As Canada’s economic outlook darkens, the federal government is looking for shovel-ready projects to jump-start its ambitious infrastructure-spending plan.
Iain Black, president and CEO of the Vancouver Board of Trade, has a suggestion.
“Purchasing 75 new SkyTrain cars at a cost of $275 million, which are replacing 30-year-old cars, and then take advantage of that to expand the capacity of the Expo and Millennium line.”
There’s more to Black’s elevator pitch: the SkyTrain cars are made by Bombardier (TSX:BDRPF) in Kingston, Ontario, and its factory there is about to complete its order of new cars for Metro Vancouver’s Evergreen Line, which is nearing completion.
“That production line may indeed shut down and move,” Black said, “so a commitment to get 75 additional cars becomes very much a win-win-win across provincial borders.”
The idea comes from Metro Vancouver mayors’ stalled plan to expand Metro Vancouver’s transit system at a cost of $7.5 billion. Some mayors, Black said, are lobbying the federal government with similar projects.
It’s an example of the jockeying for infrastructure funding that’s expected as the Liberals, back in power for the first time in more than a decade, swap Conservative balanced budgets for stimulus spending and deficits.
Where that stimulus spending will be invested and how big the Liberals’ deficit will be are key issues B.C. economists and budget advocates will be watching for as the government presents its budget during the week of March 21.
“The economy has deteriorated since they put the election platform together,” said Jock Finlayson, chief policy officer at the Business Council of BC. “When they talked about $10 billion deficits, now suddenly it’s much bigger than that, and that’s not the government’s fault.”
In last October’s federal election, voters backed the Liberal plan to run annual $10 billion deficits to stimulate the country’s flagging economy – the opposite of the Conservatives’ insistence on balanced budgets and restrained spending. A centrepiece of the Liberal plan is spending billions on new infrastructure, with an emphasis on transit, attainable housing and child care.
But federal deficits are expected to soar as Canada’s economy worsens along with stalled global markets and a prolonged oil slump.
A February update showed a much gloomier picture than expected: 2016’s projected $3.9 billion deficit ballooning to $18 billion – and that’s before planned additional government spending is taken into account.
“We are comfortable with the government of Canada running budget deficits,” Finlayson said. “I get more concerned when I see things like a report from TD Bank (TSX:TD), which suggested that the federal government was going to run five years, based on certain assumptions, of $30-billion-a-year deficits. That is not something we’re recommending.”
But Iglika Ivanova, senior economist with the CanadianCentre for Policy Alternatives, said it was encouraging that the government had already shown a willingness to move beyond the $10-billion-a-year deficit plan because Canada’s economy needs help. She said she would be watching for the Liberals to deliver on their affordable housing, child-care and income inequality promises.
The projected deficit for 2016-17 has grown to $18 billion as falling oil prices and lower economic growth have reduced government revenues
“In order to stimulate the economy you need to have a bigger deficit just because the economy is so bad,” she said. “To the extent that they are talking about a stimulus about $10 billion in the fall, I think we should see more than $10 billion on top of the $18 billion [shortfall].”
Ivanova and Finlayson agree that, with borrowing rates at historic lows, it’s the right time for a major investment in Canada’s aging infrastructure. But it’s unclear whether the budget will show Canadians where the money will be spent.
“I don’t know if we’ll see infrastructure breakdown, or maybe a framework to guide decision-making,” Finlayson said.
“If so that’ll disappoint some people who are expecting to see a laundry list of very specific projects that are going to be funded for very specific sums of money.”
Andrey Pavlov, a professor of finance at Simon Fraser University’s Beedie School of Business, said housing is the No. 1 economic and social issue facing B.C. today.
“It’s dampening all other activities because people spend a large portion of their income on housing, whether owned or rented. More importantly, this puts all of our economic fortunes in one asset and one activity: housing. If anything happens to the real estate markets, as it always does, B.C. has absolutely nothing else to fall back on.”
He said the situation has been exacerbated in large part by the Bank of Canada keeping interest rates artificially low and the Canada Mortgage and Housing Corp. insuring banks against defaults.
Ottawa, he said, is therefore short-circuiting the normal mechanisms that keep the real estate market in check.
“Add to that the blind eye our tax code is turning toward tax evasion in real estate, and you suddenly have a lot the federal government can do – or rather stop doing – to help our housing issues.”
Pavlov also criticized the Liberal government’s proposed stimulus spending. He said it will worsen – not reduce – the negative effect on the country’s bottom line from the persistent global commodities tailspin because deficit spending helps an economy only in the short term.
“If deficit spending led to prosperity, Greece would have been bailing out Germany, not the other way around. Deficit spending of this magnitude will ensure that our children are far poorer than us, because they are the ones who will be paying our bills.
Charles Lammam, the Fraser Institute’s director of fiscal studies, agreed. He said the infrastructure stimulus spending proposed by the Liberals is not an effective strategy for addressing the economic challenges faced by provinces with energy-reliant economies.
“These provinces have been hit by a supply-side shock that can’t be addressed through stimulus spending, namely the precipitous decline in the price of commodities – particularly oil and gas.”
He added that Fraser Institute research based on Statistics Canada data determined that the two-year, $47 billion stimulus package delivered by the previous federal Conservative government had a negligible effect on Canada’s economic turnaround in the second half of 2009.
Meanwhile, Lammam said the federal Liberals have announced several policy changes, including a moratorium on oil tankers off B.C.’s coast and new climate change tests for pipeline and liquefied natural gas proposals, that increase the risks and uncertainties already facing the country’s energy sector.
The first budget from the Justin Trudeau Liberal government, therefore, needs to mitigate that uncertainty for the country’s oil and gas sector, he said.
Lammam added that the budget also needs to start addressing two other critical issues:
•the economic impact of the country’s aging population and Canada’s rapidly evaporating pool of working-age Canadians; and
•the 41% decline over the past decade in the rate of business startups that have five to 20 employees.
He said the drop in the number of business startups with 20 to 50 employees is even more startling: 61% over the same period.
