amount of our government spending that goes into pay of three levels of public service, is much higher than in other countries. But on top of that, I have no problems with a modest further allocation of funds towards infrastructure.

PRU GOWARD: So Paul Keating is being too zealous?

DON STAMMER: I think he is .. well, I sympathise with his desire to cut back on Australia's swollen international indebtedness and the moves now under way there are absolutely commendable. I also support what Mr Keating has done to cut back the size of government and to begin to get priorities there, but as I see Australia, given the rate of population growth, the demands on our infrastrucuture, there are some areas of our infrastructure, much less so hospitals than you mentioned, but particularly areas such as roads, amenities to the sprawling suburbs of Sydney and Melbourne, and sewerage, where Australia's infrastructure I think, is very badly overloaded.

PRU GOWARD: And Don Stammer, just a quick comment from you. Are you intrigued to see that we've now got a bevy of Government Ministers not talking about the need or not to privatise, but what you do with the money?

DON STAMMER: It's fascinating. A year ago, the debate on privatisation in Australia was whether to privatise or not. The issue now is how to privatise and how to use the proceeds. I think the debate in Australia is now an infinitely more realistic and sensible one and it's a radical transformation of that debate, in the course of a year.

PRU GOWARD: It's really moved, it's almost a foregone conclusion.

DON STAMMER: And it's a good thing.

PRU GOWARD:. Don Stammer, thank you for your time this morning.