In the upcoming provincial budget, Finance Minister Dwight Duncan will apparently delay billion of dollars in infrastructure spending. He contends this will save “hundreds of millions of dollars of interest cost.” This makes little sense from either a public policy or business perspective. If this kind of thinking guides the logic of the approaching budget, it will be a document that will continue the pattern of deferring short term pain at the expense of our future.
As anyone who makes choices with limited resources understands, different spending decisions create different payoffs or returns (emotional or financial). Purchasing a high quality “safe” bond from the government of Canada will yield a different return than investing in a risky venture fund. Other decisions have negative financial returns that are unsustainable, like racking up large debts on your credit card. All of this holds true for public policy decisions.
While the Ontario government is faced with many difficult choices, one thing is so clear that it is an axiom of public policy: Spending on necessary capital infrastructure is always a sound bet. Estimates are that the boost to GDP from every dollar spent on public infrastructure can be as high a $1.59. Thus, additional capital expenditure is worthwhile if the GDP multiplier is greater than the interest expense of the project. For example, if a bridge is expected to yield a 40 per cent return, then it is a worthy project if the interest expense is less than 40 per cent.
This difference between expected return and the cost of borrowing can be thought of as a “spread.” For worthwhile infrastructure projects such as public transportation, high-traffic roads, and efficient energy infrastructure, the size of the spread makes such investments sound.
Beyond increasing short-term demand, smart infrastructure projects boost the long run potential of the economy as they cut costs like electricity and gasoline bills that undermine both the firm and the family. For example, a recent Toronto Board of Trade report estimates traffic in the city, the worst in North America, costs the GTA economy $6-billion each and every year.
In light of the importance of spending on needed infrastructure projects, to cut such investments to save “hundreds of millions of interest costs” makes little sense. The government will be running large deficits for the foreseeable future and Ontario will be spending nearly $10-billion this year on interest costs alone. Thus, the key decision calculus is whether these deficits are being used to lay the ground work for long term prosperity – or simply to fuel current consumption and put off making tough decisions. Is the government going to go into debt to sustain a lifestyle it cannot afford, or is it going to use deficit financing to invest in Ontario’s future?
J.C. Bourque is a business strategy consultant in Toronto. He has worked on several campaigns for the Progressive Conservative Party of Ontario.