Striking the Right Balance: Federal Infrastructure Transfer Programs, 2002-2015

Abstract

Over the last 13 years, the federal government has helped fund a wide array of infrastructure programs: A total of 8,012 projects across the country between 2002 and 2015, funded to the tune of $20.3 billion. A substantial portion of that was done in the name of recession “stimulus.” But far from all of it. And, for better or worse, federal programs have become a permanent feature of fiscal federalism. The only question now is, whether Ottawa has been spending federal taxpayer money as effectively as possible when it does fund these projects.

As it turns out, federal handouts for projects in Canadian provinces and municipalities have been relatively well deployed. An analysis finds that a greater amount of federal matching funds were dedicated to projects where provinces faced a higher marginal cost of public funds than the federal government, helping to at least somewhat minimize the negative economic impacts of the additional tax burden. And that a greater amount of funds was dedicated to projects that enhanced economic productivity, such as transit and roads, which increase the probability for national spillover benefits due to the potential for increased federal tax revenue, unlike quality-of-life projects (such as recreation projects) that do not.

However, the persistent fiscal imbalance in the provinces’ and the federal government’s marginal cost of raising public funds can only continue to exacerbate the demands from provinces for federal matching funds. Despite federal fiscal equalization programs that provide transfers to provinces with below-average per capita tax bases, there remain notable horizontal fiscal imbalances across the provinces, and a vertical imbalance between lower and higher government levels. Recent estimates calculate the federal government’s marginal cost to be 1.17, compared to a range of 1.41 for Alberta to 3.60 for Ontario, more than three times as high as the federal government’s cost.

There are already several programs that provide large block funding transfers to provinces: The Canada Health Transfer, the Canada Social Transfer, the Gas Tax Fund, and federal equalization grants. These block transfers reduce the fiscal imbalance between Ottawa and the provinces, but they have clearly not closed the gap completely. Were the federal government to increase these block transfers, it could arguably reduce its role in funding individual infrastructure projects, thereby encouraging lower levels of government to plan infrastructure more rationally, rather than being influenced by the distortions created by federal matching offers.

Indeed, among all the projects that received federal matching funds since 2002, a concerning number were small-scale projects. More than half of the 8,000 projects funded had eligible costs of $1 million or less, and a startling 92 per cent had eligible costs under $10 million. A thousand were below $100,000. Small projects may have their benefits as a stimulus response if they are “shovel ready,” since large projects may require too much planning to offer the rapid employment and spending benefits desired. But the costs of co-ordination for small projects across multiple levels of government add inefficiencies and so should generally be avoided. Again, by providing more in the form of block grants, Ottawa can leave smaller stuff to smaller governments, where it, and much else, properly belongs.

Keywords: federal infrastructure, federal infrastructure transfer programs