An ageing world and other myths

When I came back to Victoria in the mid-1980s, the water industry had an infrastructure replacement fund - in the jargon of today's world, where people give an old concept a new world so they can pretend it's new (like calling "Whole of Catchment Plan" an "Integrated Water Management Plan"), that would probably be called "asset replacement fund". It was a certain amount of money put aside each year so that when an asset reached the end of its life, you had money to replace or, at the very least, repair it.

Ignoring inflation for the moment, say a pipe was going to last 50 years; you would save 2% of the cost of the pipe each year so that when it was about to fail significantly, you had the money to replace it, or do enough repairs to keep it going.

In the field of public infrastructure, it makes good sense - if the world had followed that practice, we wouldn't now be facing an "infrastructure cliff" (not my term) of assets built for the baby boomer era that are now all going to fail, while we don't have enough (any?) money to deal with the problem.

You could consider it, in a sense, a retirement scheme for pipes, roads and other public infrastructure, except that it is unemotional replacement, not impractical retirement of an object meant to provide an active service for the public good.

Retirement . . . that also raises another matter: that of our proportionally ageing population - that is, we proportionally have more older people. In the arena of economic thought, where money is supposed to be "active", pensions are supposed to be paid by the rest of the population, rather than out of money set aside for a known, coming expense. Governments seem to have a habit of wanting that money to come from other sources, rather than the government equivalent of the everyday person's practice of setting aside money for a rainy day, and for clearly known coming expenses.

Thus, we have had superannuation schemes introduced to attempt to ensure that retirees have enough money to live on comfortably (they often don't, partly because of fallacious assumptions about home ownership, but that is another matter) without taxes on younger people that may reach a level that causes the younger people to vote for someone else - sorry, that are "unsustainable".

Now, effectively, the saving is being pushed from the public sector to the private sector. There are efficiencies in that, as the public sector quite rightly is obliged to focus on rules of accountability to ensure there is no waste, corruption, etc, but this would result in a reduced rate of return of saved money, whereas the private (superannuation) sector focuses on rates of return . . . and loses a lot of money when things like the Global Financial Crisis of 2008 occur . . .

I'm not quite sure why the government fund couldn't be invested in a superannuation fund or similar, or even used to provide funding for public projects (there are often what are called "internal rates of return", which are effectively what most people would consider interest rates).

Another aspect of public finances is that of opportunity income - things like what was covered by the "mineral resource rent tax" introduced by the Gillard government. That tax was, in my opinion, a completely reasonable thing - to choose an equivalent from an everyday person's life, it is like winning lotto, and setting a side a portion to make sure you can spend the rest of your life living comfortably, before you go wild with travel and parties, etc (incidentally, most lotto winners lose all their winnings within two years).

To continue the analogies with everyday life for a moment, the infrastructure replacement fund would be the equivalent of making sure you had enough money set aside to cover replacing fridges etc when they reach the end of their life without having to get a loan (and credit cards are loans). 

There are a few other points I'd like to make here, in passing:

• until the Andrews government, decades of governments have been reducing spending on infrastructure because (a) they thought there would be votes in reduced taxes, (b) for ideological reasons, as with the neoliberals - including the neoliberals who seem to infest world financial organisations and infect the ideologies of same, or (c) both the preceding; 
• in the 1980s, it was accepted that governments would take out loans to pay for infrastructure. This was shot down by the infesting ideologues of the neoliberal movement, but it also did (while it existed) create a true, intergenerational version of "user pays". The neoliberals I was working for back then prattled on about "user pays", but what they really meant was "current users pay for all now".

A lot of battles have been lost - then, and since, on the provision of infrastructure, and the management of public money. If I could, I would love to reinstitute the practice of saving to replace infrastructure, but that does seem to put a burden on the current generation to pay for future generations' infrastructure, except it doesn't really, as it only provides money to replace the current infrastructure: at the time it is replaced, there will need to be additional expenditure to expand the infrastructure for population growth, and the demands of new working conditions (e.g., replacing a pipe in an open area costs a certain amount, but replacing it after that area subsequently becomes developed costs a lot more).

Perhaps more importantly, as we move into the climate crisis, is ensuring we spend sufficient money to maintain assets properly. I've done some work in my day job on this, and proper maintenance was one of the main aspects of ensuring infrastructure resilience. Personally, I would like to see every grant for an asset such as a country road include an ongoing allowance for maintenance (or an amount set aside for that purpose in the grant), but the ideologues often work on the basis that "we'll pay to build it, but you must pay to maintain it", which often ignores the arguments of broader social benefit that underlay the construction grant in the first place.

In terms of how we change from the current situation, I consider that Norway has the best approach: they outsourced responsibility for thinking about such matters to a philosopher. Either the Norwegian government or the state oil company (they won't answer any emails, so I can't find details other than passing references in the media) hired a philosopher to advise on how to achieve the greatest good with income from their oil revenue, and the philosopher advised them to start . . . setting some money aside.

Here's to our Chief Scientist, Chief Veterinarian and Chief Medical Officer being joined by our Chief Philosopher :)