In the run-up to the delayed federal budget, there is a strange disconnect between fiscal policy and our changing economic circumstances. Balancing the budget seems to remain the key political priority, as if nothing had changed.
But the collapse of oil and other resource prices has changed a lot. Most notably, the Bank of Canada has, unexpectedly, cut interest rates to take out “insurance” against a serious slump in our resource-dependent economy. TD Economics forecast slow growth of just 2.0% this year, and have projected that unemployment will rise by 0.2 percentage points in the next few months.
Meanwhile, Prime Minister Stephen Harper has said that he will not run a deficit unless and until Canada falls into an outright recession, something we would know only in hindsight.
The provinces, especially Ontario and Quebec, are continuing their own austerity programs due to much more difficult fiscal circumstances than those facing the federal government. The Harper government would be easily running a surplus if they had not blown $2 billion on their unfair, pre-election family income splitting plan.
The most recent IMF Fiscal Monitor released last October, before the full impact of falling oil prices, projected that discretionary fiscal policy by all levels of government in Canada is cutting GDP growth by 0.3 percentage points. In other words, deficits are falling due to spending cuts and not just a recovering economy.
Many economists have pointed out that, given low levels of debt, there is no real imperative to balance the federal budget this year, especially through new spending cuts. If the Bank of Canada sees some need for “insurance” on the monetary policy side, why do we not need some fiscal “insurance” as well?
A broader point should be made. Now is actually the best time to boost public investment to help buoy a slowing economy, and to build for the future.
The expectation of a prolonged period of sluggish growth, and the possibility of outright deflation, have pushed Government of Canada borrowing costs to record low levels. Astonishingly, 10-year federal bonds now yield just 1.4%, well under the inflation target of 2%.
The International Monetary Fund argues that, in the current context of a very weak global economy and ultra low interest rates, well-selected public infrastructure investments can boost growth and jobs and actually reduce public debt. Any negative impact on deficits is short-term and debt will fall as GDP grows.
Moreover, proper accounting rules should mean that major public investments are amortized over the life of the assets created. And there is no impact on net public debt if borrowing is incurred to buy a new asset, be it a bridge, a highway or a mass transit system.
A major problem in Canada is that some provinces and, especially, the cities are less able to finance new infrastructure investment than the federal government despite pressing needs, and face higher borrowing costs. Ontario and Quebec borrowing costs are now about 1% higher than for the federal government.
One possible solution to consider would be for the federal government to create an arms length public investment fund, perhaps under the auspices of BDC, to borrow on the markets and then to re-lend funds at very low rates to the provinces and to worthwhile and productive municipal projects supported by the provinces.
Effectively, the federal government would be lending its borrowing power to the provinces and cities for selected, high return infrastructure investments which would in turn boost the overall tax base and reduce public debt. It might further subsidize provincial projects by way of direct spending on infrastructure programs.
There is no sound economic or accounting reason why we should not seize the opportunity of record low interest rates to address our long recognized and serious infrastructure deficit.
Andrew Jackson is Adjunct Research Professor in the Institute of Political Economy at Carleton University and senior policy advisor to the Broadbent Institute.
This article originally appeared in the Globe and Mail's Economy Lab.
Used under a Creative Commons license BY-NC-SA 2.0.