In this article, we explore how infrastructure enhances economic productivity and growth; government investors can generate revenue from infrastructure projects; and communities can build a strategic business case for a city deal.
What are City Deals?
City Deals are a partnership approach to delivering a package of infrastructure projects and complementary reform initiatives, which aim to deliver medium to long term improvements in regional economic productivity and growth.
Explicit in the partnership is the expectation that this improvement in productivity and growth will enable the funding parties – Commonwealth, state and local governments and potentially others – to automatically earn back revenues that otherwise would not have been generated in the region, i.e. using existing taxation and charging systems.
Three basic mechanics drive City Deals:
- labour force productivity improvements
- land value capture mechanisms, and
- taxation or other revenue streams that flow from these first two drivers.
Our analysis of federal City Deals policy highlights that there appears to be 1) more Commonwealth funding for productivity-enhancing projects, and 2) a new way of thinking about Commonwealth funding, i.e. as an investment rather than a tied grant. Both are exciting developments for the communities that are entertaining entering into the announced Deals.
The process for prioritising potential City Deals (i.e. deciding which communities will benefit and which projects) is still opaque. This creates a risk that outcomes will be politically driven, rather than aiming solely to maximise productivity. Given the immense demand for infrastructure investment throughout Australia, and the state and local governments universal reliance on Commonwealth infrastructure funding, this is more than unfortunate. It also flies in the face of the traditional role and processes of Infrastructure Australia, which at least has a published investment prioritisation process and project pipeline.
How infrastructure enhances economic productivity and growth
There is an extensive body of evidence that links infrastructure investment with improved economic productivity, the latter of which is measured in terms of a region’s Gross Value Added (GVA). GVA effectively accounts for the profits and wages earned by a region during the production of goods and services.
The infrastructure linkage with GVA can manifest in a wide variety of ways, including the following:
- Transport infrastructure can alleviate congestion costs, effectively bringing businesses closer to their workforce, suppliers and customers; improving the competitiveness of a region’s industry base while also promoting broader efficiencies.
- Tourism infrastructure can open up new tourism markets and provide better opportunities for a region’s businesses to generate yields from tourists once they’re in the region.
- Affordable housing can increase the supply of well-located housing, better enabling lower-paid segments of the labour force to participate in the workforce and, in doing so, reducing a region’s wage cost pressures.
- Education infrastructure enables a region to build the skills required in its existing and future labour force.
- Health infrastructure ensures that a region’s labour force is best positioned to contribute value when at work because of improved physical and mental health outcomes.
What mechanisms enable government investors to generate revenues from productivity-enhancing infrastructure projects?
A region’s GVA has three main drivers – population, labour force participation and labour force productivity. Infrastructure can affect all three of these drivers.
Ultimately, if a region is more productive, more profits and wages are earned in a region which supports higher consumption spending. Moreover, land values also increase as the more prosperous region is a more attractive place to live, work and invest. Given that more land cannot be created, this ultimately leads to land value increases.
Governments are interested in City Deals because, if this dynamic occurs, then they should earn more revenues through a wide variety of taxation and charging mechanisms, such as those listed in the table below.
|Commonwealth government||State government||Local government|
|Goods & services tax|
Land value capture mechanisms*
Land value capture mechanisms*
Source: SGS Economics and Planning, 2016
*Change of use charges, betterment charges, development license fees, etc.
In overall terms, reduced welfare expenditures should also flow on as labour force participation improves, and as increased access to jobs and services improves socioeconomic outcomes for a region’s population base.
City Deals are in the inherent fiscal interests of the Commonwealth because they benefit significantly in revenue terms (i.e. from earn-back mechanisms) when regional productivity is enhanced.
Figures 1 and 2 provide a useful context for this dynamic. Figure 1 illustrates the split of total taxation revenues between Commonwealth, state and local governments in Victoria, highlighting the absolute dominance of Commonwealth taxation receipts.
Figure 1: Victorian generated taxation - a breakdown of total taxation receipts from Victoria by tier of government
Figure 2 provides a more detailed breakdown of Commonwealth tax revenues emanating from Victoria, emphasising the dominance of personal income tax within the Commonwealth mix.
In short, if the Commonwealth can seed projects that enhance regional productivity, Commonwealth revenues will rise, providing a sound base for future project funding.
Figure 2: Victorian Commonwealth taxes - a breakdown of Commonwealth taxation receipts from Victoria
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