Whatever you may think of the specifics of Canadian Finance Minister Bill Morneau's fall fiscal update, tabled yesterday, you can't deny that he's playing a long game. The key measures Morneau is proposing, especially as regards infrastructure financing, will only be truly effective (or not) over a term far exceeding the life of the current Parliament. And given the size of the deficits Morneau expects to run in the short term, any course correction after the next election is likely to be very painful.
Let's start with those deficits. Morneau is now projecting a shortfall of C$25.1 billion for this year. That is, to put it mildly, a pretty stunning change from last year's $1 billion shortfall. Although last March's budget initially projected a $29.4 billion deficit this year, that number included a $6 billion "contingency" amount, which has now been eliminated. This means that the underlying deficit is actually $1.7 billion higher than was foreseen eight months ago.
Looking forward, Morneau expects the deficit to rise to almost $28 billion next year, then fall gradually, reaching $14.6 billion in 2021 -- which is, of course, well into the life of the next Parliament. There is no timetable for a return to a balanced budget. What's more, these numbers include no contingency or cushion whatsoever. In other words, in this fall statement, which is not even a full budget, Morneau has tossed away two of the tools that served Paul Martin well when he was struggling with an even larger deficit problems two decades ago: the contingency provision (which regularly allowed Martin to bring in deficits below original forecasts) and the focus on a two-year planning horizon. This looks ominous.
As for the infrastructure plans, the proposed sums are huge. Ottawa is proposing to spend up to $186 billion on transportation, water, green initiatives and the rest over an 11-year timeframe -- that's more than two Parliaments' worth. This is a 50 percent increase over the amount proposed just eight months ago. Much of the money will go into joint investments with Provinces and municipalities in the usual way -- and cities like Toronto already have their noses in the trough -- but the really interesting part of Morneau's plan is the so-called Canada Infrastructure Bank.
This bank, which will not be set up until early 2017, will be partly capitalized by the Federal government, to the tune of somewhere between $15 and $35 billion, with the exact amount determined by how successful the bank is in persuading the private sector to co-invest. Will this work?
It's certainly true that big pension funds, including the major global sovereign wealth funds and Canadian players like Quebec's Caisse de depots or Ontario's teachers' retirement funds, have increasingly been looking to invest in infrastructure as an alternative to equities and bonds. However, these investors in general show little appetite for what bankers call "completion risk", which is an inevitable element of getting new infrastructure built. Investors have generally preferred to let the public sector take that risk, and then step in to buy once the project is up and running. Ontario had a disastrous experience with this with the 407-ETR toll highway north of Toronto, which the provincial government of the day built and then virtually gave away to private investors. Similarly, private investment in the UK-France Channel Tunnel only materialized when the tunnel was open and operating.
Morneau is gambling that his Canada Investment Bank will be able to change that pattern, attracting institutional investors to become involved at the outset. If he's right, the government will be able to leverage its own funds to produce far more infrastructure spending than the public purse could finance on its own. If he's wrong, however, the expected boost to GDP from infrastructure investment will be much lower than the Government has been counting on. It's a worthwhile experiment -- heaven knows, there are not many alternatives available -- but it's by no means guaranteed to work, and it's certainly not going to help much in the immediate future.
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