Federal government’s infrastructure plan unlikely to spur economic growth

In their campaigning, and since coming into power, the Trudeau Liberals have talked a lot about wanting to grow the economy to better serve Canada’s middle class. And they have pinned their economic hopes largely on a multi-billion dollar infrastructure spending plan to be rolled out over the next decade.

The fundamental problem, however, is that only a small fraction of this spending is earmarked for infrastructure projects that will actually improve Canada’s economy.

In principle, sound infrastructure projects can improve the economy’s productive capacity. A needed road, bridge, railway or port that helps move people, goods and resources more efficiently—and at lower costs—can help build a more prosperous economy.

In practice, however, not all of the federal government’s infrastructure projects fit this bill. Of Ottawa’s nearly $100 billion in planned infrastructure spending, a mere 10.6 per cent is earmarked for transportation and trade projects. Put differently, only 11 cents of every dollar of new federal infrastructure spending will be spent on improving the country’s core public infrastructure.

So where’s the rest of the money going?

So-called “green” and “social” infrastructure including pet projects such as parks, cultural institutions and recreational centres. Although these initiatives may be appreciated by the communities in which they are built, there’s no evidence such spending will improve economic growth.

In fact, the federal government may end up hurting the economy by focusing on such projects, especially if the productivity gains of the infrastructure projects are less than the economic costs caused by the taxes required to fund them.

Simply calling a project “infrastructure” does not automatically make it an economically worthwhile endeavour.

Nonetheless, the federal government has stated that its infrastructure plan will not only generate long-term economic gains but will have a stimulus effect on the economy in the short-term. Even this argument fails in practise, primarily due to the considerable delays—from when the infrastructure spending is announced to when the spending actually takes place and shovels hit the ground.

Infrastructure projects typically require time for planning and debate, and in cases where multiple levels of government are involved, can take additional time to coordinate. Often, by the time infrastructure dollars are actually spent, it is long after the announcements were made.

Several recent reports from the Parliamentary Budget Office (PBO) have called into question Ottawa’s ability to deliver infrastructure spending on the timeline laid out by the government.

And just recently, a Senate report found that of the $13.6 billion in infrastructure spending planned for 2016/17 and 2017/18, only $806 million worth of projects have actually commenced. In other words, just six per cent of the planned projects have started. So for a government that believes infrastructure is a way to stimulate growth in the short-term, the evidence to date does not seem encouraging.

In the federal budget expected later this month, the government will likely tout the economic benefits of infrastructure spending. But Canadians would do well to be skeptical of such claims.