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The positive economic impacts of infrastructure investment

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A five-year $50-billion public infrastructure spending initiative would generate a return on investment to Canadians over the long term as high as $3.83 per dollar spent, trigger significant private sector investment and stimulate wage increases, according to a new study by an independent economic modelling firm.

The Economic Benefits of Public Infrastructure Spending in Canada, authored by the Centre for Spatial Economics, examined the short term (2015 to 2019) and long run (2020 to 2040) economic impacts of a large public investment program in transportation and basic urban infrastructure. It models a five-year program of $10 billion per year equally shared by the federal and provincial governments with a set of simulations that examine the benefits to productivity from public infrastructure.

The study, commissioned by the Broadbent Institute, found that in the short term the infrastructure program boosts GDP by $1.43 per $1 spent due to the multiplier impact. Within the five-year construction phase, governments also recoup $0.44 of every dollar spent through additional tax revenues.

The public infrastructure confers permanent benefits to private business by lowering their operating costs, which leads to increased productivity and higher wages for workers.

"These results show why a robust public infrastructure program just makes sense, and I'm encouraged the opposition parties are committed to investing," says Rick Smith, Executive Director of the Broadbent Institute. "This is about Canada's long-term prosperity. It will enhance our competitiveness, boost productivity and raise real wages -- while making a significant dent in Canada's infrastructure deficit."

Other key findings include:

  • In the short term, the spending program boosts employment by between 81,000 and 88,000 jobs, increasing the employment rate by 0.4 per cent to 0.5 per cent;
  • About one half of the new jobs (42,150) would be in construction, with positive short-term impacts on output and jobs in manufacturing and the business service sector providing inputs to construction;
  • In the short term, provincial revenues raised per dollar spent are highest in Quebec ($0.72), British Columbia ($0.57) and Nova Scotia ($0.46). B.C. and Quebec see the greatest impact on real GDP growth in the short term: while the average annual increase across the range of benefit scenarios for Canada is around 0.7 per cent, B.C. sees growth between 0.8 per cent and 0.9 per cent and Quebec an average increase of over 1.0 per cent.
  • Private-sector investment rises by as much as $0.34 per dollar spent in the short term, and by up to $1 per dollar spent in the long run;
  • The spending program increases labour productivity by between 0.3 per cent to 0.5 per cent in the long term and workers earn higher real wages: up 0.4 to 0.6 per cent a year on average relative to the economy without the spending program.
  • The change in the average annual deficit-to-GDP ratio from this program lies between a rise of 0.04 per cent and a decline of 0.02 per cent for the federal government, and between a rise of 0.08 per cent and a fall of 0.04 per cent for provincial governments.

"The benefits of a public infrastructure spending program include more private-sector investment, a more productive economy, and a higher standard of living -- and all are achieved without significant long-term fiscal consequences to federal or provincial governments," the report states.

"There's also a cautionary tale in here," added the study's author, economist Robin Somerville. "The costs of neglecting our public infrastructure are not zero. Allowing our public infrastructure to decay imposes costs at least equal but opposite to the benefits estimated in this study."

The report is available online at http://www.broadbentinstitute.ca/infrastructure. The economic model is based on the economic and fiscal forecasts as of January 2015.

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