NDP infrastructure plan on shaky ground

Opinion

Hey there, time traveller!
This article was published 21/08/2019 (1955 days ago), so information in it may no longer be current.

The problem with the NDP’s proposal to ramp up spending on infrastructure by hundreds of millions of dollars is the party has no legitimate plan to pay for it.

Manitoba NDP Leader Wab Kinew announced this week, if elected Sept. 10, his party would spend $690 million more on strategic infrastructure over four years compared to what the Pallister government has planned.

Strategic infrastructure includes capital spending in areas such as highways, flood mitigation, health-care facilities and public buildings.

Capital spending under the previous NDP government skyrocketed from $994 million in 2007-08 to nearly $1.7 billion in 2015-16, according to a 2018 report by Manitoba’s auditor general.

Like all large capital expenditures, those costs were debt-financed. The extra $690 million the NDP is proposing to spend would also be paid for with borrowed money.

In his report, auditor general Norm Ricard found while operating deficits add to the provincial debt, capital spending is by far the biggest contributor. During the period examined, capital spending added $13 billion to the province’s net debt, which stood at $21.4 billion in 2015-16.

The consequences have been grim. The growing debt and persistent deficits resulted in three credit rating downgrades for Manitoba from 2015 to 2017. Debt servicing costs have risen to more than $1 billion today from $756 million in 2009. The province’s debt-to-gross domestic product ratio has hit record levels.

The Progressive Conservative government’s response since taking office in 2016 has been to reduce capital spending by returning it to historical levels.

It has been criticized for that by opposition parties and interest groups, including the Manitoba Heavy Construction Association, who’ve accused government of “slashing” spending on highways. However, none have offered a realistic plan on how to finance higher capital spending, beyond adding it to the province’s growing debt.

The NDP argues increased infrastructure spending could be financed through the economic spinoffs it would generate, including job creation and higher taxation revenues.

Proponents of higher government spending love trotting out theoretical numbers that show if government spends a certain amount on something, the economic multiplier effect is sufficient to repay the initial cost. They present it as a guaranteed return on government spending– which it isn’t.

It’s not that simple. Proponents of higher government spending love trotting out theoretical numbers that show if government spends a certain amount on something, the economic multiplier effect is sufficient to repay the initial cost. They present it as a guaranteed return on government spending — which it isn’t.

We have good evidence of that in Manitoba. The former NDP government tried to spend and borrow its way out of a deficit, in large part through massive increases in capital spending.

It didn’t work. While those levels of spending created jobs and boosted tax revenues, the deficit grew to record levels and net debt skyrocketed. The economic return did not cover the initial costs.

That prompted a warning from the auditor general.

“The risks associated with increased debt balances, even when incurred for infrastructure purposes, need to be properly assessed and managed,” the report says. “It is important to note that even with infrastructure spending, effective prioritization of these expenditures, based on relative benefit to the public, is critical as not all infrastructure projects are of equal benefit.”

The Pallister government has pledged to spend at least $1 billion a year on strategic infrastructure. In 2018-19, it budgeted $1.562 billion for infrastructure projects (although the latest projections show it underspent that by $450 million). The Tories budgeted $1.488 billion for strategic infrastructure in their 2019 budget.

The NDP says that amount should be higher. However, its plan to pay for it is unrealistic.

The party claims the extra $690 million in capital spending would generate an additional $15.3 million in tax revenues in the first year, rising to $37.2 million by the fourth year.

However, tax revenues generated by infrastructure projects aren’t earmarked for debt servicing. They go into general revenues to pay for many things, including higher health care, education and other costs that arise from an expanded workforce and a growing population.

However, tax revenues generated by infrastructure projects aren’t earmarked for debt servicing. They go into general revenues to pay for many things, including higher health care, education and other costs that arise from an expanded workforce and a growing population. It’s not a net increase in government revenue.

If it were as simple as getting a guaranteed tax return from higher infrastructure spending — enough to finance and repay the debt incurred — governing would be easy. Governments could simply ramp up capital spending and watch the money roll in to pay for it.

It’s a flawed economic theory.

The provincial government’s net debt continues to grow by about $1 billion a year, even with reduced capital spending. That’s a debt future generations will have to repay. Adding another $690 million to that over four years seems imprudent.

tom.brodbeck@freepress.mb.ca