Prime Minister Stephen Harper and Minister of Finance Joe Oliver successfully used up most of the projected budget surpluses with their announcements in the April budget to “put money back in the pockets of Canadians”. They have left the Opposition Parties to figure out how they would deliver their election platforms, while at the same time “committing to balanced budgets.

The NDP are prepared to raise corporate taxes to finance their election platform, while at the same time maintaining a balanced budget. The Liberal’s recently announced “Canada Child Benefit” and “Middle Class Tax Cut” are largely funded by eliminating Conservative tax cuts and by the by the introduction of a new high-income tax rate of 33 percent. A shortfall of $2 billion was identified which they claim will be financed as part of their future election platform.

 In other words, don’t blow the “bottom line” in your election platform.

Where does this leave the three political parties when it comes to offering credible strategies to support jobs and growth. This is after all the number one priority of Canadians. And it should be, because it is the number one policy issue facing Canada.

 In their April budget the Conservatives allocated only about $9 billion for jobs and growth over the next five years. Most of this will not appear until after 2019-20. The NDP are prepared to raise corporate taxes.

The Liberals have not said exactly what they will d to support jobs and growth, but whatever they do the question remains as to how will it be financed?

There are three possibilities: reallocations from other spending programs or tax revenues; raising taxes; or introducing new innovative financing mechanisms.

Reallocations from other spending programs are a non-starter. Since 2010, departmental budgets have been subject to ongoing restraint. According to the Department of Finance direct program expenses will have been reduced by about $14.5 billion annually due to the restraint measures introduced since the 2010 Budget. This represents a reduction of about 11 per cent.  Most of this is to be achieved through freezes on operating budgets and cuts to defence and international assistance.

In contrast, there are considerable opportunities to find savings on the revenue side to finance infrastructure spending.  The current corporate and personal income tax systems have become overly complex, unfair and burdensome. The Auditor General in his latest report concluded that the Finance Department has no idea as to the effectiveness tax expenditures are distorting economic decisions, misallocating resources and reducing market efficiencies and productivity.

 A detailed examination of these tax expenditures could generate savings of billions of dollars annually. These savings could be reallocated not just to finance new infrastructure but to lower taxes as well.  Even though such a review would be politically challenging, it needs to be undertaken and now is the time. The proposal by the new Premier of Alberta to undertake a review of the energy royalty regime is a step in the right direction.

Then there is the option of raising taxes to pay for infrastructure spending. For obvious reasons that isn’t going to happen

Finally, are there innovative funding mechanisms to support infrastructure spending while maintaining the bottom line?  Infrastructure spending is different than spending on current goods and services. Spending on current goods and services should be paid for by the generation consuming it. 

In contrast, spending on infrastructure or capital spending benefits not only the current generation but future generations as well.  Capital spending has an economic life that usually lasts 20, 30, or 50 years, if not longer.  There is no reason why some of these costs should not be financed by future generations, who will also be benefiting from such spending.

Accounting policies, followed by most senior levels of government in Canada, already recognize this reality.  Capital spending is amortized over its service life rather than recognized when it is put in place.  Although financial requirements are directly affected by the cash outflow for such spending, the annual budgetary balance is only affected by the amortized amount

For example, the construction of a $50 million bridge, which has an economic life of 50 years, would have an impact on financial requirements of $50 million over the year(s) of construction but only have an impact of $1 million per year for the next 50 years on the budgetary balance, along with the annual borrowing costs. As a result, the impact of capital spending on the budgetary balance is spread out over its economic life, thereby minimizing its impact on the budget balance.

Other levels of Government have also recognized this difference.  Most municipalities are allowed to borrow for certain types of capital spending but need to finance current expenditures from current revenues.  For presentational purposes, a number of provinces (Alberta and British Columbia) have separated their budgets into two components: a current goods and services budget and a capital budget. Some countries have also adopted the “golden rule” of budgeting.  Borrowings, within certain limits, are allowed for capital spending (strictly defined) while spending on current goods and services must be balanced over the economic cycle.

Separating the budget into two components

There can be only one bottom line does not change the fact there can be only one bottom line.  That should be the combination of the two, which is presently the case. However, to better understand that bottom-line number, it is preferable to show the breakout between current costs of service and capital spending. The separation of a current services budget and capital budget should result in a better understanding of the overall budget balance. It should also allow for the provision of additional resources to address capital funding shortages.  However, it would require a major refocusing of fiscal policy, with a clear political commitment and hard rules in order to be successful.

This is an approach that should be considered carefully at the federal level. In affect, it would commit the government to balanced operating budgets (BOB) but not necessarily balancing the total budget (BBL) .

Over 95 per cent of Canada’s infrastructure is controlled by the provinces, territories and municipalities, for which the federal government already allocates significant amounts of funding through its New Building Canada Plan; a $53 billion plan spread over ten years. These amounts directly affect the federal government’s budgetary balance, as it has no ongoing liability with respect to any of the projects financed through this plan

 In the 2015 Budget, the Government announced that it was exploring new innovative financing and funding mechanisms, along with flexible payment arrangements, but this will not take affect for some years.

In the current financial circumstances, the federal government could do more now to assist the provinces by providing low cost debt financing.

The federal government has a low and declining debt burden and a sustainable fiscal structure, whereas most of the provinces and territories do not. The federal government can borrow at a much lower interest rate than the other jurisdictions, given its strong credit position.  It could then pass these savings to the provinces and territories.

 This could be done through the establishment of a federal Crown Corporation, modelled along the lines of the Export Development Corporation.  The federal government would borrow on behalf of this Crown Corporation by issuing long-term (30 year) debt at today’s historical low interest rates. Currently the federal 30-year bond is yielding around 2 to 2.3 per cent.  Ontario and Quebec would have a premium over this of around 1 per cent and other provinces higher.

 In the 2007 Budget, the federal government announced that it would borrow on behalf of the Business Development Bank of Canada, Farm Credit Canada and Canada Mortgage and Housing Corporation. There is no reason why this could not be extended to this new Infrastructure Crown Corporation.

 Provinces could then borrow for specific infrastructure projects from this new Infrastructure Crown Corporation at rates below what they would pay.  As long as the Infrastructure Crown Corporation recoups its borrowing and administrative costs, there would be no incremental impact on the federal government’s budgetary balance.

 Under this approach, the “subsidy or support” to the province is equal to the difference between what they would normally have to pay to borrow and the rate the government is borrowing at. Currently this subsidy would be one per cent or higher depending on the province. The subsidy could be increased but this would impact the federal budget balance although not by much. For example, if this Infrastructure Crown Corporation offered an interest rate below its financing costs, that would represent a direct subsidy to the provinces. It would then directly affect the federal government’s budget balance. A new Infrastructure Crown Corporation could be started immediately. It is not dependent on dubious forecasts of revenues and surpluses that might, or might not, occur five years from now.

It would take advantage of historically low interest rates, which won’t be with us forever. And it would provide immediate low financing for much-needed provincial and territorial infrastructure projects.

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