The Broadbent Blog


Liberal fiscal plan scales back "historic" infrastructure spending

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The Trudeau government's fiscal plan as updated in the Fall Economic Statement meets a number of progressive commitments, but also raises a lot of questions about what can be expected of  the federal Budget to be tabled next March.

The centrepiece of the Liberal election platform was to invest significant new funds in social, environmental and public infrastructure, financed from modest budget deficits. The aim was not only to stimulate a sluggish economy and create jobs, but also to build for the future at a time of record low interest rates and weak business investment. The Liberal platform also promised to expand and reform child benefits, to improve public pensions, and to tweak the personal income tax structure for higher income earners.

The Conservative opposition and many media pundits seem to think we have entered a new era of “big spending.” The reality is more prosaic.

The Statement tells us (Table A1.3) that federal program expenses (including the newly announced infrastructure measures ) will peak at 14.6% of GDP next year (2017-18) up from 13.7% in 2015-16 when the Trudeau government took over. That increase of about $35 billion per year has certainly boosted the deficit, along with the impacts of slower than forecast economic growth on revenues.

But the federal debt as a share of GDP is forecast to increase only marginally from 31.1% of GDP in 2015-2016 when the government took office to 31.5% in 2019 when the next election will be held. If growth revives only modestly, Finance Minister Morneau will be able to claim that the debt has remained stable.

When it comes to the new infrastructure measures announced in the Statement, the government has boosted short-term spending very modestly, while raising a lot of questions about the role of private investors and user fees and tolls in financing new projects through a Canadian Infrastructure Bank.

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The government's communications strategy seems to have been to greatly exaggerate the scale of new pubic infrastructure investment, which has been amplified by groundless Conservative charges of “out of control” spending. The Statement torques reality when it says its infrastructure spending plan is “unprecedented in Canadian history.”

It is claimed that the federal government will invest a staggering $180 billion over the next decade (see Chart 2.1). Promises of new investments are made, however, out to 2027-28, apparently assuming that the government will be re-elected at least twice and will have no second thoughts about its spending priorities. 

When it comes to more prosaic accounting detail of changes to spending since the 2016 budget in Table 3.2, we find that the total increase in infrastructure investment between now the next election will be just $8.9 Billion, spread over three years. And the net impact is an increase of just $1.8 Billion once account is taken of funds already existing in the fiscal framework or sourced from departmental resources.

In short, the increase in infrastructure spending announced in the Statement is far more modest than it first appears. Moreover, some of the money earmarked to capitalize the controversial bank seems to come from money previously earmarked for public transit, social and green infrastructure projects.

Screen_Shot_2016-11-01_at_2.29.25_PM.pngThe second key thing for progressives to note about the Statement is that it says nothing about other avowed Liberal priorities, such as building a more innovative economy and increasing health care transfers to the provinces to help fund new services such as home care. Nor does it say anything about possible tax reform, currently being studied by an expert advisory committee.

If Minister Morneau wants to further boost social spending and fund remaining Liberal platform commitments, he will have to take a serious stab at tax reform in the 2017 Budget, or run higher deficits than he has already forecast.

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

Photo: Wyliepoon. Used under a creative commons license.