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Build a new Melbourne every decade or face more congestion

Clancy Yeates

Imagine the task of building a city the size of Canberra every year, for the rest of this century. Or, how about creating a new city equal to the population of Melbourne every decade?

Sound far-fetched?

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Melbourne drivers warned to plan ahead as major road works are set to create summer traffic chaos. Vision courtesy Seven News Melbourne.

National Australia Bank chairman and former Treasury Secretary, Dr Ken Henry, says this is roughly what we'll need to do to accommodate the projected surge in Australia's population without putting even more strain on public infrastructure. And he appears to have very little confidence we will pull it off.

Speaking last week, Henry underlined the huge demands that will come from having to house, educate, transport and care for a fast-growing population.

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He is hardly the first economic or political heavy-hitter to call for more spending on public infrastructure. Former Reserve Bank governor Glenn Stevens, Paul Keating, Westpac chief Brian Hartzer, the IMF and the OECD have all made similar arguments.

But while much of this debate is conducted in the abstract terms of using public spending to kick-start economic growth, Henry made a potent case drawing on things we can relate to in our day-to-day lives: traffic jams, house prices and overcrowded transport. And as we'll get to later, this anecdotal evidence of greater congestion is well supported by the statistics.

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First though, here's what Henry had to say when asked to name an issue that doesn't get the attention it deserves.

"How come infrastructure is the elephant in the room in too many conversations about the circumstances that Australia finds itself in and the challenges and so on?

"The Australian population is growing by something like 400,000 a year. Think of it: a new Canberra every year between now and the end of the century. Or, put it this way, every five years building a brand new city from scratch in Australia for 2 million people."

"Or put it this way: building a whole new city the size of Melbourne every decade between now and the end of the century," Henry said at an Australia Israel Chamber of Commerce event.

In his former job running the Treasury, Henry would have advised the government on these sorts of issues. But he said if he walked into the cabinet room and said, 'we need to build a new Melbourne every decade', it would have received a cool reception.

"They would have said, 'we as a country are not capable of doing that, go away'. Another way of interpreting that is that what we are going to get is something vastly inferior," Henry said.

As the population lifts, this failure to spend enough on public works will inevitably increase the ratio of people to infrastructure.

"My observation in Sydney and Melbourne today, is that people already think, with very good reason, that the ratio of population to infrastructure is too high. But we have set ourselves on a journey that implies an increase in that ratio. An increase in that ratio that is associated with more congestion, longer commute times to work, increasing problems with respect to housing affordability," Henry said.

Unfortunately, these public concerns about an infrastructure shortfall are backed up the statistics.

Government capital spending – money used for assets such as roads, bridges, hospitals and schools – as a share of the economy has been on a downward trend since 2010, notwithstanding a pick-up this year.

Public investment as a share of GDP has lifted from 4.2 per cent to 4.6 per cent in the past year, but that is well below the peak of more than 6 per cent several years ago.

Perhaps the more meaningful measure is how much we're spending on infrastructure per person. That isn't even coming close to keeping up with the growth in our population, which is much faster than most developed countries.

CBA senior economist Gareth Aird in October highlighted that public capital spending per person fell consistently from 2010 until late last year, from near $1000 a head, to less than $800.

The long-term slide in public investment is partly because stimulus spending from the global financial crisis has been unwound. But is is also because governments have been reluctant to use debt to finance worthwhile infrastructure projects, for fear of triggering a downgrade in the federal government's AAA credit rating.

While there are signs of a much-needed pick-up in infrastructure spending, especially in NSW, Aird's report makes the point that not spending enough on infrastructure ultimately lowers living standards.

It cites figures showing travel times are getting longer in Sydney, Melbourne and Brisbane, all of which drag on productivity.

Aside from the need to keep up with population growth, there are other reasons why governments worldwide are being urged to lift their investment in big infrastructure projects.

With mining investment tumbling and other businesses still hesitant about investing, public investment in worthwhile projects can be a way to shield the economy, and create jobs.

Debt is also still very cheap, even though the cost to governments of borrowing has lifted from record lows in recent months. There is an argument the credit ratings agencies may not downgrade the government's rating if the extra debt is being used for productive infrastructure, as opposed to recurrent spending on social welfare or public sector wages.

As Westpac's Hartzer argued on Friday, spending on infrastructure also tends to have a "multiplier" effect on the economy, because it is typically followed by business investment.

Unless there is a rethink about our embrace of fast population growth, it all adds up to a convincing case for lifting government spending on public works. Either that, or we face the prospect of more traffic jams, more time getting to work and even less affordable housing.

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