Instead of damning the States for their current modest borrowing programs, the Federal Government should be taking a lead role in developing, with the States, a set of national infrastructure investment priorities. Labor’s idea of a national infrastructure audit is a good starting point.

As to financing, governments should continue to support viable private-public partnerships but, where the benefits of private involvement do not stack up, they should not rule out the alternative option of government net borrowing (or, what is effectively the same thing, drawing on the Future Fund) over the economic cycle — subject to a commitment to maintain or increase public sector ‘net worth’ in the medium term on an accruals accounting basis.

The Commonwealth should then use its increased borrowing capacity, as well as some of its windfall revenue from the commodity price boom, to make capital grants to the States earmarked for specifically agreed projects which meet the standard cost-benefit criteria. In the longer term, one hopes the imbalance in the federal system will be rectified and the states given more financial autonomy but there is no immediate prospect of that.

The government infrastructure spending program should be sensibly timed over the business cycle. If there is an expectation that the economy will continue to operate at full capacity for many years to come, fiscal action will be needed to defer other low priority spending (such as on middle-class welfare) and to discourage some forms of private consumerism.