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Ahead of 2013 budget, Flaherty should be serious about investing in public infrastructure


Finance Minister Jim Flaherty is said to be considering extending funding for public infrastructure investment in his forthcoming budget, as urged by the Official Opposition, the provinces and municipalities. Let’s hope, for the sake of jobs and the environment, this is a significant, long-term initiative.

On the eve of the 2013 federal and provincial budget season, public sector austerity is still the order of the day, even though the economy is rapidly slowing down.

Recent economic forecasts from TD and CIBC, as well as the Bank of Canada and the International Monetary Fund (IMF), anticipate that Canada’s growth rate this year will be about 1.7 to 1.8 per cent, significantly down from tepid growth of 2 per cent in 2012. This is not enough to stop the national unemployment rate rising from 7.1 per cent to around 7.5 per cent.

The fundamental obstacles to a stronger and continuing recovery are well-known. The high Canadian dollar and a still-weak U.S. economy mean there will be limited growth in exports, which is something that weighs heavily on business investment notwithstanding the fact that much of corporate Canada is flush with cash (dubbed “dead money” by Bank of Canada Governor Mark Carney). Households are heavily in debt and there is every indication the housing bubble, which has temporarily sustained growth and jobs, is now deflating.

Government austerity programs are making things worse. The IMF calculates that the “cyclically adjusted budget balance” – that is, the change in the overall Canadian government balance resulting from discretionary spending cuts and tax increases – will fall by 0.6 per cent of GDP between 2012 and 2013. Almost all of this austerity comes in the form of spending cuts .

Recent IMF work on the impact of budget cuts on growth when the economy is operating below potential suggests that all of that 0.6 per cent of GDP, and perhaps more, will be shaved from GDP growth. In other words, spending cuts could well mean that growth will be 1.7 per cent rather than 2.3 per cent, and that unemployment will likely hit 7.5 per cent rather than falling under 7 per cent.

The experience of much of Europe, including the U.K., Spain and Greece, has been that fiscal austerity has shrunk the economy so much that public debt has actually remained stuck at high levels as a share of the economy. Too much austerity in a slowing economy is as self-defeating as medieval doctors trying to cure the sick by draining them of blood. Even the IMF urged in its October, 2012, World Economic Outlook that governments should be much more cautious if we are to avoid a new global recession.

As John Lanchester noted in the London Review of Books, “in terms of the surprise, and its source, the IMF announcing that the multiplier effects of spending cuts had been underestimated was like the British Medical Association announcing that they had studied all the relevant evidence and come to the conclusion that exercise is bad for you.”

Some will say that the Canadian economy is much more resilient than those of the most heavily-hit countries in Europe, and that is true to a degree. But even the Bank of Canada concedes that we are operating below capacity. This shows up in our extremely low inflation rate of less than 1 per cent and our very high youth unemployment rate of over 14 per cent.

True, our public debt is much lower than in most other advanced industrial countries. That gives us more room to reflect on the wisdom of cuts, and more room to invest.

What is particularly troubling about spending cuts in Canada is that much of the impact is on long-term public investments, which we need to build a more productive and sustainable economy. Over the past year (from the third quarter of 2011 to the third quarter of 2012), government fixed capital formation fell by over $3-billion, and this cut real GDP growth over the past year by 0.2 per cent.

The main reason for this decline is that the significant increase in public investment, which was part of Canada’s Economic Action Plan to fight the recession, peaked in 2009 and has not been continued in any significant way. Funds to help the provinces and cities rebuild highways, water and waste-water plants and sewers, and public transit systems have fallen back to normal levels.

Unfortunately, normal is not enough, as strongly argued by the Federation of Canadian Municipalities. Public infrastructure investment at the peak of the stimulus program was, according to Hugh Mackenzie, just enough to offset depreciation. We are now back to increasing the huge accumulated public infrastructure deficit of some $145-billion with every year that passes.

It makes no sense to be cutting public infrastructure investment when the needs are very real, and when interest rates are still at near record low levels. The federal government pays only 2 per cent on new issues of 10-year bonds, and most economists reckon that public infrastructure investment yields returns far in excess of the cost of borrowing, mainly by boosting productivity in the private sector.

A Statistics Canada study found that public investment accounted for one half of productivity growth in Canada over the 1962-to-2006 period, and that the rate of return on public infrastructure investment was 17 per cent. The Conference Board of Canada recently found that public infrastructure investment accounted for one-fifth of productivity growth in Ontario between 2000 and 2008.

Investment in public transit yields a double bonus: Boosting productivity by reducing wasted time in traffic and reducing carbon emissions and other forms of pollution.

HDR Decision Economics calculates that investing $15-billion per year over five years in public transit would generate a 12.5 per cent economic rate of return, 3.3 million full-time equivalent jobs, and 65,000 permanent, full-time jobs in the transit sector following expansion, and significantly reduce automobile use, congestion costs and air pollution.

Put simply, it makes no sense not to proceed with public infrastructure investments, which will more than pay for themselves by building a more productive and environmentally sustainable economy. While the lead role must be taken by cities and the provinces, the federal government has to play its part as well.

Andrew Jackson is the Packer Professor of Social Justice at York University and Senior Policy Adviser to the Broadbent Institute. This article originally appeared on the Globe & Mail's Economy Lab.