Fraser Forum

Infrastructure spending OK, but that’s not what the Liberals proposed

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The dust is settling from the Liberal government’s first budget, which proposed large spending increases, some tax hikes, and deficits throughout their mandate with no balanced budget in sight. Some of the details of the budget, which ran almost 270 pages, are now emerging, resulting in serious questions about aspects of the budget.

As a number of researchers have already observed, the rhetoric of the Liberal budget simply doesn’t match their specific plans (see here, here, here). This gap between the rhetoric of the budget and its actual proposals is front and centre in one of the budget’s signature sections: infrastructure spending.

The Liberal Party ran on a promise to improve the long-term economic growth prospects of the Canadian economy, which is a laudable goal. The rationale for infrastructure spending, both during the campaign and in the budget itself, has focused on improving the ability of the economy to grow over time.

The logic behind the argument is straightforward—invest in infrastructure like roads, bridges, highways, etc. that enable producers to more efficiently (i.e. at lower costs) deliver goods and services to customers. Put differently, the economic rationale for infrastructure is to reduce the costs of doing business. Put aside the argument advanced by a wide range of economists that such investments could be achieved without public funds by using tolls and other pricing mechanisms.

The problem with the Liberal plan is that very little of the $11.9 billion in new infrastructure spending is proposed for these types of investments. The Liberal budget proposes to spend the nearly $12 billion on “infrastructure” as follows:

• $3.4 billion over three years to upgrade and improve public transit

• $5.0 billion over five years for green infrastructure, which includes:
        - $518 million for climate change adaptation and mitigation projects
        - $250 million for municipal capacity-building
        - $2.0 billion for clean water and wastewater
        - $2.2 billion for water, wastewater, and waste management infrastructure for First Nations communities

• $3.4 billion over five years for social infrastructure, which includes:
         -$1.2 billion for social infrastructure in First Nations communities
         -$342 million for cultural and recreational institutions
         -$400 million for early learning and child care
         -$1.5 billion for affordable housing

Without debating the specific merits of any of these individual initiatives, it’s fairly clear that most of the “infrastructure” spending is not aimed at improving the core infrastructure of the country such as our roads, bridges and highways. In other words, simply calling the spending delineated above “infrastructure” doesn’t mean the spending is actually on infrastructure.

In addition, there are genuine questions about the “multipliers” included in the budget as a rationale for this spending. The argument, rooted in Keynesian economics, is that governments can spend one dollar and generate more than one dollar’s worth of economic activity. The narrative employed in the budget, which combines the concepts of both improving the long-term performance of the Canadian economy and the multiplier of infrastructure spending, is that such spending pays for itself.

The problems with this argument are twofold. One, as outlined above, almost none of the spending referred to as infrastructure is actually on infrastructure.

And two, the concept of multipliers has been rigorously debated in economics and there is genuine debate about their validity. For instance, economist Valeria Ramey of the University of California, San Diego has been one of the leading researchers into government spending and multipliers over the last decade. Her extensive research indicates multipliers of government spending above 1.0, which means $1.00 of government spending actually results in more than $1.00 of economic activity, are arguable at best. There’s substantial evidence that the multipliers are actually less than $1.00, meaning that the government spending actually results in a reduction in economic growth rather than an expansion.

As is the case with so much of the Liberal’s first budget, their rhetoric is not matched by actions. In this case, a laundry list of social and environmental-related spending is couched in the blanket of infrastructure when actual infrastructure spending is largely absent from the proposed spending.