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.

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