Guardian article on infrastructure funding

This article was originally published in The Guardian Australia.

How to make Australian infrastructure pay for itself – with no selloffs, and no tricks

‘Asset recycling’, as an approach to infrastructure investment, will only end up benefiting the banks. Taxing land is a more sustainable way forward

By Warwick Smith


‘The uplift in land values that result from new transport infrastructure is literally a measure of how much the public values the improvements.’ Photograph: flickr

The federal government is offering state governments a sweetener if they sell public assets to fund the building of new infrastructure: for every dollar the states make on the sale, the federal government will give them 15 cents. On the surface it looks like a good deal for the states but it’s an approach to infrastructure funding that rejects all subtlety and evidence. Some public assets should stay in public hands and offering broad brush incentives to offload assets distorts calculations about the public benefit.

It’s tempting to call the federal government’s “asset recycling initiative” another example of their small government ideology, which is usually just cover for private rent seekers who want to pillage the public purse. When in doubt, follow the money. So who benefits from the privatisation of public assets?

The obvious answer is the buyer. Such assets will only be purchased if they stand to make a return. However, the biggest winners when multiple asset sales are considered are the banks. Privatised assets are almost always bought with borrowed money. So, while individual companies or consortia might benefit from the purchase of a government asset, it’s the banks and other lenders who benefit from a culture of privatisation.

Not only do buyers need to make a decent return on asset purchases but they also have to pay interest to the banks. This means that when an asset is privatised it’s the banks who are supplying the money and it is the public who are ultimately paying the interest; either through a lower sale price of the asset, through the increased cost of the services or through reduced services. This is something that usually slips under the radar in commentary on privatisation.

The strategy generally employed by the buyer of public assets is to privatise the profits and shift costs onto the public. It’s easy enough to make a public transport system more profitable. You reduce or eliminate unprofitable routes. The company increases profits and the public pays the price through reduced services. This means that the government has to write a very careful set of regulations in an attempt to guarantee service provision. The private owner’s lawyers go through these regulations with a fine-tooth comb in search of loopholes to exploit in the name of “efficiency”.

Similarly, we see in the electricity sector the much-reported “gold plating” of the transmission network. In an effort to ensure that the privatised networks didn’t fall into disrepair, governments guaranteed returns on network expenditure (which are recouped from us through increased charges). The result is that the electricity generators and distributors have overspent on network infrastructure – poles and wires – in order to cash in on this guaranteed return. This has driven up prices far, far more than the carbon tax did. Customers have no choice but to pay, as they cannot buy from a different transmission network.

It’s important to understand that these companies’ first interest is not in the efficient and effective supply of electricity. They just want profit. If they can most easily maximise profits by being good providers of a service that’s what they’ll do but, in this case, it’s easier to exploit loopholes in the regulations. It’s very difficult to write regulations that are watertight when it comes to these sorts of asset sales.

There are plenty of sound ways to fund infrastructure, but land taxes are the best and also the least likely to be used – because the financial industry, and in particular, the big four banks, would hate it. Taxes that capture uplift in land values (sometimes called betterment taxes) can be effectively used to recoup spending on a lot of public infrastructure. Most good public infrastructure projects lift land values for properties that the infrastructure serves.

For well prioritised projects, this uplift in land value is well in excess of the cost of the infrastructure. By prioritising transport projects based on projected land price rises, and taxing enough of that rise, we could have rolling infrastructure programs that pay for themselves. The uplift in land values that result from new transport infrastructure is literally a measure of how much the public values the improvements – and is therefore a great way to prioritise efforts. Of course, government should also remain open to providing infrastructure for social justice reasons that may not fit into this model.

If we could have fantastic public transport in our major cities that pays for itself, why aren’t we already doing it? There are three major hurdles to implementing greater use of land taxes: the banks, the real estate industry and property investors. The first two are very powerful political lobby groups and very generous political donors, and the last is quite a large voting bloc.

In the lead up to the 2013 federal election, the financial industry gave more money to the Coalition than any other industry. Profit making corporations do not give their money away for nothing. Though rarely explicitly admitted by those involved, there is an understanding that corporate political donations buy access and favourable treatment in policy development and legislation. Why else would for-profit organisations make such donations? Is it any wonder that no action taken by the Abbott government has been inconsistent with the interests of the financial sector?

Using land taxes to recoup infrastructure spending would be a double blow to the banks. Firstly, as stated above, it would deny them the new markets opened up by privatising government assets. Additionally, broadly implemented land taxes, as recommended by the Henry Tax Review, would reduce speculation on land prices (the buying of land on the expectation its value will rise), thus lowering prices in the long term and reducing the size of loans needed to buy property.

That the banks are the principal beneficiaries of ever-climbing housing prices is yet another largely overlooked fact. The more banks can lend people to buy houses, the more expensive real estate gets, the more money banks get to lend and the more profit they make. It’s a beautiful self-perpetuating gravy train.

Politicians feign concern about housing affordability and how hard it is for first home buyers to get into the market but they don’t enact any of the policy measures that we know would improve affordability for fear of upsetting the financial industry, the real estate industry and all the “mum and dad” property investors who’ve been lured into real estate by distortionary government policies like negative gearing and concessional treatment of capital gains (both of which are effectively corporate welfare for the banks).

However, the ACT government is leading the way to reform. They are slowly and incrementally replacing inefficient and unreliable stamp duties with land taxes. This will not help much with infrastructure, as the rates are too low, but it’s a little step in the right direction that should open the way for broader acceptance of land taxes as an efficient and socially beneficial way to collect government revenue. After that, maybe we can work towards our infrastructure utopia. Rome’s aqueducts weren’t built in a day.

This entry was posted in Australian politics, Land tax, tax economics and tagged , , , , . Bookmark the permalink.

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