The Broadbent Blog

Investment should be the federal budget priority

wood-wwworks.jpgThe federal Budget to be introduced on April 21 should have one clear priority – to boost public and private investment so as to create jobs now and a more productive and sustainable economy tomorrow.

The slowing Canadian economy continues to be mainly driven by household borrowing fuelled by ultra low interest rates. With wages stagnant, families are still going deeper into and deeper into debt to spend more than they earn, setting the stage for a nasty housing crash and a rude shock to family finances down the road.

Meanwhile, investment actually shrank in the fourth quarter of 2014. Government investment in infrastructure and buildings has been flat due to fiscal austerity programs, and business investment in buildings and machinery and equipment shrank in dollar terms in the fourth quarter and has been falling as a share of the economy for the past year.

The problem is not profits, which are still near a record high as a proportion of the economy, nor a lack of funds. Corporations are sitting on a $600 billion plus cash hoard of surplus profits, boosted by recent deep corporate tax cuts.

Business investment is likely to fall even further due to the resource slump and halted mega projects. This might be offset a bit by new investment in the hard-hit manufacturing sector and in high tech, though there is no sign of that in the most recent numbers

In this context, the federal government should be doing everything in its power to boost a slowing economy and to help set the stage for a more durable, investment driven recovery.

Ottawa has been advised by the IMF and many prominent economists, from former US Treasury Secretary Larry Summers to former federal deputy minister of finance Scott Clark, that it can and should boost public investment, especially in mass transit and basic municipal infrastructure.

Since the economy is operating with a significant and growing slack, such spending would boost GDP by more than the actual increase in investment. The federal government itself has cited figures showing that the boost to infrastructure investment in the recession had a multiplier impact on the economy of 1.5, meaning that GDP rose by $1.50 for every $1 spent.

The case for public investment is even more compelling now that the Government of Canada can borrow long term at interest rates well below the rate of inflation to finance projects such as mass transit which demonstrably have a positive economic return in terms of boosting long-term productivity.

Numerous studies have shown that lagging public infrastructure investment helps explain poor business sector productivity growth.

On top of the boost to the private sector that would come from public investment, the federal government could and should do much more to directly support and stimulate business investment in research and development, innovation and the other key building blocks of the so-called new knowledge based economy.

The government's own advisory body, the Jenkins Committee, recommended less reliance on no strings attached tax breaks and more targeted supports for major new investments.

To be sure, the federal government does support new investment in the auto, aerospace and defence sectors through special funds, has set up venture capital funds including though BDC, and is a major funder of university based research.

The fact remains that such investment in private sector innovation has been cut significantly since the recession, and that much more has to be done to offset a serious decline in Canada's research and development efforts as compared to other advanced industrial countries.

There is also a need to focus our research and development efforts on industries which will transition us to much more environmentally sustainable economy, such as renewable energy, the construction of a national power grid to displace coal-fired power, and the promotion of much more energy efficient technologies throughout the economy.

The federal Budget will likely pay lip service to boosting investment through small additions to existing commitments. But the current government has given the real priority to costly tax cuts such as family income splitting and doubled TFSA contribution limits, leading them to cut spending on direct government programs to balance the books.

Lack of real attention to investment will leave our sluggish economy dangerously dependent upon growing household debt, and ill-prepared to face the economic and environmental challenges of tomorrow.

Andrew Jackson is Adjunct Research Professor in the Institute of Political Economy at Carleton University and senior policy advisor to the Broadbent Institute.

This column originally appeared in the Globe and Mail's Economy Lab.

Photo: wwworks. Used under a Creative Commons License.