David Dodge is senior adviser at Bennett Jones and former governor of the Bank of Canada. Kevin Lynch is vice-chairman of Bank of Montreal and former clerk of the Privy Council and secretary to cabinet. Tiff Macklem is dean of the Rotman School of Management, University of Toronto, and former senior deputy governor of the Bank of Canada.
The Liberal government's first budget has used much of the available fiscal room to invest in shovel-ready and social infrastructure projects.
While this will create some welcome jobs in the short run and help communities in need, it will do little to boost medium-to-long-run economic growth. For this, the budget holds out the promise of a second phase of strategic infrastructure investment. Delivering on this promise is a critical piece of the solution to Canada's growth problem.
Aging demographics, lacklustre private investment, weak innovation and limited access to high-growth markets have all conspired to reduce the potential expansion of Canada's economy. For much of the past 40 years, real potential or trend growth has averaged 2.75 per cent to 3 per cent, with about 1.5 percentage points of this coming from labour force increases (more workers) and the other 1.25 to 1.5 points coming from productivity gains (more output per worker). But not so, any more.
The combination of rapidly retiring baby boomers and declining fertility rates is on its way to cutting labour force growth to only 0.5 per cent. Absent sustained increases in economic class immigration, this can only be replaced with faster productivity growth. But in the past decade, productivity growth has slipped below 1 per cent. In other words, on our current track, sustained real growth of about 1.5 per cent may be as good as it gets. Factor in that aging demographics will inevitably require us to devote more resources to health care, and there is not much left to grow the rest of the economy and to support our prosperity as a society.
This growth problem will not be solved with monetary stimulus or fiscal priming. It requires new investments in talent and equipment, new products to sell and access to new markets. Strategic infrastructure that unlocks private sector investment and innovation and provides gateways to new markets is an essential part of the solution.
With real interest rates near zero and underutilized design and construction capacity, particularly in the oil-producing regions of the country, there is an opportunity to make large infrastructure investments without creating inflationary pressures or crowding out private investment. In other words, there won't be a better time.
But this doesn't mean it will happen. In an environment that increasingly looks for short-term results, investing in strategic infrastructure for the long term will require steadfast political leadership. It will also require determined professional execution. Beyond political will, we suggest three critical ingredients to getting the strategic infrastructure we need.
First, a clear policy anchor. We believe the objective should be to raise productivity growth – measured as gross domestic product per worker – over the next 10 to 15 years. The primary filter for strategic infrastructure proposals would be whether they are of the scale, scope and impact to raise Canadian productivity levels. Key analytic metrics would include the private sector investment multiplier, economic efficiency gains and direct/spillover benefits from investing in the economy and ecosystems of the future. Transportation, for example, is likely to be transformed by electric and autonomous vehicles, smart corridors, artificial intelligence and global supply chains. An objective to sell or lease a proportion of the new strategic infrastructure to the private sector once constructed would align incentives up front as well as condition public expectations.
Second, a fit-for-purpose process. Executing a strategic investment plan focused on enhancing long-term productivity growth will require institutional structures with the resources and credibility to attract first-class talent in infrastructure investment, a sufficient scale and runway to attract large outside pools of capital, and sufficient independence to provide transparent and rigorous investment advice to government. Such a fit-for-purpose vehicle would be arm's length and have the analytic capacity to expertly review the many project proposals, rigorous benchmarks for what is strategic and excellent, a requirement for co-funding partnerships, and the ability to serve the policy interests and accountability needs of government while withstanding political interference.
Third, the fiscal space to invest in scale. Squaring the scale of infrastructure investments required with the prudent public borrowing capacity available will require additional sources of finance. Fortunately, as the experience of Australia and Britain demonstrates, private capital is a willing partner where the risk-return calculus is attractive and there is a commitment to scale. The design of a number of greenfield infrastructure projects by the public sector should include the possibility of direct revenue generation as this creates the conditions for the involvement of private capital. Asset recycling through the sale or lease of existing assets also increases the overall stock of infrastructure by providing incremental funding for government investments in new strategic infrastructure. Candidates for asset recycling in Canada include a host of federal as well as provincially and municipally owned assets. Existing infrastructure is attractive to private capital because it is less risky and the private sector has the managerial expertise to operate infrastructure successfully and often raise the efficiency, viability and marketability of the asset.
Getting the strategic infrastructure we need is a productivity imperative. Developing a sound execution plan should be a policy priority. Rebuilding our growth potential is the payoff.