Quietly, Albanese springs a $20
billion budget cut on the states.
The federal government is slashing its funding for national roads and railways – and shifting the cost to the cash-strapped states.
The Albanese government is forcing the states and
territories to sign a new five-year transport infrastructure agreement that
will save the federal government at least $20 billion by shifting that
liability to the states.
But the need for that infrastructure, and the costs of
building it, won’t go away. It is a blatant cost-shifting arrangement but although
the states are beginning to fight back, it’s an offer they can’t refuse. If
they don’t sign, they risk getting nothing at all. The federal government has all
the power.
The move has happened without almost no public outcry. But these
budget cuts greatly exceed those to the National Disability Insurance Scheme,
which will save
the government around $14 billion over four years. The implications for
state budgets are enormous.
Because the NDIS changes needed to be legislated, they
couldn’t be kept quiet. The infrastructure agreement, on the other hand, could
and was. The federal government says Queensland, South Australia and the ACT
have signed
up. But the document the government is
asking all states and territories to agree to, does not mention the cuts.
Until now, the Commonwealth has covered almost 80% of the
cost of roads and railways that its experts at Infrastructure Australia had
assessed to be both cost-effective and of national significance. Two major road
projects in New South Wales, conducted under the former agreement, show how the
split typically works:
The 80% figure wasn’t mentioned by the Prime Minister at a
press conference in Adelaide when South Australia became the first jurisdiction
to sign up.
“This is about getting proper planning done and making sure,
with 50-50 funding, that the Commonwealth is doing our share of the heavy
lifting in partnership with the South Australian Government,” Mr Albanese said. Journalists,
not knowing the details, asked no hard questions.
In November last year the Infrastructure Minister, Catherine
King, claimed at a forum in Adelaide that the change did not represent a funding
cut.
“The 100 per cent Commonwealth funded, or 80-20 percent
funding split is no longer the default” she said. We are returning to a
preference of 50-50 with the states and territories, so both levels of
government carry an equal share of both the benefits and the risks.
“This is not about saving money. It is about shared
accountability and maximising our investments.”
If the new policy had been in place over the past five years, the states would have had to pay $18.7 billion more for the same amount of work. New South Wales would have had the biggest hit, with a cost to its budget of $5.4 billion over the period. But no state would be untouched.
The states now face two unpalatable choices: to go even further into debt than they already are, or abandon plans for important road and rail projects that their economies and people need.
Because construction costs have risen so sharply, the cost of doing the same amount of work over the next five years will be much higher. Therefore, the potential savings to the federal budget, and the consequent hit to the states, is likely to be well over $20 billion.
When is a
cut not a cut?
In 2008 Anthony Albanese, then Infrastructure Minister in
the Rudd government, set up a new expert unit within his department to assess
whether projects being advocated by the states deserved Commonwealth funding.
For the first time, projects to be funded by the federal
government were required to show that they were cost-effective – that is, that
benefits to the community were likely to outweigh the costs. And because not
everything could be funded, even if it was cost effective, an infrastructure
priority list was established.
In May 2023, a year after coming into office, Catherine King
commissioned a review
of the Infrastructure Investment Program. Its main message was that the
government’s allocation of money was nowhere near enough to fund the projects
on the list. And cost blowouts, which could make a nonsense of cost-benefit
analyses, were frequent.
That was an argument for culling the list, to make sure that
only projects of genuine national significance were approved. It was not an
argument for slashing the Commonwealth’s infrastructure budget and to transfer
the pain to the states, who are already in fiscal trouble.
And it was an argument for increasing the federal
responsibility for infrastructure. If essential work couldn’t be done within
the allocated budget, how about changing the budget?
“The reviewers found an estimated $33 billion dollars of
known cost blowouts on projects in the infrastructure investment program. And
they said there was a high chance that this would blow out even further,” she
told the forum in November.
“This is a stunning amount of money. It’s enough that we
could pay the cost of what it took to build Melbourne’s West Gate Bridge 30
times over. And that’s after adjusting for inflation.”
It ignores one basic point: the Commonwealth has never been
liable for cost blowouts. The old
agreement, as well as the new one, gives the primary responsibility for
ensuring projects come in on budget to the states. If there’s a cost overrun,
the state has two options: to go back and ask for more, or to cover the
shortfall in savings from other projects. In either case, the federal
government has to agree.
What this means is that the states are already on the hook
for those blowouts. The Commonwealth is protected.
Again, there’s no case here for budget cuts.
A lopsided
policy
Successive federal governments have had a highly selective
idea of what constitutes infrastructure. It’s almost all about transport.
Just two months after coming to power in 2022, Catherine
King commissioned another
report, this one on the role and governance of Infrastructure Australia. It
made, among others, two important recommendations that could have greatly
improved federal policy in other infrastructure areas, such as health and
education.
One recommendation was that the organisation should be
allowed to consider social infrastructure, which includes hospitals, schools
and housing. Another suggested the organisation should be transferred out of
the Infrastructure Department to either the Treasury or to the Department of
Prime Minister and Cabinet.
Both these recommendations would have allowed a far more
rigorous and transparent approach to critical areas of government
responsibility. But they were very quickly squashed by Ms King. She was not
interested in helping schools, hospitals and housing. And she certainly wasn’t about
to surrender a key element of her power and responsibilities to another minister.
The Commonwealth spends about a quarter of its budget on
assistance to the states but almost all is for recurrent, day-to-day costs.
They help pay for doctors, nurses and teachers – but not for the buildings in
which those people work.
There would be more of an argument for cutting transport
funding if those savings went to other, even more critical, areas. You can’t
have a hospital without adequate buildings and equipment and you can’t run a
school without classrooms. But the federal contribution to these things is tiny
and haphazard.
This financial year the Commonwealth will spend just $484
million on state health infrastructure.
From that list, there’s no evidence of any systematic
approach. It’s a grab-bag of unrelated projects that add up to very little.
Funding for school infrastructure is even less adequate and
is currently limited to a single one-off project. That money was delivered over
two years and amounted to $219 million for all government and non-government
schools in Australia. That works out to $54 per student, with no more to come.
The Commonwealth has far greater capacity than the states to
meet these costs. Almost all the revenue-raising capacity is with the Commonwealth,
from income tax to the excise on liquor. The states are reliant on the GST and
handouts from Canberra, plus a range of relatively small and often-inefficient
taxes like stamp duty and car registration. The GST, originally meant to solve
the states’ revenue problems, has failed in that basic purpose.
But the states are responsible for most of the services the
Australian community relies on – hospitals, schools, roads, railways. The
rolling crises in our hospitals and schools are a direct result of the failure
of revenue to keep up with necessary expenditure.
The result, particularly in the largest states, is large budget
deficits. Only Western Australia has a substantial surplus, due solely to its
highly spurious GST deal that gives it much more money than any other state.
There’s nothing wrong
with borrowing for productive infrastructure, but most states – and particularly
Victoria – are reaching the limit. They have no more room to move.
The Commonwealth, on the other hand, has an operational
budget surplus this year of $18.2 billion.
The extent of state government debt can be seen in the next
table. In Victoria, net debt is the highest in the country and far outstrips annual
revenue. Only Queensland and Tasmania have relatively low ratios of debt-to-revenue
– and, at least in Tasmania’s case, that’s because of the state government’s unwillingness
to borrow to fund even the most important capital projects.
The federal government is in a different situation. Its
ratio is entirely manageable. And there’s a further twist to this: much of that
net debt is in the form of government securities held by the Reserve Bank. In
other words, it’s money the government owes to itself.
The dodge on transport infrastructure is the latest example
of the Albanese government’s program of shifting costs from its own budget onto
those of the states and territories. A range of national funding agreements are
due for renewal – on the NDIS, health and education, as well as land transport – and the
same tactic is being employed. People who are worried about public hospitals
will also be concerned about whether the Commonwealth will do the same thing in
the forthcoming health agreement.
In the end, the community will pay the price of the federal
government’s reluctance to use its constitutional powers to raise the money to
pay for the things we need. But they have ruled out any tax policies, like ending
negative gearing or reducing the capital gains tax discount, that would help.
Unless there is a rapid change of heart, people who rely on
public schools, hospitals, roads and railways will see all those services deteriorate.
And this is a Labor government.