Digging for extended stimulus

Ottawa's stimulus fund expires in March, but many are calling for it to be extended.

Responding to opposition demands that they provide economic stimulus, in 2009 the federal Conservatives returned with a budget that pledged to throw money at just about everyone.

One of its biggest projectiles was the $4-billion Infrastructure Stimulus Fund. This money was aimed at “shovel ready” projects across the country where construction could begin immediately and be completed during the 2009 and 2010 construction seasons. In most cases, the cost of the projects would be split equally between the federal government, the provinces and the municipality carrying out the work. There was only one catch: the projects had to be finished by March 31, 2011, or risk losing the federal contribution.

Now that the end date is only four months away, voices are calling for the federal government to extend the March 31 deadline so the provinces and cities are not stuck paying a bill they cannot afford. The cries are loudest in Quebec, where it’s estimated that as recently as October, less than 60% of planned projects had broken ground. “It took a long time to get the project list approved in Quebec, so they’re months and months behind the rest of the country,” says Brock Carlton, CEO of the Federation of Canadian Municipalities.

Carlton says his members in the rest of Canada are not overly concerned. This, he says, is because only 10% of projects in the other provinces and territories are at risk of missing the March 31 deadline. Yet that hasn’t stopped it from turning it into a hot political issue. Last week, Ontario Premier Dalton McGuinty said 166 projects involving 9,100 jobs could miss the deadline in Ontario. He asked for an extension, arguing that it made no sense to cut funding for a building that had four walls and was only waiting for a roof.

“The government set the deadline so tight at the outset because it wanted to avoid the moral hazard problem,” says Jack Carr, an economist with the University of Toronto. “They wanted projects that were going to stimulate the economy when it was at its weakest. They didn’t want local politicians putting forward projects that were politically expedient but wouldn’t be completed for five years.” The logic, while sound, came with its own problems. Initially the federal government said any project that wasn’t completed by the deadline wouldn’t get a cent. That position was later softened. As it stands now, the federal government will pay for its share of all the work done on a given project by the deadline. What hasn’t been done by then, however, will be billed to other levels of government.

Much of the political rhetoric has been fed by reports that at the end of the 2009-10 fiscal year only a quarter of the $2 billion allotted for projects in the first year of the fund had been spent. It raised questions among many who were told this spending was supposed to create jobs when the economy needed them most, not years down the track. After all, the fund couldn’t create jobs if the money was still sitting in a bank account, or could it? “Federal dollars out the door are not an indication of job creation,” says Carlton. “As soon as the project is approved, the municipalities hire staff and break ground. When the work is done, then and only then do they invoice the feds. Jobs are in play from the moment the project is approved.”

Providing the projects that were approved are “substantially complete” or about 95% built by March 31, almost nothing should be lost. Of course, determining how many projects will be completed on time has not been easy.

The Parliamentary Budget Office has tried to crunch the numbers to produce an estimate of just how many projects will make the deadline. A report published by the PBO in August used March 2010 data to predict that in a worst-case scenario about $500 million of the $4-billion fund would expire. The baseline scenario suggested a more modest $293 million would lapse. At the time Canadian Business went to print, the PBO was in the process of releasing an updated report using June numbers that were expected to be broadly in line with its August predictions.

If the PBO’s worst-case does come to pass, municipalities that have fronted money for construction will likely be knocking on the doors to Parliament looking for help. So far the message from Ottawa has been mixed. Finance Minister Jim Flaherty has said that projects barely beginning or nowhere near completion will not get another cent, while Harper has told MPs the “government will be flexible in order to ensure that these projects are completed.” An announcement on this is expected soon.

While $500 million is a lot of money, it’s not much when held against the sheer size of the deficits now being run federally. When the Infrastructure Stimulus Fund was first announced, the Tories predicted their plunge into the red would amount to about $85 billion in additional debt before returning to surplus in 2012-13. A little more than half of that was earmarked as stimulus. The government’s most recent estimates put the running deficit at more than $164 billion, with no firm date to rebalance the accounts. The growing deficit, say economists, reflects the fact that the downturn was worse than expected.

A key factor likely to steer how the federal government will behave come March is the overall health of the economy and the degree to which the fund was considered a success. On that front, the FCM estimates 100,000 jobs were created or saved, as $10 billion was pumped into the economy when contributions from other levels of government are lumped in. With that in mind, many think the tough talk could be replaced by flexibility when the snow melts. “I think when push comes to shove, they won’t take money away from anyone,” says Carr. “But if I’m wrong and the government does keep its word, then people will get burned, and next time they’ll learn.”