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Building blocks

By Donal Curtin

Thursday 1st December 2005

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Fiscal spending was one of the key battlegrounds in the general election: on the one side, promises of increased government spending on key groups and issues (Working For Families, student debt), on the other reduced government taxation (higher tax thresholds, ultimately lower tax rates). Much of the debate, in short, centred on what the economists call 'transfer payments' - money taken from one group to support the incomes of another.

Oddly, there was much less attention paid to the quality and quantity of government services purchased with your taxes, and less again to one of the more crucial issues on New Zealand's economic agenda - the state of the nation's infrastructure. Any amount of sound and fury on sloshing money around from one set of voters to another, little or nothing about the choke points of roads and energy.

It's easy for pompous economists to pronounce that the politicians and the electorate should have focused more on fundamental issues, so it's time for a confession: if asked, I couldn't have told a voter what the government's capital spend on infrastructure was, nor whether it looked adequate for a growing economy. So here is an attempt to fill in the blanks.

First, let's put things in context: how much, overall, does the government spend? According to the 'Prefu' - the Pre-election Economic and Fiscal Update published by the Treasury on August 18 - total public sector spending is expected to be $62.4 billion over the current fiscal year (ending June 30 next year). There's arguably room to spend more than that: total public sector revenue is expected to be $69.5 billion. For now let's not buy into the politically charged bunfight of whether there is or isn't a real surplus of $7 billion or so, and let's just observe that actual spending is at least $62.4 billion, and arguably somewhat more if some of those election promises are thrown in.

How much will go on infrastructure? It's not easily readable from the government accounts (or at least not by me). But we can observe (in the Prefu) the increase in value from one year to the next of the government's stock of physical assets. Given that the increase will be a mixture of valuation changes (for example, government properties going up in value with the rest of the market) and genuine new investment in facilities, it's very likely to be an overstatement, but at least it's a sighting shot.

This year, the gross value of the government's infrastructural stock will go up by $6.9 billion - at first blush, a remarkably large amount, equivalent to more than 10% of total public spending. But the more you peer at it, the less impressive the number starts to look.

First of all, this year shows a much bigger number than most years. The corresponding increase in fiscal 2005 was only $1.8 billion.

Second, the bulk of the increase occurs outside the hot spots of energy and roading. Two billion dollars of it is the increased value of government-owned buildings, some of which may well be infrastructural in character but many may not be (plus part will be the increased value of existing buildings, and not the construction of new ones). Another $1.2 billion is aircraft; over half a billion is the increased value of specialist military equipment; there's another $300 million or so of increased land valuations. The key infrastructure line items - electricity generation, electricity distribution, and the state highways - are expected to go up in value by $1.6 billion between them.

Third, all this is before depreciation. Roads and equipment wear out: deduct the value of the expected depreciation, and the hot spot areas increase in value by only $1 billion (indeed, the value of the national distribution network actually goes down, though only marginally). Roughly half goes on the roads, the rest to electricity. Similar sorts of figures are expected in the next two years, and a bit more (close to $1.4 billion) in the fiscal 2009 year.

Is this an adequate amount? Let's acknowledge first that looking at the public spend on its own doesn't show you the complete infrastructural picture: in New Zealand large parts of the infrastructure have been privatised (including parts of the electricity sector, and Telecom) and you'd have to add in the private sector's infrastructural spend to see the whole jigsaw. For the same reason international comparisons with countries that have privatised less will show in a relatively poor but possibly undeserved light. And a quick squizz like this won't answer the question properly in any event.

That said, there are grounds for suspecting our government spend is on the light side. As the election debate showed, and these figures confirm, a net $1 billion a year on the areas widely suspected to be actual or potential constraints on the economy doesn't look as if they are getting a high priority within a total government spendup approaching $63 billion. And you'd wonder if half a billion a year on the state highways is buying you much, when a project like Auckland's Spaghetti Junction costs around $150 million.

It's also a bit sobering to think that if you add up the expected value of the government's total holdings of physical assets as at June 2006 - every school and hospital in the country, the entire state road network, Transpower, the state-owned generators, Landcorp - it falls well short of the value of Australia's largest company. Sell the lot at the government's own valuation, and you'd get $65 billion: you'd need another $23 billion to be able to afford BHP.

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