Trudeau government bets big on infrastructure investment amid rout in commodity prices
Source: The Wall Street Journal
In the global struggle to boost growth, a Canadian experiment in fiscal spending is providing a test case for some of the world’s biggest economies.
Prime Minister Justin Trudeau’s Liberal government unveiled a plan last spring to spend heavily on tax benefits and infrastructure, with $120 billion Canadian dollars (US$91.39 billion) going into infrastructure over the next decade, including about one-tenth of that on short-term projects.
It’s a bold bet to inject life into an economy struggling with a rout in commodity prices, especially crude oil, which was once Canada’s top export. It also highlights the limits of monetary stimulus, since the country’s central bank cut rates twice in 2015, to 0.5%, and has acknowledged—as its counterparts around the world have—that monetary policy becomes a less powerful tool when interest rates are already low.
Mr. Trudeau’s big infrastructure spend will be largely financed by a bigger deficit, which is projected to reach C$29.4 billion this fiscal year, or about 1.5% of gross domestic product. That’s a sharp turn from the balanced-budget promise of his Conservative predecessor, who hewed the austerity path Mr. Trudeau is now shunning.
Canada’s efforts stand in contrast to many of the world’s economies, whose finance ministers and central bankers meet this week in Washington for semiannual meetings of the International Monetary Fund and World Bank. Some—like Australia, also hit by the commodity rout—are trying to use coordinated fiscal and monetary policy. But larger advanced economies are holding firm to tight budgets, making Canada’s embrace of debt-fueled stimulus unusual.
“The eyes of the world—the economists—will be watching to see how Canada performs,” said Martin Eichenbaum, a Northwestern University economist who is also an international fellow at the C.D. Howe Institute, a Canadian think tank. “We’re all watching to see: Will they get it right?”
Though Canada is breaking from the experience of most major advanced economies, the idea of leaning more heavily on infrastructure spending to boost growth is regaining currency. Years of ultralow interest rates haven’t been enough to fuel global economic growth, and many economists say a fiscal role is needed.
The Paris-based Organization for Economic Cooperation and Development in February called on governments to borrow at current low rates to boost infrastructure spending as part of a collective bid to increase global growth. Coordinated spending would help all countries get a “bigger bang for everybody’s buck,” OECD Chief Economist Catherine L. Mann said. She said Canada made the right choices in deciding what to spend its money on, and offers an example of the kind of behavior the OECD is promoting.
Canada’s plan also won praise from the IMF, which has urged governments to do more to boost a sagging global economy.
Finance Minister Bill Morneau has said the new spending—which during the first two years includes about 40% for infrastructure and most of the remainder for child benefits and other social transfers—should add 0.5% to Canada’s economic growth in the fiscal year ending 2017 and 1% in the fiscal year ending 2018. Economic growth in Canada, which averaged around 3% during the decade leading up to 2008, was just 1.1% in 2015 and the Bank of Canada has said it expects 2016 growth to come in around 1.3%.
Both U.S. presidential candidates have called for new infrastructure spending, and the U.K. is considering additional stimulus after the vote to exit from the European Union.
Japan recently announced about $74 billion in new stimulus spending. That country is an outlier in fiscal stimulus spending: The Japanese government has added to its significant debt through several years of stimulus spending.
It’s still unclear whether the Canadian bet on fiscal stimulus will pay off, and much of the spending has yet to be detailed. While most short-term infrastructure projects announced in recent months should be complete by spring of 2018, the bulk of Canada’s infrastructure spending will be spread over the next 10 years.
The decision to spread spending over the next decade should allow time for the government to choose its projects wisely, said Pedro Antunes, deputy chief economist at the Conference Board of Canada, a business-research organization.
“We want to make sure that it’s not just to drive GDP for the sake of driving GDP,” Mr. Antunes said. “We want to make sure that it’s a project that will have some long-term benefit, be it a park that raises people’s well-being, or something that lifts [economic] potential down the road.”
The expected length of the infrastructure program contrasts with Canada’s last big stimulus effort, in 2009, when the former Conservative government was aiming to pull the country’s economy out of recession. That round of funding totaled C$47 billion and was designed to cover a two-year period, after which the government set its sights on returning to a balanced budget.
Canada’s auditor general concluded that the 2009 spending program was managed well, though the government’s reporting on job creation and on the effectiveness of individual projects fell short.
Spending at colleges appeared to work well, since many schools already had a backlog of infrastructure projects they hoped to complete. A new ventilation system at Mount Allison University in eastern Canada, for example, had been a priority for the school for more than 10 years.
Other projects were criticized for being rushed through so they could qualify for the federal funding. The cost of an underpass built in the east coast city of Halifax grew to about C$16 million due to significant cost overruns, a report from that city’s auditor general found.
Mr. Eichenbaum said the two governments’ approaches reflect different economic realities. The problem Canada faces today isn’t a recession, but rather an extended period of slow growth. That reduces the pressure to dole out a lot of money quickly and makes longer-term projects more attractive.
Other advanced economies, many in similar straits, will be watching the results closely.