Sean Speer, US deficit, deficit reduction

More federal spending on local infrastructure undermines jurisdictional exclusivity and political accountability by further breaking the link between financing and spending, writes Speer in the Hill Times.

By Sean Speer, Apr. 9, 2018

The Trudeau government has increased the share of infrastructure project costs that it’s prepared to cover from one-third to 40 per cent for municipal projects.

This is a mistake. More federal spending on local infrastructure undermines jurisdictional exclusivity and political accountability by further breaking the link between financing and spending. It also in turn diminishes the federal focus on core national infrastructure.

Instead federal infrastructure spending should focus on areas of national responsibility—such as on-reserve needs, military assets, ports, border crossing, and so on—and local projects should be the purview of municipalities. Restoring these clear lines of responsibility may require some rethinking of fiscal federalism.

The growing federal role in provincial and municipal infrastructure dates back to the early 2000s. As Ottawa recovered from its mid-1990s fiscal crisis, it started to direct considerable, new funding to sub-national infrastructure. New federal programs functioned as intergovernmental transfer payments to the provinces for specific projects and were conditional on matching financing from provincial and municipal governments.

This trend was greatly expanded by the Harper government of which I was part of. Federal spending on provincial and municipal infrastructure increased by more than one-third between 2007 and 2015. Most of this came in the form of cost-sharing with the other levels of government.

This spending was well intended and even arguably justified during the global economic recession. But in hindsight there were errors along the way. Institutionalizing fiscal arrangements for Ottawa to co-finance local projects is the key one which I admittedly advocated for as an adviser. I was wrong.

The Trudeau government has of course since expanded these arrangements by more than doubling federal spending on provincial and municipal infrastructure and relaxing minimum contributions from the other levels of government. These policy choices have further entrenched the expectation that Ottawa ought to co-finance local projects.

As economists Phil Bazel and Jack Mintz argue, this is a flawed means of funding local infrastructure. It centralizes project decision-making, blurs financial and political accountability, and diverts federal resources away from its core infrastructure responsibilities.

And there’s plenty of need in the federal infrastructure gamut—including on-reserve housing, broadband, energy, and water systems. A 2017 Parliamentary Budget Office report estimates that federal commitments for water and wastewater infrastructure fall about 30 per cent short of what’s needed to end all boiled water advisories. It’s hard to justify dedicating federal resources to local “green” and “social” infrastructure when the need in core national areas is so significant.

The newly-announced $1.6-billion funding for Wataynikaneyap Power to connect 16 First Nations to the provincial power grid in Northern Ontario is a great example of what Ottawa ought to be funding. Local hockey arenas, libraries, and wellness centres are not.

The solution then is for federal government to start to shift its focus away from projects that are clearly local in nature and reorient to national ones. It’s time to stop this trend to nationalize local responsibilities.

This would naturally provoke a negative reaction from municipal leaders who’ve come to rely on Ottawa’s forty-cent dollars. But there’s scope for a political compromise. The cost of extracting the federal government from the current arrangement may involve a short- or medium-term expansion of the Gas Tax Fund or other unconditional transfers to the provinces and cities. That would be worth it to restore greater exclusivity and more decentralized decision-making and ultimately end the trend of uploading of local infrastructure.

Sean Speer is a Munk senior fellow at the Macdonald-Laurier Institute.