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Infrastructure spending 'hurting' state budgets

12 June, 2014

An unprecedented surge in infrastructure spending is a major factor responsible for a general decline in states' finances since 2006, a report has found.

The finding comes in the lead up to the Mike Baird-led NSW government delivering its first budget next Tuesday (17 June), and the expected announcement of a new tunnel to unclog the gridlock along Sydney's Military Road.

The 2014 Edition of Budget Pressures on Australian Governments finds that claims of a "massive infrastructure gap" are not borne out by analysis of state and territory budgets.

Instead, states and territories have spent more on infrastructure – mainly road and rail projects — in each of the past five years than in any comparable year since the Australian Bureau of Statistics first measured infrastructure spending in the 1980s.

Capital spending in real terms in 2013-14 is four times higher than it was in 2002-03, even after excluding stimulus projects in response to the global financial crisis.

Prime Minister Tony Abbott had pledged to use the May Budget to boost infrastructure funding, but Grattan Institute CEO John Daley says that runaway state contributions to infrastructure spending are already hurting state and territory budgets.

The report shows that state and territory borrowing for capital expenditure over the last seven years drove their finances backwards from $37 billion in the black in 2006 to $69 billion in debt in 2013.

"States and territories are spending 3 per cent more of their budgets on interest and depreciation for past infrastructure. This really hurts state and territory budgets already under strain from extra health spending," Daley said.

"States and territories can only afford to continue their current contributions to infrastructure spending if they post substantial recurrent surpluses to pay for new capital works."

Budgeting for big surpluses will be difficult. The report finds that on current trends Australian government budgets risk deficits of about 4.5 per cent of GDP within 10 years.

"Closing that gap requires savings and tax increases of $70 billion a year.

"Governments have to make tough choices, such as increasing the pension age, and targeting Age Pensions and superannuation tax concessions more tightly.

"We will be far better off if they make these decisions sooner rather than later. Leaving the problem to future taxpayers is deeply unfair."

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