Waiting for Stimulus

It appears that, once again, “We are all Keynesians now.” Almost everyone agrees that the federal government needs to inject significant fiscal stimulus into the deteriorating Canadian economy. In particular, there now seems to be a consensus for more infrastructure investment.

While accepting this prescription in theory, the federal Conservatives maintain that tomorrow will simply be a fiscal “update” and that Canadians will have to wait until the budget (or closer to then) for a stimulus package. This distinction between an update and a budget does not fit recent practice.

The fall 2006 Tax Fairness Plan, which overhauled the taxation of income trusts, cut the corporate tax rate and introduced pension income splitting, was arguably as significant as the spring 2007 Budget. The fall 2007 Economic Statement, which enacted a new round of corporate tax cuts and cut the GST by another point, was far larger than the spring 2008 Budget, which essentially just affirmed these measures.

In 2006 and 2007, the Conservatives did not believe that new fiscal initiatives needed to wait until budget time. In 2008, the urgency of new fiscal initiatives is dramatically greater.

Indeed, I had thought that changing the document’s name from Update to Statement was partly to acknowledge its frequent inclusion of Budget-style measures. (For the record, tomorrow’s document has been announced as “Economic and Fiscal Statement 2008,” even though government members are informally calling it an “update.”)

Part of the real reason for delaying a stimulus package, or at least its infrastructure component, may be the difficulty in arranging private financing for Public-Private Partnerships (P3s). But the point of a stimulus package is for government spending to offset the lack of private spending. A further reason to undertake public investments now is that public borrowing is especially cheap since lenders heavily favour safe government bonds over riskier private-sector bonds. Insisting that new infrastructure projects be organized as P3s largely defeats the purpose of ramping up infrastructure spending at this time.

The notion that governments could not run deficits was a major motive for P3s, which essentially shift needed borrowing from government accounts to private enterprises. (Credit rating agencies were not fooled and treated public liabilities from P3s the same as direct public debt.)  With the government now openly acknowledging that it will run a deficit, the rationale for P3s is even less clear.

An expert quoted by The National Post “said one way to overcome the problem would be for the government to provide the financing itself. Since governments are among the few players that can get the benefit of lower borrowing costs, that advantage could be brought into play in doing P3s, he said.” While this approach makes sense, it is hardly a new innovation. Having the government borrow money to pay private construction contractors is how almost all infrastructure was built before the term “Private-Public Partnership” was invented.

Budget 2007 decreed that provincial and municipal infrastructure projects receiving federal money must be organized as P3s. Even if the Conservatives do not present a meaningful stimulus package tomorrow, they should at least ditch this artificial constraint on public investment.