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The case for stimulus through city spending

‘Infrastructure is twice as effective in short-term stimulus than tax cuts’


 

The case for stimulus through city spending

Municipal politicians are about to take centre stage in Ottawa, jockeying for position along with the provinces and various industry groups in advance of what’s shaping up as an epic federal budget.

The Federation of Canadian Municipalities is slated to release a long list of infrastructure projects it deems worthy of federal funding on Jan. 14. Then the FCM’s Big City Mayors Caucus gathers in the capital the following day to press their case with federal politicians.

Often this sort of pre-budget pleading is merely an annoying ritual: of course everybody wants more federal money all the time. But this year the case being made for spending billions on municipal infrastructure, in Finance Minister Jim Flaherty’s Jan. 27 fiscal blueprint, deserves a much closer look.

In the heated debate that’s being carried on in both Canada and the U.S. about what sort of stimulus spending is likely to work best, small-scale public works by cities and towns consistently scores high with a wide range of economists.

As well, the shortcomings of the alternatives are increasingly well understood. Tax cuts, no matter how much Conservative politicians love to dangle them, tend to be saved rather than spent. For example, last year’s U.S. tax rebate program, which cost Washington US$168 billion, has generally been judged a bust, since sensible taxpayers tended to use the windfall to pay off debt. Business tax cuts might be a bit better, but only if the tax breaks are specifically tailored to encourage firms to make immediate capital investments (as two eminent economists agree in this broadcast chat).

To get a sense of what’s coming from the FCM over the next couple of days, Maclean’s spoke with the federation’s chief executive, Brock Carlton.

Q: You’re going to be releasing a long list of so-called ‘shovel-ready’ municipal infrastructure proposals tomorrow. Can you ease the worries of any taxpayer who might fear that this is a grab for cash, at a time when the federal government seems happy to spread some around?

A: I would say that these projects that we’re talking about are things that have to be done. They are repairs to water systems, repairs to roads and bridges, expansions of water treatment plants. The opportunity is now to do these things, create employment, help combat the recession, and position ourselves better for the long term when we come out of it.

Q: Economists say the key is getting the projects going quickly enough to make a difference, preferably in the first half of this year, as the recession sets in. Wouldn’t it be hard to get real work started so soon after federal funding is announced?

A: We’re rolling out a list in the hundreds, close to a thousand projects. A lot of times people think about the bigger stuff, convention centres, subway extensions, that sort of thing. Those are not the kind of projects that are going to generate immediate impacts in the economy. We’re talking about smaller things that can be brought into this fiscal year and set to move very, very quickly.

Q: How fast?

A: We’re asked that projects be operational within the next construction season. That’s to get the shovel in the ground.

Q: So that’s this spring and summer. How do we know cash-strapped municipalities won’t just use the money to keep their taxes down, or clean up their balance sheets?

A: Very simple. We’ve said to the federal government we would expect there would be accountability, including a use it or lose clause.

Q: Would municipalities have to prove that the projects they undertake with this new money would be above anything already planned for 2009?

A: Yes.

Q: How much job creation can we expect to get?

A: The economic research from Informetrica tells us that $1 billion in investment equals 11,000 jobs.

Q: Why should we favour municipal infrastructure over other types of stimulus, like tax cuts to help consumers and businesses?

A: Informetrica also says that infrastructure is twice as effective in short-term stimulus than tax cuts. So a billion in tax cuts gets you half as many jobs as a billion invested in infrastructure. There’s also a lot less leakage if you invest in infrastructure, because the supply chain is largely Canadian.

Q: You mean because the supplies needed are, say, bricks and asphalt sourced here, rather than flat-screen TVs imported from Asia?

A: Precisely. And Canadians are very concerned about the economy right now, so there’s a very good chance they are going to take any tax cut and put it in the bank for a better day, which isn’t going stimulate your economy and generate any jobs.


 

The case for stimulus through city spending

  1. If only 50% of tax cuts are redirected back to the economy (highly suspect), therefore only 50% efficient; how efficient is a tax dollar spent by a municipal government?
    By the time that dollar is collected and filtered through 3 levels of government and bureacracy and delivered to the contractor to pay for the brick, how much is left for stimulation?

    I don’t know the answer, but in all the articles premoting infrastructure spending as being far superior to tax cuts as stimulus I have never seen the answer. Sure the losses of efficiency mostly stay within canada, but what impact is there in terms of direct stimulus, actual dollars helping the economy?
    There is also the difficulty with delivery time, and targeting. Most people are not brick layers or bridge builders, but do make an income and have cost pressures.
    I don’t think it’s an either or scenario, likely both strategies and measures will be implemented. They do complement each other and help address shortcomings of the other option.

  2. It seems to me that the economists can argue this every which way, but I am continually struck by the “problem” of ordinary Canadians getting their own finances in order by paying down debt or saving.

    I am extremely distrustful of any economist who asks us to put aside our common sense in pursuit of some “macro” economic benefit.

  3. If we need spending to stimulate the economy, it must be done properly – it cannot be more of the same and it must point our economy in the right direction. Also, it must be the same direction as our Southern neighbours will take, for best results.

    Under Barack Obama, the future is green. The US will invest heavily in green technology, in the coming years. So what can Canadians do?

    Wind energy has enormous potential -it has transformed the face of countries like Germany and Holland. The US is giving massive help to wind farmers. As a result, areas like upstate New York are sprouting wind farms all over, especially near the Canadian border. We can invest in wind energy projects in the economically depressed areas in rural Canada. This will create a multitude of jobs, including manufacturing of wind turbines.

    See my article at: http://www.wecanadians.com.

    We should also invest in infrastructure like inter-city trains and in light rail projects to reduce dependency on road systems. Surely, there are plenty of other opportunities for green projects that create jobs and help preserve our environment.

  4. As a municipal councillor, the costs from our end are not remarkable. Our staff formulates a ranked capital expenditure budget annually as well as a five year projection of capital projects. Any project of any significance is tendered. There is some expense to preparing tender documents and some cost to project oversight, but this is no different from a private sector project. The federal and provincial governments have harmonized their environmental approval streams. I do find that when there is federal funding involved, the process is a bit more cumbersome. That said, most of the work is done by the private sector through competitive tender.

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