The Liberal federal government is looking hard at fast-tracking its infrastructure program to fight a weakening economy. Why?
Yes, there's a good argument for spending heavily on infrastructure right now, at a time when money is cheap and the infrastructure deficit is deep. But none of that spending will immediately goose our torpid economy. At best, it will help growth down the road; at worst, the money could be wasted.
Bank of Canada Governor Stephen Poloz offered the best advice this week: "There is no simple policy response in this situation," he said at a press conference. "The forces that have been set in motion simply must work themselves out."
Easy for him to say; he doesn't have to get re-elected. But that's why he can speak the truth and Finance Minister Bill Morneau cannot.
Let's remember where we're at. We are seven years into a rotten global economy. The aftershocks of the 2008-09 financial crisis are still with us. Developed countries are growing slowly, and emerging economies aren't emerging as fast as we had hoped. Commodities are weak, especially petroleum, and so is the Canadian dollar.
But though things are bad, they're not that bad. Low oil prices are gutting the Alberta economy, but helping to lower energy costs elsewhere. The weak dollar is good for tourism now, and will boost manufacturing down the road. Unemployment is at a reasonable level, and though growth is sluggish, we are far from a real, oh-my-God recession.
Kevin Milligan, an economist at University of British Columbia, advised the Liberal Party on economic policy before the election. He is a big believer in infrastructure spending, but not as a quick fix for a quarter or two of weak growth.
"One of the reasons I'm pretty skeptical about the infrastructure-as-stimulus argument is the timing thing," he said in an interview.
Neither Rome nor Montreal's Champlain Bridge was built in a day. If you want to boost growth right this minute, Prof. Milligan believes, then something like a home-renovation tax credit might get people spending, but first ask yourself: Is something that might help Calgary's economy needed in Toronto? Isn't it bad planning to attack a regional problem with a national program?
Nonetheless, Avery Shenfeld, chief economist at CIBC World Markets Inc., favours heavy spending on infrastructure to stimulate the economy. He agrees that "there's no genie that you can pull out of the bottle that waves a magic wand and instantly creates growth." But "the growth slowdown that we're feeling isn't going to be over in a heartbeat," he predicts. So spending on roads will help down the road, when the economy is still likely to need help.
Bottom line: Short-term fixes won't help this economy much and, in any case, may not be needed outside Alberta and perhaps Saskatchewan.
But weak growth and low interest rates do justify infrastructure spending, which will upgrade the country's physical plant and help the economy grow in the medium term.
There's a caveat, although it's one that both politicians and voters constantly forget. All of this infrastructure spending will create big budget deficits. Those deficits can be justified when growth is weak, cities are in desperate need of bridges, sewers and public transit, and interest rates are at historic lows.
But deficits are seductive. It's easy for a finance minister to convince himself that these wise investments will pay off in the future. But then a recession – a real one, with skyrocketing unemployment – comes along and suddenly your deficits are going through the roof to pay for unemployment insurance, social assistance and other relief, and to stimulate growth.
After the recession ends, the deficits remain. Now they're large, chronic and structural. Servicing the interest on the debt consumes more and more of your budget. Bond-rating agencies are slashing your credit rating. Public servants are threatening to strike as you try to balance the books on their backs. It's the federal government 25 years ago. It's Ontario right now.
Prime Minister Justin Trudeau vows that the budget will be back in balance by 2019. We'll see.