The state may finance current and future infrastructure needs from existing budget appropriations or special purpose debt. Public debt generally takes the form of bonds, treasury notes or commercial paper issued by the commonwealth, state and territory governments. 63 Overall government borrowings are subject to voluntary undertakings or caps agreed at a meeting of the Loans Council which is formally a Commonwealth-State Ministerial Council comprising Treasurers of Australian governments.
By international standards, Australian public debt levels are low and in the period 1994-2003, average aggregate state debt stood at around 20% of GDP compared with the EU group 52%, Japan 39%, the United States 48%, OECD average 47% and New Zealand 25%. Recent events in the international and domestic economies and fiscal interventions by the Australian Government has increased public debt to around 14% of GDP and in Queensland, increases in state borrowings to a forecast deficit of $1.6 billion contributed to Standard and Poor's recent downgrade in the state's credit rating from AAA to AA+. 64 The re-rating increases the average cost of all state debt although subsequent intervention by the Australian Government with a state debt guarantee reduced the impact of the pricing differential.65
Comparative analysis of infrastructure financing options using general equilibrium analysis show that the social returns are highest with the state debt option and generate nearly twice the output and employment outcomes offered by taxation. 66 Nevertheless, state debt is subject to borrowing limits and adverse impacts including deadweight costs and difficulties matching the tenor of borrowings to the financial life of infrastructure assets.
Deadweight Cost of State Debt
Deadweight cost or loss refers to the direct and indirect cost of state debt raisings in capital markets. It is the reduction of consumer surplus or welfare that results from a particular state activity and is a measure of the inefficiency of that activity. 67 The cost includes the actual expenses associated with the capital raising, future interest payments and administrative costs.68 Additionally, state borrowing in capital markets has a "crowding out" effect on private firms which is generally reflected in changed investment behaviours, credit rationing, higher interest rates and the diversion of investment away from higher yielding private investment. The effect of the crowding out effect depends on the supply and demand elasticity for debt at a given point in time Deadweight cost adversely affect medium term growth prospects and domestic savings69. Deadweight cost also increases in proportion to the size of the capital raising.70
Alternatives available to the state include federal government interest rate subsidies for state and local infrastructure borrowings and the issuance of tax exempt debt securities which permit the separation of the tax exemption component for sale in capital markets which has a parallel to emissions trading schemes.
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63 Queensland Treasury Corporation 2008.
64 Australian Government 2009, Budget Paper 1, Statement 7: Asset and Liability Management, Budget Strategy and Outlook 2009-10, Canberra.
65 The actual pricing differential is the guarantee fee paid by the state to the Australian Government.
66 Allen Consulting Group 2003.
67 Stiglitz 2000, pp. 111-112.
68 Direct costs can be significant. For seasoned IPO infrastructure equity offerings it is around 3% and for debt raisings it is 8.5 to 12.5 basis points per annum for BBB credit rating (Allen Consulting 2004). For government business enterprises, debt raising transaction cost is around 15.5 basis points per annum for regulatory purposes (Hird and Grundy 2008).
69 Stiglitz 2000, p. 780, 784.
70 Campbell 1997.