Yes, we need to be vigilant about government expenditures.

The first thing is to ensure that our governments don’t borrow.

The second is to acknowledge that governments don’t spend from the taxes they raise. These disappear into ‘consolidated revenue’ and necessary spending is conducted digitally, not from consolidated revenue.

However, while neither the federal nor state governments need to borrow, there are limitations: their spending must be necessary programs if inflation isn’t to occur.

We also need to understand from where the greatest part of inflation comes, and the consumer price index (CPI) is an inadequate measure.

Few people realise that land prices and all taxes, except those on land values (which are in the nature of a ‘rent’) are key generators of inflation. Although land has no cost of production, its privatised rent is capitalised into land price escalation. All other taxes are similarly passed off into prices, but not those on land values.

Along with listeners and an expert from the Grattan Institute, Tom Elliott bemoaned Victoria’s infrastructure cost blowouts on 3AW this morning. No doubt the excesses of the CFMEU have acted to inflate infrastructure costs, but they don’t explain what appears to be extraordinary blowouts.

Discussions reminded me of the cost blowouts associate with construction of the Sydney Opera House. Jorn Utzon’s design was approved for an estimated $7 million 4-year build in 1957. Construction commenced in 1959, and the Opera House was completed 14 years later for a total cost of $102 million: a $95 million or 14.5 times cost blowout. Yes, there were political delays, and they certainly didn’t help, but it still looks pretty cheap in today’s dollars, doesn’t it? Note: today’s dollars.

Could it be that the cost blowouts that are upsetting Victorians may be expected over a period of time, and that the CPI is a ridiculously too low measure of real inflation? I’d argue that increases in land prices are a far better measure of what inflationary increases we may expect for any large infrastructure project.

Let’s look at the Sydney Opera House again, using land values as our measure of inflation, and taking 1957 as our base year. In 1957, the total value of all land in Australia was $5884 million. In 1973, it was $39,900 million, an increase of 6.78 times. (Terry Dwyer, “The Taxable Capacity of Australian Land and Resources” in Australian Tax Forum, Vol 8 No.1, 2003.) This superior inflationary measure at least assists to explain half of the Sydney Opera House blowout.

I’d argue that at this particular junction in the 18-year property cycle, many Australians are experiencing their own increasing cost-of-living issues, “So, what the hell is this rotten Victorian government doing about these incredible infrastructure cost blowouts, Tom Elliott!” The point is that the government isn’t a household, and curtailing necessary expenditure will have the private sector suffering and recession ensue.

In my opinion, it would be a great pity now to curtail construction of Melbourne’s suburban rail loop – just as it was for the Labor government to put an end the Liberal government’s extension of the Eastern Freeway to Citylink.

Things that are necessary should get done, and we need a complete rethink about “taxpayers’ money” and inflation.