Public Investment, Productivity and Economic Growth - the Role and Contribution of Debt Funding

This publication discusses the critical issue facing governments today of how to maintain and expand infrastructure without accumulating excessive levels of long term debt. Investment in infrastructure has productivity, economic and social benefits.

All parties in the discussion of this issue recognise that governments have a role in infrastructure development, and recognise that well-targeted infrastructure investment creates significant social and economic benefits. Infrastructure investment increases productivity and competitiveness and the capacity of the private and public sectors to deliver high quality services. Ultimately it helps to build a stronger economy, raising real incomes and improving community well-being.

A key question, then, for governments seeking to promote economic development and growth is to what extent should investment in public infrastructure be funded by public debt? This report addresses this question and outlines a model for estimating the fiscal impact of public debt funded infrastructure to inform infrastructure investment decision making.

The decision making framework typically adopted by governments for assessing the desirability of large infrastructure projects is cost benefit analysis (CBA). Ideally, a CBA will indicate to decision makers the expected economic welfare outcome should the project go ahead. The method by which an infrastructure project is funded, however, is generally not a direct part of the CBA framework - focussing on consumer surplus measures rather than indirect taxation implications.

The simple model developed in this paper provides guidance to infrastructure investment decision makers on how potential projects can be structured and assessed. The model is preliminary only and based on a range of parameter assumptions that require further investigation but it does indicate the set of 'hurdle tests' that will allow the selection of investment projects which are fiscally neutral even when some proportion of the project is funded by public debt.

To access this publication visit: http://www.cpsu.asn.au/PSA2012BudgetSubmission.pdf