Looking to discretionary public infrastructure investments as a response to economic downturns may be a poor policy choice, suggests a new study released Wednesday by public policy think-tank the Fraser Institute.
The Fiscal Policy and Recessions: The Role of Public Infrastructure Spending report said infrastructure spending is not an effective policy for stimulating the economy during a recession.
“Infrastructure projects have very long timelines, and by the time shovels hit the ground on a new bridge, highway or subway tunnel, the recession is usually over and the economic recovery has already begun,” said Finn Poschmann, resident scholar at the Fraser Institute and author of report, in a statement.
The report said many governments, including Canada’s, operate on the assumption that a dollar of public infrastructure investment is worth more than a dollar, in the long run, to the economy. Data suggest this is not the case and that’s before accounting for the cost of the taxation required to fund public spending, added the report.
“Decision making and implementation take time, and governments have difficulty responding at the same pace at which the private sector adjusts. When governments do intervene, they may compete for human and financial resources that would otherwise be put to productive use without intervention,” said the Fraser Institute.
“In other words, their actions may hinder recovery rather than encourage it. And expenditure commitments by upper levels of governments may displace those that would have been made by lower levels of government anyway, limiting potential gains. Speeding up investments, even if they are economically sensible, may borrow growth from the future, with uncertain impacts on the long run growth path.”