Unlocking Canada's Future Growth Through Infrastructure

IMF News, July 13, 2017

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Canada’s economy expanded at an annual pace of nearly 4 percent in the first quarter of 2017—the fastest growth rate among the Group of 7 countries.
Growth is expected to accelerate to 2.5 percent this year, up from 1.5 percent in 2016.
The recovery has been driven mainly by stronger consumer demand and housing activity, while business investment and nonenergy exports remain weak.
Risks to the outlook include rising housing market imbalances and greater uncertainty about U.S. trade and tax policies.

Low productivity growth and population aging are identified as factors that will weigh on potential growth.
Historically, Canada’s economic growth has been largely driven by growth in the labor market.

The number of persons aged 15-64 (the working age) as a share of the total population has fallen by about 2 percentage points since 2010—from about 69 percent—and is projected to fall another 7 percentage points over the next 20 years.
The rapid aging of the population reflects the “baby boomers” cohort reaching retirement age.

The government has launched structural reforms aimed at reversing declining long-term growth, including:
- reducing barriers to internal trade,
- improving the innovation framework,
- investing in education and training,
- promoting high-skilled immigration.
The federal government plans to double public investment to Can$187 billion (equivalent to 7½ percent of GDP) over the next decade.

The federal government created a new Canada Infrastructure Bank, to become operational by late 2017.
The CIB will focus on large, complex, and revenue-generating projects that are in the public interest but would not be feasible for private investors because risks are too large and financial returns too small.
The CIB is authorized to invest Can$35 billion.
The CIB will work closely with provincial and local governments, as well as private sector investment partners, to transform the way infrastructure is planned, funded, and delivered in Canada.
By attracting private capital, demand for budget resources would be lowered, reducing public borrowing or freeing up taxpayer money for other high priority projects.
The CIB differs from the Public Private Partnerships model, in which the government retains ownership of the asset and funds the project from the budget.

Public acceptance of the CIB’s basic strategy is identified as a precondition to its success.
The government and the CIB need to enhance public understanding of the benefits of involving private investors, emphasizing that private partners bring technical competence, discipline, and creativity to help reduce risk and lower overall project cost.
Publication of the selection criteria for projects and investors—and competitive selection of investors—will give the public confidence that their interest is being served at the least cost.

Higher infrastructure spending can spur both short-term and long-term growth if implemented correctly.
The Canada Infrastructure Bank is an important new tool to promote long-term growth in Canada, according to the report.

By Kotaro Ishi, David Gentry, and Cheng Hoon Lim, IMF Western Hemisphere Department; July 13, 2017 — IMF News