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Mind the gap

By Pedro Antunes | March 30, 2015
Mind the gap
Pedro Antunes

If investing in public infrastructure is the engine of growth, have we taken our foot off the gas pedal? Recent numbers say yes – and the challenges to closing our infrastructure gap will only be exacerbated as provincial governments deal with difficult finances. It is generally accepted that Canada has underinvested in public infrastructure, but by how much is hard to say.

Statistics Canada, which compiles data on public infrastructure across regions and by asset type, provides a big-picture view. According to its figures, public investment lagged economic growth for three decades spanning the 1970s, ’80s and ’90s, such that the stock of real public capital per person barely grew from the mid-1970s to the early 2000s. By the end of the 1990s, news about crumbling infrastructure was a frequent occurrence. 

The 2000s witnessed an infrastructure revival as spending as a share of gross domestic product (inflation-adjusted) swelled from 2.8 per cent in 2000 to 4.6 per cent in 2010, spurred by peak spending from the federal and provincial governments to help offset the effects of the 2008-’09 financial crisis and recession. 

A worrisome investment trend

However, the gap seems far from closed. This is corroborated by a recent study from the Federation of Canadian Municipalities, which found that another $172 billion is needed to bring the country’s water utilities and road infrastructure up to “good” condition. Also, according to the Toronto Region Board of Trade, underinvestment in commuter rail has resulted in the Greater Toronto Area having some of the longest commute times in the world, hurting the region’s competitiveness. Montreal and Vancouver don’t fare much better, with average commutes that exceed one hour.

Yet the latest data from Statistics Canada reveals a worrisome trend: real infrastructure spending is again not keeping pace with economic growth. Infrastructure spending as a share of GDP has been falling quickly since its 2010 peak, down to less than 4 per cent in 2012 and just 3.6 per cent in the third quarter of 2014. In essence, we’re taking our foot off the gas before getting the economy up to speed.

Strong infrastructure means better cities

For many years the Conference Board has made a strong case for closing the gap on infrastructure. We know that it is an important catalyst in lifting private sector productivity, which in turn boosts Canada’s competitiveness and productive capacity. Moreover, good infrastructure plays a critical role in our quality of life and the attractiveness of our cities. This is crucial for attracting international talent at a time when labour supply and skills are constrained. Investment in municipal infrastructure must remain a priority.

But meeting this challenge will be difficult. Funding for infrastructure has typically come from a three-tiered formula, with federal, provincial and municipal governments contributing equally. Today, though, most provinces are strapped for cash – struggling to balance their books given tepid growth in revenues and escalating pressures on health care. Although the federal government is near balance, its room to manoeuvre is slim given the recent announcements of more generous family tax credits. Also, the recent slide in oil prices to below $60 (U.S.) per barrel will further erode corporate profits and tax revenues (for the federal government and oil-rich provinces), should prices stick at those levels.

The funding situation reinforces a point that the Conference Board has often made: municipal governments need more flexibility when it comes to delivering and financing their infrastructure. Securing a stable revenue base is one solution, and the federal gas tax fund – which allocates $2 billion annually (indexed to inflation) for municipal infrastructure – has certainly helped. 

The Conference Board has also argued that provinces should share out sales tax revenues with municipalities, not on a per capita basis but based on the share of collections accrued to municipalities. This change would help secure and allocate funding to places where economic and demographic growth are occurring, and where infrastructure is likely needed most. Our hub cities work has shown that it is Canada’s urban centres that compete in an ever-more-open world, and that economic growth across all regions depends on the success of the largest cities. Finally, municipalities also need to be more innovative in procuring and financing infrastructure. There’s room for a greater private sector role in providing infrastructure, helping to reduce costs and share in the risks associated with the delivery of infrastructure services.

Solutions need to be found sooner rather than later. Provincial finances are stressed, and the situation won’t turn around soon. We should mind the infrastructure gap: before we know it, should the recent trend continue, funding will again be eroded to a pittance.

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