VANCOUVER, B.C. — The International Monetary Fund's October 2014 economic outlook publication contains a chapter devoted to infrastructure policy and financing.
One of the points it makes is that investing in certain categories of infrastructure assets - particularly transportation, communications and energy infrastructure - can strengthen the foundations for long-term prosperity by expanding the economy's productive capacity and improving the competitive position of local industries engaged in global commerce. According to the analysis by IMF economists, there is often a positive "supply side" effect from well-targeted, efficiently-delivered investments that lead to a higher level of infrastructure capital stock.
The benefits of stepped-up spending on economic infrastructure were also highlighted at the recent G-20 Summit in Brisbane, Australia. At the conclusion of the Summit, the G-20 leaders committed to a Global Infrastructure Investment Initiative to address the worldwide need for improved infrastructure services.
Government plays an important role in developing and financing infrastructure. Because the "social return" from investing in infrastructure typically is greater than the "private return" that would accrue if the investment was made by a for-profit owner, historically a substantial share of infrastructure has either been directly supplied by the public sector or else delivered through public-private partnerships or by regulated industries (e.g., electric utilities). However, in recent decades, governments in many advanced economies have cut back on spending to build and maintain infrastructure, with such spending falling by one-quarter measured relative to the gross domestic product (GDP) of the major industrial countries collectively. Closer to home, Canada is grappling with ongoing infrastructure-related pressures affecting municipalities, health care, and the energy and transportation sectors.
Now would seem to be an opportune time for governments (and others) to allocate additional resources to building and rehabilitating infrastructure assets. To begin with, there is still some slack in the Canadian economy. More importantly, borrowing costs, as evidenced by the yields on 10-year government bonds, are hovering near record lows - running at less than 2.5 per cent for the federal government, and in the vicinity of 2.6 to 2.8 per cent for most of the provinces. These low yields are striking, given that expectations for future inflation in Canada are firmly anchored at 2 per cent.
In a recent development that attracted little attention, last month the federal Department of Finance announced that Ottawa has issued $1 billion in 50-year bonds, with a coupon that will generate an annual return of 2.57 per cent. This comes on the heels of two previous issues of "ultra-long" federal bonds earlier in the year. As the Department of Finance observed in the accompanying news release, "Locking in additional low-cost financing for 50 years benefits Canadian taxpayers and is consistent with the key objectives in the [government's] medium-term debt strategy."
In the current financial environment, the "real" or inflation-adjusted cost of borrowing for credit-worthy governments is less than 1 per cent. Rarely in history has money been so cheap, at least for high-quality borrowers.
But not everyone is in a financial position to increase investments in long-lived physical assets. The Canadian government, fortunately, is. At one-third of GDP, the federal government's accumulated debt is both manageable and relatively low by international standards. Worries over fiscal sustainability need not constrain Ottawa from directing additional funding toward priority infrastructure projects, particularly projects judged to have a significant economic payoff. Some provincial governments also have fiscal room to undertake additional infrastructure development should they wish to do so.
The Harper government has indeed given a higher priority to capital spending on infrastructure through its 10-year Building Canada Plan, as well as a suite of other programs focused on areas such as broadband, wastewater, border infrastructure, and transportation. A number of provinces have followed suit, while others are retrenching on capital spending.
For governments with strong balance sheets, there is an argument for doing more. Most economic forecasters are convinced that, by the end of the decade if not before, 10-year government bonds will be approximately twice as "expensive" as they are today, as measured by their market yields. While government policy-makers understandably want to maintain solid credit ratings and ensure that debt is carefully managed, it is important to recognize that the era of astonishingly low interest rates will not last indefinitely.
Stated differently, doesn't it make sense to accelerate capital spending on infrastructure assets that will be required within the next decade and beyond, when the cost of money is expected to almost double within three to four years' time?
Jock Finlayson is Executive Vice President of the Business Council of British Columbia.
