A Forgotten Solution For Infrastructure Funding Problem

Canada's infrastructure is aging fast. According to Federation of Canadian Municipalities, a $123 Billion investment is needed to rebuild the decaying roads, bridges and water systems.

Canada has used up 79 per cent of the service life of its roads, sewage systems and other vital components of the country's backbone, and municipalities simply can't afford to fix the problem on their own, said federation president Gord Steeves.

Without significant federal funding, infrastructure could begin to fall apart across the country, he said.
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But federal Minister of Transport, Infrastructure and Communities Lawrence Cannon said the federation is misleading the public in suggesting that he hasn't already acted.

A new $33-billion, seven-year "Building Canada" plan will help fund infrastructure renewal in big cities and small towns and will address some of the priorities the federation is focusing on, including roads, bridge rehabilitation and safe drinking water, he said.

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So the Federal government is providing $33B out of 123. What about the remaining $90B? Most of the politicians would consider only two options to make up the shortfall: higher taxes or higher user fees. (The latter would include charging tolls for using the rebuilt roads and bridges.) But there's another option. We can use the Bank of Canada to provide low-interest loans to provinces and municipalities to finance new highways, roads, bridges, ports and airports, urban and interurban rail transportation, water and sewage treatment.

Similar policy had been used in Canada for about quarter of a century after the Second World War.

To stave off the threat of massive unemployment, the Cabinet of that day instructed the Bank of Canada to make loans, virtually interest-free, to provinces, municipalities and other local authorities for infrastructure: roads, highways, bridges, railways, port facilities, etc. Local governments were able to launch construction programs that brought unemployment down to about 3% (considered by economists to be the minimum level — mostly workers in transition from job to job or from city to city). With local agencies freed from the crushing burden of compounding interest, the increased economic activity generated revenues that enabled the loans to be quickly repaid — and the infrastructure was a legacy.

At the time C.D. Howe launched that program, in the late ’40s and the ’50s, the Bank of Canada created about 50 per cent of the money supply, and the fractional reserve requirement was 10 per cent; today, the BoC creates only two per cent of the money supply, and the reserve requirement is zero.

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While those loans weren't technically interest-free, all the interest (less the administrative costs) went to the Bank of Canada's owner - the Federal government which could redirect the funds back to the provinces and municipalities.

Unfortunately, the Federal government stopped using the Bank of Canada for national infrastructure funding since mid-1970s. The share of the federal debt held by the Bank of Canada went down from 21% in 1975 to less than 5% nowadays. All governments since then (both Liberal and (Progressive) Conservative) chose to boost the credit bubble, rather than taking control over their finances.

We have asked both the Liberals & (Alliance) Conservatives to look at this idea because it is the best for Canadians. The Liberals sent a form letter thanking us for the idea.... and never did a thing about it. The (Alliance) Conservatives didn't respond.

Source: Vicki Gunn (CHP York Simcoe)

Too bad that none of our legislators is ready to raise the issue in the Parliament. Cutting government handouts to special interest groups is an excellent start, but using taxpayers money on runaway interest payments when better financing option is available is also a kind of wasteful spending that must be addressed.