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Drop in infrastructure spending a drag on economy: Conference Board

A construction worker on the Sea to Sky Highway in B.C. in January of 2008.


Public spending on infrastructure in Canada is dropping off, even as Ottawa keeps spending millions advertising its infrastructure-heavy Economic Action Plan.

In advance of Finance Minister Jim Flaherty's fall economic update, the Conference Board of Canada has weighed in with a wide-ranging assessment of the Canadian economy.

The report notes that for the first time since the late 1990s, government spending levels are actually a drag on the economy. Fiscal restraint policies by Ottawa and the provinces are expected to contribute negatively to economic growth this year and next. Part of this, according to the Conference Board, is due to a "substantial" decline in infrastructure investment.

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Conference Board economist Pedro Antunes said provinces still face pressing infrastructure needs, but are going to have a harder time finding the money over the coming years.

"We don't really see the provinces getting out of the fiscal mess that they're in," said Mr. Antunes in an interview.

Spending on infrastructure by all levels of government is down from $54.5-billion in 2011 to $50.4-billion in 2012, and is expected to slide a bit further next year.

Mr. Antunes said this $4-billion decline is equal to about 0.3 per cent of GDP. Still, current spending levels are substantially higher than what they were over the two decades prior to the recession.

When the recession hit in late 2008, infrastructure spending by Ottawa and the provinces was a big part of the public sector's response. For the three fiscal years ending March 31, 2012, Ottawa and the provinces spent $63.8-billion on stimulus, including a mix of spending, tax cuts and unemployment benefits. Ottawa's contribution included $14.5-billion spent directly on infrastructure.

But those stimulus programs are over and regular federal infrastructure programs expire in 2014. That means one of the biggest decisions facing Mr. Flaherty this budget season is how to shape Ottawa's next long-term pledge of federal cash for infrastructure.

The wind-down of the stimulus program hasn't stopped Ottawa from promoting its efforts. A recent government report on advertising approvals for the first quarter of this year shows Finance Canada approved $16-million in Economic Action Plan ads.

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Mr. Flaherty has repeatedly called on Canada's private sector to grab the economic baton as governments work on repairing their balance sheets. Bank of Canada Governor Mark Carney has also pushed this line, chiding corporate Canada to put its "dead money" to use.

The Conference Board takes issue with this general view.

"While it's true that private sector hiring has lagged this year, it's not all that fair to suggest businesses haven't stepped up in terms of lifting investment spending," states the report.

The next big move facing Mr. Flaherty is his fall economic update, in which he revises Ottawa's expectations for growth and begins framing expectations heading into the next budget.

Last week Mr. Flaherty hinted he'll be tweaking his numbers.

"We may have to revise downward somewhat," he said last Thursday. "But so far we're in the same ballpark as we anticipated in the federal budget."

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Federal budgeting uses a growth forecast based on an average of private sector forecasts. Next Monday, Mr. Flaherty and economists will meet privately to discuss the latest forecasts.

The March, 2012, budget survey forecast 2.1 per cent real GDP for 2012 and 2.4 per cent for 2013. Ottawa also added a cushion for risk, an adjustment that amounts to assuming $3-billion less a year in fiscal revenues.

The Conference Board, which contributes to the government's private sector average, is now forecasting 1.8 per cent growth this year and 2.3 per cent next year.

Still, Mr. Antunes agrees with the Minister that Ottawa's target for balanced books by 2015-16 is achievable.

"We do feel that the federal government can get back to a balanced budget," he said.

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