Canada’s short-term economic problems include very sluggish growth due to the recent collapse of resource prices, an unemployment rate of 7.0%, and troubling levels of underemployment in low paid and insecure jobs. Growth for this year is forecast to be just over 1%, meaning that unemployment will likely rise.
Most economists agree that we also have very serious long-term issues to deal with, including weak levels of business investment in new machinery and equipment and in innovation. Low business investment is the major reason why recent labour productivity growth has been dismal, about 1% per year, translating into very weak wage growth.
An independent study by the well-respected Centre for Spatial Economics commissioned by the Broadbent Institute confirms the argument that a major public infrastructure program would give an important short-term boost to the economy. Even more importantly, it would significantly improve the longer-term performance of the private sector.
The Centre puts hard numbers and sound technical analysis behind the often heard argument that government investment can yield high returns to the private sector and to all Canadians. Both main federal opposition parties propose new investments that are comparable in scale, but differ in terms of their composition, timing and source of financing.
The study models the economic and fiscal benefits of a plan to invest $10 billion per year for five years in basic municipal infrastructure, such as roads and highways, transit, and water and waste water treatment. The cost would be shared equally by the federal and provincial governments and would approximately double current federal government support for such investments for the next five years.
While the plan is ambitious, it has to be put in the context of a large municipal public infrastructure deficit. There is a high cost to inaction in terms of even more traffic congestion and delays, and in terms of rising greenhouse gas emissions and pollution in our major cities. Crumbling infrastructure is a major negative for new business investment.
The study estimates the short and longer term impacts of the investment program relative to an economic and fiscal base case as of January, 2015 that excludes the new program spending. Note, however, that the base case does include emerging federal government surpluses that are used, in part, to fund existing infrastructure investment plans.
The study presents a range of impacts reflecting the uncertainty in the precise level of benefits to private industry arising from public infrastructure spending.
The short-term stimulative impacts of public infrastructure investment are confirmed. Over the term of the building program from 2015 to 2019, GDP would be boosted by $1.43 per dollar spent. This finding is especially relevant today given very slow growth.
There would be an additional 42,150 construction jobs per year, up 4.5% compared to the base case. About as many jobs again would be created in other private sector industries, such as manufacturing and business services, due to the direct and second round impacts of the program.
The longer term, post construction impact of the program from 2020 to 2040 would depend upon the degree to which it lowered business costs and promoted higher business investment and higher productivity.
The study shows that business investment after 2020 would increase by $3.1 to $4.7 billion per year, or by 0.7% to 1.1% compared to the base case. Labour productivity growth would increase significantly, by 0.3% to 0.5% per year.
The study estimates that the overall benefits to Canadians of the initial investment program would be a very significant $2.46 to $3.83 per dollar spent, and that GDP would rise by between $7.6 billion and $13.9 billion.
While total employment would not be changed significantly in the long run, wages and household incomes would be higher. GDP per person would increase by an additional 0.3% to 0.5% per year from 2020 to 2040.
The study further finds that the long term impact on government finances would be at worst marginally negative or even positive due to increased revenues from a larger economy. Even in the construction phase, tax revenues would rise by 44 cents per dollar spent.
The overall message from this expert and independent study is that it makes eminent economic sense to boost federal and provincial public infrastructure investment. Such a program would create much needed jobs now, while also boosting the productivity and competitiveness of the private sector.
Andrew Jackson is Adjunct Research Professor in the Institute of Political Economy at Carleton University, and senior policy adviser to the Broadbent Institute.