Federation of Canadian Municipalities: Municipal Infrastructure Study

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Table of Contents

• Overview
• Context
• Contribution of the Study
• Assessment

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Overview

The Federation of Canadian Municipalities (FCM) has commissioned a study by Informetrica Limited (Informetrica) which highlights the significant short-term employment and income gains from investments in municipal infrastructure. The report also claims that if municipalities were to finance the increased spending in infrastructure, municipal finances would be negatively affected, while provincial and federal finances would benefit. Their findings stress that reliance on the municipal tax to finance infrastructure may have more severe consequences for the economy than financing infrastructure by other levels of government.

Context

The study commissioned by the FCM is a rigorous econometric and general equilibrium exercise that was undertaken by Informetrica. Inevitably, such an exercise is based on a very simplified version of reality and addresses very specific questions. In this case, the authors looked at the direct impacts of increasing municipal infrastructure investment by $1 billion and also at the direct impacts at fund raising through different level of government.

Contribution of the Study

The study's strength is in estimating the likely immediate effects of additional infrastructure investment on income and employment. The study usefully confirms that investments have significant effects on jobs, particularly in the construction related sectors, and that these effects are beneficial in the context of the current slowing in the economy. In the longer term, when the economy is operating at full capacity, the net effects of such investments are likely to have lower or no benefits.

In fact according to the study, an increase in municipal infrastructure spending of $1 billion in 2008 should increase GDP by 0.13 per cent in 2008, or by $1.3 billion. If the same amount is added in each of the following four years, the real effect erodes over time, and is about 0.6 per cent from 2010 through 2012. In 2008, this adds 11,500 jobs to overall employment, with the impact eroding to 7,700 jobs in 2012 and averaging 8,800 jobs in 2009-12.

The study confirms that the most significant effect is on the construction sector, with the annual impacts on the industry's GDP steady at 0.6 per cent. The average annual impacts of 5,400 jobs in construction employment in 2008-12 account for almost 60 per cent of total employment effects.

Assessment

Additional investments, by government, in almost every sector of the Canadian economy would generate significant short-term employment effects, specifically in that given sector. The results of the study, while interesting, are unsurprising. The results also need to be set beside other sectors and other strategic concerns in allocating limited government investments to meet longer term goals.

Further, the study is unable to offer clues on the more strategic benefits of infrastructure investments. Investing in infrastructure makes us more competitive, provides environmental benefits and ensures that Canadians live in safer communities. In relation to securing Canada's economic advantage, the report merely cites Statistics Canada estimates that investment in infrastructure of $1 raises productivity in the long term by 17 cents. No estimate of the value of the environmental gains and enhanced security benefits from investment are included in the study. These represent real, quantifiable municipal, provincial and national socio-economic benefits that need to be accounted for in making major investments. The study therefore only provides one piece of a wider cost-benefit analysis of infrastructure investments.

In addition, the study's $1 billion additional infrastructure funding impact assessment is based on current Statistics Canada baseline data (at the release of the study the latest official data was 2005) and may not sufficiently take into consideration the additional funds which the Building Canada Plan will inject starting in 2008-2009. Our preliminary calculations indicate that the federal government's annual contribution to municipal infrastructure, mostly from the $8.8 billion of the Building Canada Fund (BCF) for the 2008-2014 period may already provide part of (1) the additional annual $1 billion considered in the report. This federal contribution is planned within the current budgetary envelope and will not require additional tax levies.

The analysis of the fiscal efficiency effects of funding by different levels of government assumes that municipalities will make identical and equally efficient investments regardless of who pays for them. This assumption contradicts some usual hypotheses about economic behaviour and does not take into consideration that federal funding would not be matched fully at the municipal level on infrastructure. In addition, funds from federal government given to municipalities may not add entirely to what municipalities would have spend on infrastructure without the transfer, but can in some part free-up money that municipalities will spend on other local priorities. Therefore, federal taxation to support an additional $1 billion in municipal infrastructure may imply a higher level of taxation than would municipal governments need to draw from their property taxes.

(1) Only part because, as reported in Informetrica's 1996 analysis of the Canada Infrastructure Works Program, federal transfers are not fully incremental.