(Bloomberg) -- Justin Trudeau's latest lesson? Spending billions of dollars allocated to kick-start a sluggish economy can be harder than it looks.
The Canadian prime minister's meager progress on infrastructure projects may undermine his case, and that made by the Bank of Canada, that deficit spending will offer a timely shot in the arm for an economy struggling to make up for low oil prices.
The new government's first budget, introduced by Finance Minister Bill Morneau in March, pledged to invest in infrastructure to provide "immediate" help to the economy and deliver jobs "that can help the middle class grow."
But of the 860 infrastructure projects approved since the first budget implementation act was passed on June 13, ground has been broken on exactly one, according to Infrastructure Canada's dataset: A disaster-relief project in the town of Whitecourt, Alberta. The federal contribution for this effort amounts to 0.04 percent of the more than $4.2 billion total set aside for infrastructure projects.
While this number most likely understates the actual progress made on the government infrastructure plan, the exact magnitude of the gap remains unclear.
Brook Simpson, a spokesperson for Infrastructure Canada (a government agency responsible for infrastructure) said a number of projects have begun and that 65 percent of all phase one investments are "underway" —that is, eligible to incur costs.
The discrepancy arises from two factors: a project is marked as "in progress" by Infrastructure Canada based on the estimated start date initially submitted by the provinces, and includes pre-construction work such as engineering and design. Reports from provincial governments on actual start dates of these projects, meanwhile, don't arrive in a very timely fashion.
What the data do suggest is that in the early stages of the 2016 fiscal year, there hasn't been a noteworthy boost to activity from spending on infrastructure projects. In fact, ahead of the release of August GDP figures and the fall fiscal update on Tuesday, a group of sub-industries sensitive to infrastructure spending have contracted in real terms over the course of the last 12 months.
"The part of the fiscal plan that hasn't shown up is the infrastructure spending," said Craig Alexander, chief economist at the Conference Board of Canada. "Infrastructure is not a short-term stimulus measure: it's something that gives you a boost in the long term."
While the federal government has allocated and transferred a substantial amount of funds for infrastructure projects in its return to deficits, the actual outlays are what matter for economic growth—and based on the data available, they've been sparse.
As the old saying goes, you can lead a horse to water, but you can't make it build a bridge over it to improve a farmer's access to markets. Bank of Canada Governor Stephen Poloz said that "in the data that we have available, there are no signs yet" of a boost to growth stemming from expansionary fiscal policy, according to his testimony before the House Finance Committee Oct. 24. Poloz, who declined to comment on the previous government's quest to balance the budget, has emerged as a champion of Trudeau's fiscal stance.
In keeping rates unchanged in April, the governor said the "notable" impact of new fiscal measures more than outweighed headwinds facing the Canadian economy, and gave the nation "a better mix of policies today than we would have without that fiscal change."
The infrastructure plan "will be welcomed by firms," the governor added last week.
Poloz has emphasized that infrastructure projects ought to be growth-enabling, boosting potential activity over the long term, but also expected this spending to make a meaningful contribution to growth in the short term. The central bank estimated that all of the government's new measures would add 0.5 percentage points to GDP in fiscal year 2016, which began in April, and a full percentage point in the following fiscal year. These numbers are in line with the Finance Department's forecasts.
"It's safe to say, in terms of what they had hoped for and the timing of the impacts they've been talking about, it's not clear to me that it's going to happen that quickly," said Brian DePratto, an economist at Toronto Dominion Bank. "The data are suggesting the same."
"It's certainly very fair to say that impacts were overestimated," added Benjamin Reitzes, senior economist at the Bank of Montreal.
TD Bank and the Bank of Montreal projected that the government's spending plans would add less to growth in 2016 than the Finance Department or Bank of Canada had estimated, citing doubts on how expediently infrastructure spending would arrive and also the magnitude of its positive ripple effects on activity.
In many respects, Trudeau's government has run into the same problem the late Finance Minister Jim Flaherty faced when his "timely, targeted and temporary" stimulus package to support the economy in the wake of the financial crisis failed in its first objective.
Stephen Tapp, research director at the Institute for Research on Public Policy, sought to temper expectations of how quickly the new government could buoy activity back in January, before the budget had even been submitted. The spending profile for Budget 2009, which came in the immediate aftermath of the financial crisis, estimated that provincial and municipal infrastructure spending would total more than $4 billion in that fiscal year. Budget 2012 indicated that less than one-third of the funds were spent during that timeframe, the economist observed.
"I think this certainly suggests to policymakers that you've got to be pretty cautious," said Tapp. "Don't have high expectations that things will happen quickly."
"Time and time again, governments build in a boost from infrastructure spending sooner than it ever shows up," said Alexander. "They tend to be optimistic on their time horizons."
Sources familiar with the situation, however, indicated that the changes in funding arrangements under the new government have allowed provincial and municipal governments to move ahead more aggressively with tenders and contracts than they otherwise would have. However, none of the data publicly available show a meaningful fiscal impulse at work in Canada. For instance, in the province of Ontario, transfers received from the Government of Canada have spiked, but actual expenditures on this segment were down slightly from April to June of this year relative to the same stretch in 2015.
Cooperation between different levels of government, engineering and design work, bidding processes, due diligence, and the confines of the prime summer building season all combine to hamper the effectiveness of infrastructure as a timely method of bolstering economic activity.
On infrastructure spending, there's an inherent tension between projects that might be shovel-ready and those that are shovel-worthy, adding to the economy's growth potential over the long haul.
"Shovel ready is not always the best metric to use when deciding on infrastructure spending," said DePratto. "The focus should be more on the productivity-enhancing aspect."
"Historically, it's always taken time for the stimulus to have an impact, and that is one of the negatives of infrastructure stimulus," concluded Reitzes. "Because you're going to put it into place when things are at their worst and the economy will be in a far better place by the time shovels are in the ground."
To contact the author of this story: Luke Kawa in New York at lkawa@bloomberg.net.
To contact the editor responsible for this story: Joe Weisenthal at jweisenthal@bloomberg.net, David Rovella
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