Otherwise it could lead to a debt-financed spending spree of epic proportions
With the collapse in energy prices and the decline of manufacturing, the new panacea for economic salvation is “infrastructure”. Governments need to curb their enthusiasm, however, to avoid building up massive debt for future generations.
All three federal parties are campaigning on promises of new funds for public infrastructure spending. This is on top of plans in provinces such as Alberta, which has promised a major increase in provincial infrastructure spending in its October budget and Ontario, which in its spring budget announced plans for $130 billion in infrastructure spending over 10 years.
At the federal level, Justin Trudeau has announced a Liberal government would run deficits and invest $60 billion over 10 years in infrastructure spending across Canada. According to the Parliamentary Budget Officer, annual federal spending on infrastructure is at about $5 billion and the Conservatives have announced a new $1 billion annual public transit infrastructure fund.
Meanwhile, the NDP is promising increases in municipal infrastructure spending via the federal gas tax transfer program to $3.7 billion annually by the fourth year of their mandate. As well, they would spend $1.3 billion annually on public transit.
Spending on public infrastructure after its 20th century decline has gained new favour. Raising our capital stock in transportation, water, power and communications infrastructure is supposed to create construction jobs in the short run – thereby boosting employment and income – and build productive capacity in the long run by reducing business costs – further stimulating economic growth.
Indeed, the Conference Board of Canada estimates that for every $1 billion in infrastructure spending, 16,700 jobs are created for one year and GDP is boosted by $1.14 billion. On the surface, it is hard to argue against spending money on capital projects designed to boost our productivity.
Yet, in our haste to stimulate the economy, we run the risk of wasting tax dollars if we build poorly designed or unnecessary infrastructure as well as bid up the cost of building. Key to any infrastructure building is the need to develop a list of priorities – no easy task given the federal nature of our system of government with its overlapping jurisdictions.
More importantly, what exactly is the size of infrastructure gap that we are addressing? There is a wide range of estimates. The Federation of Canadian Municipalities estimated that Canada has fallen behind in infrastructure spending on water systems, transportation, waste management and communities by $123 billion since the 1950s.
The McKinsey Global Institute has estimated that Canada must invest $66 billion by 2023 into maintaining roads and bridges.
Upgrading Canada’s electricity infrastructure alone by 2030 could cost another $300 billion, according to the Canadian Chamber of Commerce, with the total infrastructure deficit as high as $570 billion.
Another study by the Canada West Foundation estimated the accumulated infrastructure debt at $123 billion for existing infrastructure with an additional $110 billion for new infrastructure for a total of $233 billion.
A report by the Canadian Centre for Policy Alternatives estimated that, depending on your target, annual spending could range from $60 to $75 billion annually – an amount substantially higher than that allocated during the peak years of the Great Recession stimulus program. Over 10 years, this amounts to $600 to $750 billion in spending.
Infrastructure spending is an important policy problem for Canada, given that public infrastructure has deteriorated. At the same time, we may be embarking on substantial expenditures without a firm estimate and without a systematic approach to prioritizing needs.
We need to know if we are embarking on a long-term program that will spend as little as $200 billion or as much as $750 billion. If the latter, then all of the proposed spending by our politicians probably represents a mere drop in the bucket. We need to know what projects should receive priority and where.
Even with the lowest interest rates in 50 years to facilitate borrowing, this is a recipe for an expensive debt-financed spending spree the likes of which we have never witnessed. Getting this wrong would be a spending boondoggle of gargantuan proportions.
By Livio Di Matteo
Livio Di Matteo is Professor of Economics at Lakehead University.