Infrastructure spending in Canada—myths and reality
In the coming weeks, the Trudeau government and several provincial governments will release budgets that will include plans to collectively spend hundreds of billions of dollars on infrastructure over the coming decade. However, the case for massive increases in government infrastructure spending is largely based on five myths that do not withstand scrutiny.
Myth 1: Increased infrastructure spending will spur economic growth
Reality: In principle, sound infrastructure spending (a needed road, railway or port) can increase long-term economic growth by improving the economy’s productive capacity through more efficient movement of people and goods. In practice, however, as noted by a recent Senate committee report, not all public infrastructure spending fits this bill. For instance, just 10.6 per cent of Ottawa’s nearly $100 billion in planned infrastructure spending will be on trade and transportation infrastructure. In fact, most of the money will go to so-called “green” and “social” infrastructure including pet projects such as parks, community centres and hockey arenas. Although these initiatives may be appreciated by communities, they are unlikely to provide productivity gains.
Myth 2: Government must ramp up infrastructure spending to make up for past neglect
Reality: The stock of government infrastructure in Canada (total value net of depreciation) has grown steadily over the past 15 years and is now at the highest level since 1971, after accounting for inflation and population changes. In fact, from 2000 to 2015, the net stock of government infrastructure per person has grown 27 per cent, from $16,394 to $20,876 per person (all in 2015 dollars). Since 2008, annual spending to acquire new public infrastructure has been particularly elevated, with Canada ranking relatively high on international comparisons of government capital spending as a share of the economy.
Myth 3: Infrastructure is largely the domain of governments
Reality: Those who argue for more government spending on infrastructure often overlook the major contribution made by the private sector (businesses and non-profits). Yet for more than 40 years, the net stock of infrastructure undertaken by non-government organizations has exceeded that of the government sector. In 2015, non-government organizations were responsible for 73 per cent of Canada’s total net stock of infrastructure, up from 63 per cent in 1971.
Myth 4: With interest rates low, now is the time to ramp up government infrastructure spending
Reality: Interest rates are only one factor in assessing the costs of increased infrastructure spending. Failing to account for other relevant fiscal and economic costs exaggerates the opportunity provided by low interest rates. Other fiscal considerations include the future operation and maintenance costs of new infrastructure, which can reach 80 per cent of the total lifetime cost and are not influenced by current interest rates. In addition, the economic costs of the taxes that fund infrastructure spending, now and in the future, have both direct and indirect costs on the economy. When we factor those costs into the infrastructure spending, it’s much less likely that the spending will actually result in a stronger economy.
Myth 5: The federal government should take the lead on infrastructure
Reality: Federal grants give the federal government influence over which projects are undertaken and how they are managed, imposing federal priorities that may not reflect the particular needs of every region. Crucially, conditional grants distort local decision-making by encouraging recipient governments to undertake projects that are more likely to receive funding over projects that may be of higher priority. Federal infrastructure grants can also erode accountability to taxpayers because the government doing the infrastructure spending is not the same one raising the revenue. If provincial and local govern¬ments want to spend more on infrastructure, they can prioritize the use of available own-source revenues, which have grown significantly over the past 15 years, for that purpose rather than calling for additional resources from the federal government.
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