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The Two Distinct Visions For Ontario's Economy

05/09/2014 08:22 EDT | Updated 07/09/2014 05:59 EDT
David Cooper via Getty Images
TORONTO, ON- MAY 1 - NDP leader Andrea Horwath talks with seat mate Gilles Bisson while Ontario Minister of Finance Charles Sousa delivers the budget speech in the Legislative Assembly of Ontario during the reading of the Budget at Queen's Park May 1, 2014. (David Cooper/Toronto Star via Getty Images)

If Ontario's election is all about jobs, then the Liberals offered a plan for creating those. The Liberal Budget presented earlier planned to invest $130 billion in infrastructure over 10 years. This would have created 2.2 million new jobs.

Ontarians, however, have lost an ideal job creating budget to brinkmanship.

Andrea Horwath, leader of the Ontario's National Democratic Party, couldn't bear to support a budget that promised to build a strong infrastructure for Ontarians. "The Liberal budget is a mad dash to escape scandal by promising the moon and the stars," Horwath said the morning after missing the budget presentation at Queen's Park. The budget did not promise the moon and the stars. In fact, it was a classic stimulus budget that would have received an A+ from Paul Krugman, a Nobel Laureate in Economics.

As Ontario inches closer to elections in June, two distinct visions emerge for the provincial economy. The Liberals propose investments in physical and social infrastructure, which will require running a deficit in the short run. The Ontario Conservatives, however, balk at the idea of deficit financing and propose stringent spending cuts. Still, Tim Hudak, the Ontario PC leader, claimed that the June 12 election in Ontario is about one particular issue: jobs.

With competing visions for Ontario's future, i.e., spending cuts versus deficit spending, the electorate needs an informed view of the economic consequences of these approaches. The deficit for 2013-14 is estimated at $11.3 billion. While the deficit may appear large, infrastructure investments are necessary for Ontario's economic recovery. Investments, made with debt financing, are required to build much-needed infrastructure in Ontario and to add to the production capacity of the economy in time for a full-blown economic recovery later.

The Ontario budget identified $130 billion in infrastructure spending over the next ten years. At least $29 billion were earmarked for investments in transport infrastructure. Given the severe mobility challenges in Canada's largest employment hub, Liberals proposed $15 billion in transport infrastructure in the Greater Toronto and Hamilton Area. These investments would not only have improved infrastructure in the region, but they would have created much needed jobs. Here is how it works.

Investments in infrastructure are known to work as a countercyclical fiscal policy tool. Research has shown that infrastructure investments during recessionary times serve two important purposes. First, infrastructure investments serve as an economic stimulus and create jobs when the private sector falters at generating employment. Second, such investments in critical infrastructure improve the productive capacity of the economy in time for economic recovery.

My co-authors and I undertook a detailed study of investing in Ontario's infrastructure and its impact on the economy. We determined the impact of infrastructure investments on job creation, GDP growth, and tax revenue. Our study revealed significant benefits to the provincial economy, thus providing the stimulus needed to keep Ontarians employed and businesses profitable.

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Using a simulation model, we forecasted the impact of a $12 billion public sector investment in non-residential and engineering construction in Ontario. We found that a $12 billion investment would result in a $38.4 billion impact on Ontario's economy. This also translates into 203,000 person-years of employment, generating no less than $10 billion in employment income. The provincial coffers would receive additional $669 million in corporate taxes and $161 million in personal income taxes.

Based on the same model, we estimate that over the 10-year period, $130 billion in infrastructure spending would have created 2.2 million person-years of employment. Stated differently, an average $13 billion per year in infrastructure spending would have created 220,000 person-year of employment.

During recessionary times, the private sector fails to generate enough jobs to keep up with the labour force. At the same time, decline in corporate and other taxes reduce the flows to the provincial economy. Investments in infrastructure, and not spending cuts, are required for Ontario to generate new employment opportunities and to keep Ontario's industry competitive in the long run.

Deferred maintenance in Ontario has reached such extent that City engineers in Toronto can no longer certify the safety of certain highways. At the same time, the investments needed to add capacity to public transit in the region have failed to keep pace with the increase in population. The status quo of deferred maintenance and not adding new public transit is not an option for Ontario. Such a gridlocked economy will not be able to compete within Canada or with the emerging economic powerhouses across the globe.

Investment in infrastructure development and renewal, and not spending cuts, is needed to maintain Ontario's competitiveness. Not spending now will result in the reduced productive capacity in the future when the private sector is ready to boost the economy. It will be foolish to wait when we could act now.

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