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No Time Like the Present for Governments to Spend on Infrastructure

Pedro Antunes, Director, National and Provincial Forecast, Forecasting and Analysis
May 1, 2009

While the Conference Board is forecasting that the economic recovery will begin later this year, the effects of the recession will linger well into 2010. As a result, the massive government spending that is just beginning to enter the economy will not come too late. The money is unlikely to begin rolling out until the third quarter of 2009 (July to September) and spending is not expected to peak until mid-2010 (see chart). Nevertheless, public spending on infrastructure will help fill a gap left by the phenomenal drop in private sector investment and construction.

In the Depths of the Economic Cycle

Real gross domestic product (GDP) fell by an annualized 3.4 per cent in the fourth quarter of 2008, the largest quarterly decline since the 1990–91 recession. The Conference Board’s Canadian Outlook: Spring 2009 estimates an even greater decline—6 per cent—in the first quarter of 2009. Thousands of full-time jobs have disappeared; consumers have crawled into their shells. Businesses are slashing capital investment this year—real private sector investment and construction are forecast to contract by 14 per cent. And our export market, so dependent on the U.S. consumer, is in dire straits (consider autos and forestry).

Provinces Need to Ante Up

The federal budget includes a large sum for infrastructure, which is expected to provide the lion’s share of the stimulus. Including both federal and provincial contributions to infrastructure and social housing, the budget measures would inject almost $12 billion into new construction in fiscal 2009–10. According to Conference Board estimates, this amount alone would add 0.8 per cent to GDP and create about 115,000 jobs, the majority of them in the construction sector. To put this money to work, however, the provincial and municipal governments have to chip in their share.

Public spending on infrastructure will help fill a gap left by the phenomenal drop in private sector investment and construction.

Of the nearly $12 billion in construction spending proposed in the budget, the federal government plans to spend nearly $460 million directly on federal infrastructure—such as bridges, harbours, and parks—in fiscal 2009–10. About $2.7 billion is allotted to social housing construction, split roughly three ways among the federal, provincial, and municipal governments. As for the largest portion of the federal stimulus ($5.3 billion), provinces will need to come up with $3.2 billion in fiscal 2009–10 alone to take full advantage of it. In all likelihood, the provinces will turn to municipalities to help fund the provincial share. To top it all off, the federal money will only be available for projects that can be started before the end of the 2010 calendar year—they have to be approved and ready to go.

Provincial Budget Response

As provinces tabled their budgets, sources of new financing for infrastructure seemed scarce. Ontario, however, made clear in its March budget that it is ready to play. While the budget document does not reveal details of new infrastructure projects, the Ontario government mobilized about $3.4 billion per year for each of the next two fiscal years. Municipalities now must get involved in proposing, approving, and financing their portions of each project. These steps will take time. In addition, there are legitimate concerns that spending could be squandered in the rush to get it out the door. For example, the shovel-ready projects are not always the best projects to undertake.

Provinces will need to come up with $3.2 billion in fiscal 2009–10 alone to take full advantage of federal stimulus.

Canada’s Infrastructure Deficit

Canada’s infrastructure is badly in need of upgrading. While there is no full accounting of Canada’s infrastructure deficit, both new projects and repairs to existing facilities or systems are required. There is plenty of evidence that public infrastructure contributes to private sector competitiveness. Governments should be actively building and planning for the future. What better time to do so than when private sector investment is faltering, unemployment is rising, and construction costs are fading?

Pedro Antunes
Pedro Antunes
Director, National and Provincial Forecast 
Forecasting and Analysis
613-520-3090 ext. 326
Canadian Outlook: Spring 2009

Related Executive Networks 
Centre on Infrastructure

Related Events 
2009 Spring Technical Forecasting Seminar