Infrastructure spending no easy fix
Not all projects likely to generate the instant returns some are expecting
Solving Canada’s economic woes sounded so easy during the election campaign. The Trudeau Liberals promised a $125-billion infrastructure plan — billed as the biggest in Canadian history — that would “kick start” the economy and they’re expected to follow through now that they’re in power.
We’ll get our first detailed look at what the Liberals have in mind on March 22 when they release the federal budget in Ottawa. But in the meantime it’s worth thinking about the infrastructure promise: Can a federal government spend its way to economic Nirvana?
A handful of think-tanks have generated studies that claim positive results are guaranteed. For example, Ottawa-based Broadbent Institute said spending on infrastructure triggers a multiplier effect that percolates through the economy. For every buck a government spends on infrastructure, $1.43 is added to short-term GDP and up to $3.83 is added to longterm economic growth.
Such figures make infrastructure spending sound like a perpetual cash machine. But while Canada’s economy, bashed by the rout in commodities, in particular oil, needs something to help turn it around, other economists are far more skeptical that this particular strategy is the way to go.
They aren’t denying Canada needs to boost infrastructure spending. On the contrary, many will tell you the country needs to step up its investment in assets that will boost economic productivity. If transportation corridors improve, for example, it makes it easier for manufacturers to get goods to market.
They’re just not sure that all infrastructure projects generate the instant returns some Canadians have been led to expect.
“To the extent the Liberals are selling the idea that all we have to do is spend a few extra billion dollars on something and then we’re back to the good times, well, no, that’s not going to happen,” said Stephen Gordon, an economics professor at Laval University in Quebec City.
The Liberal government’s 10year, $125-billion plan isn’t all new money, but an expansion of an existing $65-billion plan put in place by the previous government. The money is also spread over time, so the amount flowing into the economy is more like $10 billion a year, a fraction of the $300 billion or so the federal government spends each year.
Of course, $10 billion is a lot of money, but it represents only 0.5 per cent of Canada’s $2-trillion GDP. And since the new money being spent is only about $5 billion or 0.25 per cent of GDP, the plan looks more like a rounding error on the federal balance sheet.
That sum is a far cry from the stimulus promise — an instant cash injection that will flood a weak economy with money and jobs — marketed by the Liberals to voters.
Moreover, even if the planned funds weren’t a drop in the proverbial bucket, there are problems with the plan.
Mike Moffatt, an assistant professor at Western University’s Ivey Business School in London, Ont., points out the Liberal plan is actually trying to serve both as a short-run stimulus and a longterm productivity boost.
“If government can spend well and get the details right, infrastructure can have a long-term benefit to the economy,” he said.
Getting the details right, of course, is no easy feat.
But Gordon is not convinced there is even a dire need for stimulus, at least on a nationwide basis. “To my mind, there’s not a lot of slack in the economy,” he said.
RBC Economics Research forecasts the Canadian economy will expand “close to its potential rate” of 1.7 per cent in 2016, though it underperformed in 2015, growing only 1.2 per cent. The employment rate, currently 7.3 per cent, is still well below the peak of 8.7 per cent reached in the 2009 recession.
But those are national numbers. Weak commodity prices are causing local pain in provinces whose economies depend on resources. Alberta’s unemployment rate is currently 7.9 per cent and in January it surpassed the national average for the first time since December 1988.
A Conference Board of Canada forecast describes Alberta’s economy as in a “tailspin” and said the one thing that could help its economy return to growth by 2017 is infrastructure spending.
The budget’s unveiling on Tuesday will show how the government plans to divvy up its spending commitments. Prime Minister Justin Trudeau has already spoken about the need to “fast track” some $700 million in infrastructure spending for Alberta.
Yet speed points to another problem with the stimulus argument. It’s hard to launch complex, capital-intensive construction projects overnight. It can take months for promised infrastructure funds to reach those will work on those projects. That makes it difficult to pair a particular project with local employment needs.
“Getting the timing of those investments correct is extraordinarily hard,” said Kevin Milligan, who teaches at the University of British Columbia’s Vancouver School of Economics. “If you commit to infrastructure now, especially given the ‘ building season’ in Canada, nothing is going to be in the ground until 2017.”
But the Broadbent Institute and others argue infrastructure spending has that “multiplier effect” that boosts GDP in the short term.
The theory is that if the government drops a big pile of cash on a project, that money immediately becomes income in workers’ pockets. The money then percolates through the economy as they spend that cash on other things, perhaps more groceries or skates for the kids. That, in turn, makes money for retailers, who then spend that cash to buy inventory or pay their employees. And so on.
“The whole multiplier thing works by staying in the country and using the money to finance other spending that stays in the country,” Gordon said.
Trouble is, the process is not an infinite loop. Roughly one-quarter of everything Canadians spend is on imports. That means government infrastructure money will eventually bleed out of the country or get sucked up by exchange rates.
In other words, infrastructure spending is hardly the most efficient tool if the goal is to stimulate Canada’s economy.
A better way would be to mail cheques to lower-income people, and hope they spend the money on locally produced goods and services. “If you were just trying to get cash out into the economy, that would be the quickest, easiest and cheapest way of doing it,” Ivey’s Moffatt said.
There’s also a debate whether government spending actually pulls economies out of recession. The Conservative government deployed a $47.2-billion stimulus package in response to the 20082009 recession. Some $12 billion of that was infrastructure spending.
A Fraser Institute study in 2010 concluded the entire stimulus package added just 0.2 percentage points to the 1.1-per-cent growth achieved in the second and third quarters of 2009. A 2010 study by the Conference Board of Canada argued that infrastructure spending during the recession added 0.9 per cent to Ontario’s GDP in 2009.
Although infrastructure spending might not be stimulus, that’s no argument to ignore it. Governments at all levels neglected infrastructure such as fixing roads during the 1980s and 1990s as they fought budget deficits.
The result of that neglect is striking. A 2016 survey of local governments found that Canadian municipalities own $1.1 trillion worth of water, road, bridge, buildings, rec- reation and transit assets. Of those, $141 billion, or 12 per cent, are described in “poor” or “very poor” condition. A further $247 billion, or 22 per cent, are described as in fair but declining condition.
Much of the political attention goes to the promise of brand new shiny assets such as transit lines, but sooner or later, governments will have to replace or fix some $ 388 billion worth of existing works that are wearing out.
A 2013 Conference Board of Canada study said Ontario’s infrastructure spending between 2006 and 2014 boosted the province’s real productive capacity by 2.1 per cent and added $1,044 to the average income per resident.
And the Broadbent Institute said private-sector investment picks up 34 cents for each government infrastructure dollar spent in the short term, and that raises $1 for every government buck spent in the long term.
There’s no doubt Canada needs infrastructure, and low borrowing costs make an attractive case to tackle big projects now.
But it’s likely wrong to assume infrastructure spending is a quick and easy fix for what ails Canada’s economy.