Years into Liberals’ ambitious infrastructure program, few signs of promised economic benefits

OTTAWA — In the last week of August 2015, with a federal election campaign underway regardless of whether Canadians were willing to interrupt their summer plans to pay attention, the Liberal Party — in third place in most polls and eager to set itself apart — announced a policy that diverged sharply from those of its opponents: party leader Justin Trudeau promised a hefty rise in infrastructure spending over the next decade, aimed at jolting the faltering Canadian economy. And despite the received electoral wisdom about the importance of balanced budgets, he pledged to fund it, in part, by running deficits.

When Trudeau took office as prime minister later that fall, the spending plan became a centrepiece of his mandate, totalling a mammoth $186.7 billion over 12 years.

That enormous pool of money came alongside lofty ambitions: It would reinvigorate Canada’s aging roadways and bridges, expand public transit, build green energy assets and widen access to social housing in the North, among other things. The plan amounts to roughly $5,186 for every Canadian citizen over the next decade. The C.D. Howe Institute, a think tank, called the program one of the biggest infrastructure commitments in Canadian history.

If you’re coming to commit $186.7 billion … you better know where this money is being spent

Three years later, however, the program has fulfilled few of its lofty ambitions. The initial rollout of the program was hobbled by delays, forcing Department of Finance officials to push billions worth of planned spending into the future. Ottawa’s budget watchdog found gaping holes in how spending was being tracked and reported, revealing a program that seems to lack organization and transparency. Meanwhile, provincial spending on infrastructure, long expected to rise in tandem with the federal plan, have instead fallen, wiping out a key assumption in the Liberal plan.

The expected economic benefits have also failed to materialize. In the 2016 federal budget, the Liberal government estimated the infrastructure program would raise Canadian GDP by 0.4 per cent in fiscal 2017-18. An August report from the Parliamentary Budget Officer estimates the program actually increased GDP between just 0.13 and 0.16 per cent.

These shortfalls in both bucks spent and bang delivered could cast doubt on the plan as the Liberals enter their 2019 re-election bid. But they also raise deeper questions about whether government can effectively channel this sort of sprawling infrastructure commitment into real-life, tangible economic gains. And beneath all of that, an even murkier question: after the billions have been spent, how can we actually measure whether the program’s been a success?

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Flaws in the program emerged almost as soon as it was rolled out, exposing Ottawa to waves of criticism on a file that typically provides nothing but good news. Unlike some of the more centralized infrastructure programs that preceded it, the Liberal plan was spread across 32 different departments and agencies, each responsible for its own individual pool of money.

That sprawling structure was at least partly responsible for widespread reporting gaps across the agencies, leaving billions of dollars unaccounted for. In February 2017, the PBO released a report that found only $4.6 billion of the $13.6 billion in planned spending under Phase I of the program — spanning 2016 and 2017 — had actually been assigned to specific projects. Many agencies were unable to provide basic information like a list of projects, project costs and anticipated start dates.

A June 2017 study by the Senate National Finance Committee said it was “troubled by the fact that there is no one federal department accountable to Parliament for this $186 billion program,” and that it was “difficult to understand” why many agencies and departments would fail to report spending details.

Justin Trudeau at a campaign rally in August 2015. FRED CHARTRAND/THE CANADIAN PRESS/FILE

The University of Ottawa-based think-tank Institute of Fiscal Studies and Democracy (IFSD) founded by Canada’s first parliamentary budget officer, Kevin Page, studied two separate data sets in order to track Ottawa’s spending. It determined that both were so lacking in information that they were unable to produce even a rough analysis.

“There were just so many gaps that one expert essentially said it was as though they were being purposely non-transparent,” said Azfar Ali Khan, director at the IFSD.

“If you’re coming to commit $186.7 billion — the single-largest investment by this government over a 10-year period — you better know where this money is being spent,” former Conservative infrastructure critic Michael Chong said in an interview this summer.

According to Infrastructure Canada’s public database, most of those reporting gaps have since been filled — with the exception of a still-missing $700-million that is largely due to an ongoing failure by two agencies, Indigenous Services Canada and Crown-Indigenous Relations and Northern Affairs, to report details of their spending.

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Meanwhile, funding for Phase II of the program, which includes the bulk of the spending over the next decade, has begun to make its way out the door. A National Post review of the most recent data suggests about $18 billion has been allocated toward roughly 10,700 individual projects across Canada, from wastewater treatment plants to city rail line expansions.

But if the plan seemed to lack transparency, it would face even deeper scrutiny over whether it has actually stimulated the economy.

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When the Liberals first announced their deficit-funded infrastructure plans in the summer of 2015, the Canadian economy was faltering after a collapse in oil prices. Unemployment was about to reach 7.2 per cent, the highest since December 2013. Experts warned that Canada, seen as having been unscathed by the 2008 financial crisis, was suddenly at risk.

During a January 2016 tour of a construction site for a City of Ottawa light rail project, then-minister of infrastructure Amarjeet Sohi said the federal government was “keenly aware of the need to intervene in the economy.”

But by late 2017, with much of the promised spending yet to get out the door, the situation had changed. Oil prices were on the rise. Labourers in the prairies were getting back to work, shrinking the unemployment rate to its lowest level in years. Average wages were climbing. GDP was growing at a breakneck speed, far surpassing the trajectory of any other G7 nation.

Then-Infrastructure Minister Amarjeet Sohi tours the site of a future light rail transit station in Ottawa with Mayor Jim Watson, Jan. 13, 2016. ADRIAN WYLD/THE CANADIAN PRESS/FILE

Suddenly the notion of stimulus spending seemed counterproductive. Economists have long argued ill-timed stimulus spending can simply drive up inflation, pushing interest rates higher and effectively erasing any potential economic gains. Many now recommended Ottawa instead reduce its deficit in order to save for a rainy day.

“This is not the right time in the cycle for deficit spending,” David Rosenberg, chief economist at Gluskin Sheff + Associates Inc., said in an interview this summer.

The wisdom of stimulus spending has been a topic of debate ever since the 1930s when, amid immense political pressure, U.S. President Franklin D. Roosevelt announced a series of fiscal measures aimed at jolting the country out of the Great Depression. Decades later economists still debate whether the move revived the U.S. economy, or whether it simply disguised its deeper flaws and endorsed a new-found addiction to debt-fuelled spending.

Former prime minster Stephen Harper similarly jolted the economy with a massive infrastructure spending plan during the 2008 crisis. Some of that spending is still being rolled out today (The Liberals took roughly $92 billion of Harper-era spending and rolled it into their current program, heaping on nearly $100 billion of their own to reach the $186.7 billion total).

But the bigger question might be whether the program has had the intended economic effects in the first place.

Even with the unprecedented scale of the Liberal program — its total contribution is set to rise from about $10-billion-per-year today to around $18 billion in 2025-26 — the federal government is responsible for only a small fraction of overall infrastructure spending in Canada. The bulk of that spending instead comes from the provinces and municipalities.

A central conceit of the Liberal plan was that the provinces, starved for infrastructure dollars yet eager to build a long list of projects, would pitch in more spending if Ottawa did the same, which Infrastructure Canada said in a 2016 report would “more than double the reach of the Plan’s funding.”

It has fallen well short of that mark. An August PBO report found that while provincial infrastructure spending levels have been rising gradually, “significant downward revisions” in provincial spending levels in 2017-18 threaten to “diminish the magnitude of economic gains” seen by Ottawa. The provinces spent $52.6 billion on infrastructure in 2017-18, down from the $57-billion estimate.

The notion that higher federal funding will incentivize provinces, or even municipalities, to likewise raise their spending is the driving force behind many big-ticket infrastructure programs. It’s based on a simple theory: that higher investment levels will in turn incentivize still more investment, creating a sort of upward spiral that will prompt new projects to be approved and funded.

This is not the right time in the cycle for deficit spending

The expected gains from such a program are often determined by measuring its so-called “fiscal multipliers” — basically, the ratio of economic payoff for every dollar of economic stimulus spent.

In its 2016 budget, Ottawa suggested the fiscal multiplier of its infrastructure spending would be 1.4 in 2017-18 (or that it would generate $1.4 for every $1 that it spends). Such multipliers often form the underlying assumptions behind such big ticket spending plans. However, the PBO pegs the multiplier ratio for that year at 1.1, or just $1.1 dollars of growth for every dollar it spends. 

Meanwhile, in that same budget, Finance officials had admitted “there is some uncertainty, and debate, surrounding the size of fiscal multipliers” and how they are calculated.

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That uncertainty goes to the heart of questions about what motivates infrastructure programs like these. There remains a near-consensus across the political spectrum that the federal government needs to spend to maintain the roads, bridges, telecommunications networks, rail lines and waterways Canadians need. However, there’s little evidence governments can accurately gauge the impact of that spending.

The error in the Liberal plan might simply be that they marketed it as a stimulus package in the first place, according to former Bank of Canada governor David Dodge.

“My criticism of politicians is they tend to sell this stuff on stimulus grounds rather than production capacity growth grounds,” he said.

That fixation on stimulus means the federal government has often turned to infrastructure spending in times of economic anxiety. While it’s usually good politically for the government of the day to be seen to be doing something, the sudden influx of federal dollars — and the politicians’ desire to see projects underway before election time — can cause a bottleneck of new projects moving ahead within a short time period, raising costs for labour and materials.

Pat Vanini, executive director of the Association of Municipalities of Ontario, said the most recent round of Phase I stimulus spending by the Liberals required municipalities to apply for funding within a tight 18-month window. She said a similar trend took place when then-prime minister  Harper ramped up infrastructure spending in a bid to ride out the 2008 financial crisis.

Such expedited processes can sometimes funnel capital into the wrong sorts of assets. Rather than building the most economically beneficial projects, provincial and municipal governments may be forced to favour “shovel-ready” projects in order to meet deadlines, even if they’re not high priorities.

“They had to be shovel-ready, and a priority project might not be shovel-ready,” Vanini said.

Municipal officials, for their part, favour steadier streams of infrastructure dollars. Many point to the federal gas tax fund, which pulls together tax revenues from gasoline and diesel sales across Canada and ploughs that money back into the municipalities on a biannual basis.

Such funds also allow municipalities to select the most ideal projects and maximize their benefits to local residents — an area where Ottawa has routinely fallen short.

A study by the University of Calgary’s School of Public Policy analyzed 13 recent public transit projects in the Toronto and Hamilton regions based upon their net benefit to taxpayers. It found three projects whose net benefit was deemed to be below the cost to build, despite still receiving funding, while only one project showed a large net benefit to citizens. Another three projects showed small net benefits, while the six others did not have publicly available business cases.

“Given that these projects can run into the billions of dollars, tie up immense amounts of government resources, and can cause any number of disruptions to business and families, it is remarkable how little cost-benefit scrutiny is brought to bear on them,” the report said.

Infrastructure just sounds like a good thing

Combined with the perception by some that Canada is slowly losing its competitive edge due to an increased tax burden and regulatory uncertainty, infrastructure spending shortfalls only add to the misery.

“Not only has the government failed to provide a business environment conducive to more investment by firms, it has not produced the promised boom in its own infrastructure spending,” economist Philip Cross wrote in a recent report for the Macdonald-Laurier Institute.

Since 2016, infrastructure spending in Canada across all level of governments has increased only 8.7 per cent in volume, or 0.2 per cent per year, the report said.

Even so, large-scale infrastructure programs remain popular with voters.

“Infrastructure just sounds like a good thing,” said the IFSD’s Azfar Ali Khan. “But when it comes to the question of how has our infrastructure performed, there’s just no answer for that — and I don’t know why.”

That absence of clear answers has hardly given pause to politicians, who appear happy to attend as many ribbon-cutting ceremonies as their schedules permit, promoting everything from rail line expansions to wind farms. Perhaps in time they will know whether it was worth the cost.

Email: jsnyder@postmedia.com | Twitter: jesse_snyder