Why Trudeau’s infrastructure plan may not be a quick and easy fix for the economy after all

Solving Canada’s economic woes sounded so easy during the election campaign. The Trudeau Liberals promised a $125-billion infrastructure plan — billed as the biggest in Canadian history — that would “kick start” the economy and, they’re expected to follow through now that they’re in power.

We’ll get our first detailed look at what the Liberals actually have in mind on March 22 when they release the federal budget in Ottawa. But in the meantime it’s worth thinking about the infrastructure promise: Can a federal government spend its way to economic Nirvana?

A handful of think tanks have generated studies that claim positive results are guaranteed. For example, Ottawa-based Broadbent Institute said spending on infrastructure triggers a multiplier effect that percolates through the economy. For every buck a government spends on infrastructure, $1.43 is added to short-term GDP and up to $3.83 is added to long-term economic growth.

Such figures make infrastructure spending sound like a perpetual cash machine. But while Canada’s economy, bashed by the rout in commodities, particularly oil, needs something to help turn it around, other economists are far more skeptical that this particular strategy is the way to go.

They aren’t denying that Canada needs to boost infrastructure spending. On the contrary, many will tell you that the country needs to step up its investment in assets that will boost economic productivity. If transportation corridors improve, for example, it benefits the economy by making it easier for manufacturers to get goods to market.

They’re just not sure that all infrastructure projects generate the instant returns some Canadians have been led to expect.

“To the extent the Liberals are selling the idea that all we have to do is spend a few extra billion dollars on something and then we’re back to the good times, well, no, that’s not going to happen,” said Stephen Gordon, an economics professor at Laval University in Quebec City.

The Liberal government’s 10-year, $125-billion plan isn’t all new money, but an expansion of an existing $65-billion plan put in place by the previous government. The money is also spread over time, so the amount flowing into the economy is more like $10 billion a year, a fraction of the $300 billion or so the federal government spends each year.

Dario Ayala/The Gazette/Postmedia News filesA worker climbs down a set of metal stairs at the St. Lambert Lock in the Saint Lawrence Seaway. Some economists are unsure that all infrastructure projects will generate the instant returns Canadians have been let to expect.

Of course, $10 billion is a lot of money, but it represents only 0.5 per cent of Canada’s $2-trillion GDP. And since the new money being spent is only about $5 billion or 0.25 per cent of GDP, the plan looks more like a rounding error on the federal balance sheet.

That sum is a far cry from the stimulus promise — an instant cash injection that will flood a weak economy with money and jobs — marketed by the Liberals to voters.

Moreover, even if the planned funds weren’t a drop in the proverbial bucket, there are problems with the plan.

Mike Moffatt, an assistant professor at Western University’s Ivey Business School in London, Ont., points out the Liberal plan is actually trying to serve both as a short-run stimulus and a long-term productivity boost.

Link: http://business.financialpost.com/news/economy/why-trudeaus-infrastructure-plan-may-not-be-a-quick-and-easy-fix-for-the-economy-after-all