Infometrics
Infometrics
PUBLIC ACCESS:
Quality of spending always matters
Fri 13 Feb 2009 by Infometrics Ltd.

We have been in mild recession for a year now but this is turning out to be no ordinary recession. The news from the leading economies is ever bleaker and politicians around the world are scrambling to find ways to halt the slide in their economies.

It is strange that the answer to our troubles seems to be the same as the cause – spend, spend, spend.   We got into this mess by spending money we hadn’t earned and now we’re going to go into debt to try and spend our way out of the mess. Let’s not get into the economic contortions that justify this apparently contradictory logic.

Instead let’s focus on the sort of spending that is being recommended. Firstly, the government is going to do most of the spending because individuals are now too scared to spend and have started to squirrel away some savings.

So where’s the government going to spend? Infrastructure seems to be a popular choice for many governments and that normally means roads, bridges, water and sewerage networks, electricity generation and transmission, buildings and maybe a stadium or two.

These are the concrete things that are nice-to-haves, and in some cases must-haves, to help the economy function and ideally grow. They are attractive areas to turn the spending hose onto because they can soak up a lot of dollars, the spending produces a long stream of benefits and these projects retain or create lots of jobs.

The last point is particularly important because it may convince thousands of construction workers and others that they have secure employment,   and if people feel secure about their incomes they are more likely to spend on goods and services that other people make or provide. Slowly but surely the stimulus from infrastructure spending restores confidence amongst households and they return to the shops, cafes and builders’ yards. We get back to business as usual.

Physical infrastructure certainly dominated the government’s $500m package announced a few days ago (roads, buildings and transmission upgrades). It’s important but given the substantial shift to services in most developed economies the government should look at public spending programmes that lay down the capital that a service-intensive economy will need if it is to grow over the medium term.

The government and businesses invest heavily in intangible capital to ensure all sorts of activities run smoothly and ideally lay the foundation for future growth. The current crisis has highlighted how important the banking system is to the proper functioning of the economy. One of the biggest investments banks make is in software, which is critical in allowing them to operate as a bank. Sure this is private-sector intangible infrastructure.

Although not strictly intangible investment, the government’s commitment to help fund the roll-out of super fast broadband to schools, businesses and households is believed to be an important piece of infrastructure for a modern service-intensive economy. The education sector looks likely to be one of the first beneficiaries of the proposed new faster network.

The priority given to education is interesting because the quality and extent of our human capital is one of the most crucial elements of economic infrastructure that determines our future growth prospects. We can have all the new bridges and buildings we want, but if our kids aren’t being educated to the very highest standards we surely cannot expect to enjoy first-world living standards.

Education is a publicly-funded and vital element of the economy’s infrastructure. And we’re not talking simply about more schools or upgrading of school buildings. It is about providing more resources to ensure many more of our kids attain a level of education to equip them to contribute to a relatively sophisticated modern economy. Too many kids in New Zealand leave secondary school without the basic skills needed to secure the types of jobs that might one day underpin a standard of living close to that enjoyed by Australians.

The government could be bold and invest heavily in lifting the educational achievement of the bottom third of kids passing through our schools. The returns on this investment would not be immediate but they would be substantial over the longer-term. There could be some immediate benefits from investing in education or retraining of those losing their jobs over the next three years. While this type of government spending is generally regarded as operational and therefore a long way from the infrastructure spending being used to revive sick economies, education is the process of creating human capital – the critical infrastructure of any modern economy.

It’s clear that the government is committed to trying to spend our way out of this recession, and infrastructure is a popular spending option. But they need to weigh up the short-term benefits of infrastructure spending against the long-term value of the capital we’re now borrowing to create. The quality of government spending always matters.

Related Articles