Media reports of crumbling and even dangerous public infrastructure have become commonplace. Large sinkholes now routinely disrupt life in Canada’s largest cities. Many critical bridges and highways need immediate attention. And traffic gridlock in urban centres underscores the need for major investment to improve and expand public transit. While everyday experience suggests that Canada’s public infrastructure is in need of renewal, common observation is also confirmed by research.

A five-year, $50-billion public infrastructure spending initiative would generate a return on investment to Canadians over the long term as high as $3.83 per dollar spent, trigger significant private sector investment and stimulate wage increases, according to a new study by an independent economic modelling firm.

The Economic Benefits of Public Infrastructure Spending in Canada report (broadbentinstitute.ca/infrastructure), authored by the Milton, Ontario-based Centre for Spatial Economics, examined the short term (2015 to 2019) and long run (2020 to 2040) economic impacts of a large public investment program in transportation and basic urban infrastructure. It models a five-year program of $10 billion per year equally shared by the federal and provincial governments with a set of simulations that examine the benefits to productivity from public infrastructure.

The report defines public infrastructure as the engineering construction component of all levels—federal, provincial and territorial, and local—of the public administration sector’s capital stock, and includes primarily transportation systems, such as subways and highways, water supply, and wastewater treatment facilities. The benefits of a national public infrastructure program arise from the direct program spending, but then extend beyond this direct impact with public capital promoting long-term economic growth and productivity.

The study, commissioned by the Broadbent Institute, found that in the short term the infrastructure program boosts gross domestic product (GDP) by $1.43 per $1 spent due to the multiplier impact. Within the five-year construction phase, governments also recoup $0.44 of every dollar spent through additional tax revenues.

The public infrastructure confers permanent benefits to private business by lowering their operating costs, which leads to increased productivity and higher wages for workers.

“These results show why a robust public infrastructure program just makes sense, and I’m encouraged the opposition parties are committed to investing,” said Rick Smith, executive director of the Broadbent Institute. “This is about Canada’s long-term prosperity. It will enhance our competitiveness, boost productivity and raise real wages—while making a significant dent in Canada’s infrastructure deficit.”

Since productive public infrastructure reduces costs for private businesses, a compelling case can be made for public funding of this capital. Although the $50-billion program’s size is arbitrary, it is evident that a program of this scale is required to begin to address the estimated $171.8 billion cost of replacing the municipal assets rated fair, poor, or very poor condition across the country, as reported by the 2012 Canadian Infrastructure Report Card. Because there is always a risk that such a large infrastructure program could be administered inefficiently, leading the economy to realize fewer benefits (perhaps as low as the half benefits case results), it is imperative to structure such programs so they are designed and managed well.

Key findings in the report include the following:

  • In the short term, the spending program boosts employment by between 81,000 and 88,000 jobs, increasing the employment rate by 0.4 to 0.5 per cent.
  • About one half of the new jobs (42,150) would be in construction, with positive short-term impacts on output and jobs in manufacturing and the business service sector providing inputs to construction.
  • In the short term, provincial revenues raised per dollar spent are highest in Quebec ($0.72), British Columbia ($0.57), and Nova Scotia ($0.46). British Columbia and Quebec see the greatest impact on real GDP growth in the short term: while the average annual increase across the range of benefit scenarios for Canada is around 0.7%, British Columbia sees growth between 0.8 and 0.9 per cent and Quebec an average increase of more than one per cent.
  • GDP benefits in Saskatchewan and Newfoundland and Labrador are the weakest. Factors influencing short-term benefits on a provincial basis include differences in import propensities, where provinces that need to import more goods and services rather than producing them within the province experience weaker benefits. However, the difference in impacts across provinces is significantly lower in the long run than it is over the five-year construction phase.
  • Private-sector investment rises by as much as $0.34 per dollar spent in the short term, and by up to $1 per dollar spent in the long run.
  • The spending program increases labour productivity by between 0.3 to 0.5 per cent in the long term and workers earn higher real wages: up 0.4 to 0.6 per cent a year on average relative to the economy without the spending program.
  • The change in the average annual deficit-to-GDP ratio from this program lies between a rise of 0.04 per cent and a decline of 0.02 per cent for the federal government, and between a rise of 0.08 per cent and a fall of 0.04 per cent for provincial governments.

“The benefits of a public infrastructure spending program include more private-sector investment, a more productive economy, and a higher standard of living—and all are achieved without significant long-term fiscal consequences to federal or provincial governments,” the report states.

While a five-year, $50-billion program does represent a major spending commitment for Canada’s federal and provincial governments, public infrastructure spending has been curtailed for decades as governments of all levels have restrained spending in order to avoid increases in tax rates or to provide tax cuts. In the absence of surpluses, taxes or deficits will need to rise, at least in the short term, but, because of the expected benefits to private business from the public capital, they need not become a significant long-term burden.

This study also provides a cautionary tale for policy analysts. The costs of neglecting our public infrastructure are not zero: allowing public infrastructure to continue to decay imposes costs at least equal but opposite to the benefits estimated in this study. The competitiveness of private businesses in Canada is tied to the quality of our public assets, so a significant and sustained public infrastructure spending initiative is required if households and businesses are to continue to enjoy the high standard of living provided by our public infrastructure.

 

Robin Somerville is with the Centre for Spatial Economics, which the Broadbent Institute commissioned to produce the report.

 

Study Methodology

The analysis consists of four scenarios was conducted using the Centre for Spatial Economics’ provincial economic modelling system. The baseline scenario does not include any additional public infrastructure spending, and is the benchmark against which each of the other scenarios is compared. The other three scenarios reflect changes in economic activity arising from the public infrastructure spending program. The first is the zero benefits case, which assumes public infrastructure provides no benefit to private business. The second and third scenarios are the half and full benefits cases, which assume respectively that the new public infrastructure provides either half or all the benefits to private business estimated by 2003 economic research previously done by Tarek Harchaoui and Faouzi Tarkhani (bit.ly/2003tarek).

The zero benefits case is not considered a likely outcome, but is included to allow readers to assess the impact of reduced private business costs from new public infrastructure by comparing it against the half and full benefits cases. Federal and provincial funding for the program is assumed to come from either existing budget surpluses or from deficit financing. Tax rates are left at baseline scenario levels so as to prevent mixing the results of the spending initiative with the impact of selected tax increases.

The economic model is based on the economic and fiscal forecasts as of January 2015.

 

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