THE ECONOMIC BENEFITS OF PUBLIC INFRASTRUCTURE … · The Economic Benefits of Public Infrastructure Spending in British Columbia 1 Executive Summary There is a broad consensus that

THEECONOMICBENEFITSOFPUBLICINFRASTRUCTURESPENDINGINBRITISHCOLUMBIA

Preparedfor:

BroadbentInstituteStationB,POBox1273Ottawa,ONK1P5R3

Preparedby:

TheCentreforSpatialEconomics336BronteStreetSouth,Unit221Milton,ONL9T7W6

March2017

TableofContentsExecutiveSummary......................................................................................................................................1

BritishColumbia'sInfrastructureSpendingOptions....................................................................................3

EconomicTheory:LinkingPublicInfrastructureandEconomicPerformance.........................................3

MethodologyandAssumptions...................................................................................................................6

AScenario-basedApproachtoModelingUncertainty.............................................................................6

Results:TotalEconomicImpact...................................................................................................................8

EconomicMultipliersandReturnonInvestment...................................................................................10

Short-runMultipliers..........................................................................................................................10

Long-runReturnonInvestment.........................................................................................................11

SummaryandObservations.......................................................................................................................13

References..................................................................................................................................................15

AppendixA:ContributionofPublicCapitalattheIndustryLevel..............................................................16

AppendixB:C4SEProvincialEconomicModelingSystem..........................................................................18

AppendixC:SectoralImpacts.....................................................................................................................20

AboutthisStudy

ThisreportwaspreparedforTheBroadbentInstitutebyTheCenterforSpatialEconomics.TheBroadbentInstituteisanindependent,non-partisanorganizationchampioningprogressivechangethroughthepromotionofdemocracy,equality,andsustainabilityandthetrainingofanewgenerationofleaders.Formoreinformation,pleaseseewww.broadbentinstitute.ca.

TheanalysisestimatestheeconomicbenefitsofpublicinfrastructurespendinginBritishColumbiausingtheC4SE’sprovincialeconomicmodelingsystem.Resultsarepresentedintermsoftheplan’simpactsuponGDP,employment,governmentrevenuesanddeficitsovertime.SpendingmultipliersandreturnoninvestmentstatisticsaregeneratedtoprovidesummarymeasuresofthebenefitstoBritishColumbiaresidentsandtaxpayers.Theresultsdemonstratethebenefitsofpublicfundingforinfrastructurewherepubliccapitalcanplayanimportantroleincontributingtoinvestment-ledeconomicexpansions,andimprovingtheproductivityandcompetitivenessofprivatebusinessesinBritishColumbia.

ThereportwasconductedbyRobinSomerville,Director,oftheCentreforSpatialEconomics(C4SE).TheC4SEmonitors,analyzesandforecastseconomicanddemographicchangethroughoutCanadaatvirtuallyalllevelsofgeography.Italsopreparescustomizedstudiesontheeconomic,industrialandcommunityimpactsofvariousfiscalandotherpolicychanges,anddevelopscustomizedimpactandprojectionmodelsforin-houseclientuse.TheC4SEprovideseconomicmodels,analysisandforecaststonineprovincialandterritorialgovernmentsacrossCanada.Formoreinformationpleasegotowww.c4se.com.

TheEconomicBenefitsofPublicInfrastructureSpendinginBritishColumbia

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ExecutiveSummary

ThereisabroadconsensusthatCanada’spublicinfrastructurehasdeterioratedoverthelastfewdecades.Issueswithtrafficcongestion,inadequatepublictransportation,sewercollapseandsinkholesregularlymakemediaheadlinesandhavegonefrombeinginconvenienttoaseriousimpedimenttoeconomicactivity.TheBroadbentInstituteisencouragingalllevelsofgovernmentsacrossthecountrytofocusondevelopingthecountry'sinfrastructure.

ThisreportexaminestheeconomicbenefitsofthreepossiblepublicinfrastructurespendingplansinBritishColumbia.Thethreeplansinvolve5-yearcumulativespendingcommitmentsbytheprovincialgovernmentof$5,$7and$10billionrespectively.Thebenefitsfromapublicinfrastructureprogramarisefromthedirectprogramspendingbutthenextendbeyondthisdirectimpact.Publiccapitalpromoteslong-termeconomicgrowthandproductivityasproductivepublicinfrastructurereducescostsforprivatebusinessesprovidingacompellingcaseforpublicfundingofthiscapital.

Thebenefitsofapublicinfrastructurespendingprogramincludethefollowing:

o Intheshort-run,GDPrises$1.78perdollarofspending,9.6jobsaregeneratedpermilliondollarsspentand$0.29ofeachdollarspentbygovernmentisrecoveredinadditionalprovincialtaxrevenue

o Overthelong-term,thediscountedpresentvalueofGDPgeneratedperdollarofpublicinfrastructurespending(ROI)liesbetween$1.42and$2.09

o Privatesectorinvestmentriseso Businessesaremoreproductiveandcompetitiveininternationalmarketso Realwagesrise,providingahigherstandardofliving

Table1

Productivepublicinfrastructurereducescostsforprivatebusinesses–boostingGDPbyupto$2.09perdollarspent–sothatacompellingcasecanbemadeforpublicfundingofthiscapital.TheC4SEbelievesthatthefullbenefitscaseresults,basedonthecost-savingsbenefitstoprivatebusinessestimatedbyHarchaouiandTarkhani(2003),arecredibleandrepresentthebenefitsthatshouldaccruefromspendingonpublicinfrastructure.Butthereisariskthatalargeinfrastructureprogramcouldyieldlowerbenefitssothatthehalfbenefitscaseprovidesaprudentlower-boundtotheanalysis.

TheC4SEcautionsagainstviewingpublicinfrastructurespendingastooltocounterthebusinesscycle.

HalfBenefits

FullBenefits

GDPper$ofspending 1.78 1.42 2.09Non-Residentialinvestmentper$ofspending 1.35 0.84 1.04Jobsper$millionofspending 9.6 1.1 1.1BCGov'ttaxrevenueper$ofspending 0.29 0.14 0.19

BritishColumbiaPublicInfrastructureSpending:SummaryofBenefitsLong-runReturnon

InvestmentImpactperdollarofpublicinfrastructurespending

Short-runTotalImpact

Multiplier


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Publicinfrastructurefundingdecisionsshouldbebasedonlong-termbenefitsandavoidfundingprojectsthatyieldlesslong-termutilitytotheeconomysoastoensurethatthespendingdoesnotyieldreducedlong-termbenefitstooutputoremploymentwhilesaddlingtheeconomywithadditionaldebt.

StudyMethodology

TheanalysisconsistsofsevenscenarioswhichwereconductedusingtheC4SE’sprovincialeconomicmodelingsystemwhichisamulti-region,multi-sector,dynamicstochasticgeneralequilibriummodelofCanadaanditsprovinces.Thebaselinescenariodoesnotincludeanyadditionalpublicinfrastructurespendingandisthebenchmarkagainstwhicheachoftheotherscenariosiscompared.Thethreeothersetsofscenariosreflectchangesineconomicactivityarisingfromthepublicinfrastructurespendingprogram.Eachsetofscenariosisconstructedforcumulative5-yearspendingprogramsof$5,$7and$10billion.Thelong-termimpactsfromthehalfandfullbenefitscasescenariosassumerespectivelythatthenewpublicinfrastructureprovideseitherhalforallofthecost-savingsbenefitstoprivatebusinessestimatedbytheresearchofHarchaouiandTarkhani(2003).

TheincreaseinpubliccapitalcanalsohelpachievesomethingelsethathaseludedpolicymakersinCanadaandBritishColumbiaoverthelastfewyears:gainsinprivatesectorinvestmentspending.Apublicinfrastructureprogramboostsprivateinvestmentinboththenearandlong-termandcan,therefore,playanimportantroleincontributingtoaninvestment-ledeconomicexpansion.

Thereadershouldnotethat,likeotherreports,thisstudyonlyconsiderssomeofthepossiblebenefitsfromspendingonpublicinfrastructure.Thebenefitsarelimitedtothosefromtheactualordirectspendingandthelong-termbenefitstobusinessintermsofreducedcostsfromthepubliccapital.Butpublicspendingontheseassetsisalsorequiredtoachieveothersocialobjectivesthathavenotbeencapturedorquantifiedinthisanalysis.Thesebenefitsincludethosetohouseholdsfromlowertransportationcongestioncosts,improvedbusinessnetworkingopportunities,reductionsinpollutionandgreenhousegases,andsocietalgainsfromeducation,healthcareandotherpublicassets.

Inclosing,thisstudyalsoprovidesacautionarytaleforpolicyanalysts.Thecostsofneglectingourpublicinfrastructurearenotzero.AsnotedbyInfrastructureCanada,allowingourpublicinfrastructuretocontinuetodecayimposescostsofatleastequalbutoppositeconsequencetothebenefitsestimatedinthisstudy.ThecompetitivenessofprivatebusinessesinBritishColumbia(2011)aretiedtothequalityofpublicassetssoasignificantandsustainedpublicinfrastructurespendinginitiativeisrequiredifhouseholdsandbusinessesaretocontinuetoenjoyahighstandardofliving.


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BritishColumbia'sInfrastructureSpendingOptions

ThereisabroadconsensusthatCanada’spublicinfrastructurehasdeterioratedoverthelastfewdecades.Issueswithtrafficcongestion,inadequatepublictransportation,sewercollapseandsinkholesregularlymakemediaheadlinesandhavegonefrombeinginconvenienttoaseriousimpedimenttoeconomicactivity.Manygovernmentsacrossthecountryarenowcommittedtoaddressingissueswithpublicinfrastructurewithincreasedspendingtoexpand,replaceorrepairpublicassets.

LemireandGaudreault(2006)estimatedthatin2003Canada'sroadandhighwaynetworkhadover50percentofitsusefullifebehinditwhilefederalandprovincialbridgeshadpassedthehalfwaymarkoftheirusefullife.Municipalbridgesfaredalittlebetterwith41percentoftheirusefullivesbehindthem.Morerecently,GuyFélio(2012)preparedareportfortheFederationofCanadianMunicipalitieswhichestimatedthereplacementcostofmunicipalinfrastructureassetsthatwereratedbetween"fair"and"verypoor"tobe$171.8billionin2010.Federalandprovincialgovernmentshaveincludedspendinginitiativesinrecentbudgetsbut,after25yearsofunderinvestment,thespendingrequiredtocorrecttheissuewillrequiresignificantlymoreresourcesandsustainedcommitmentbyalllevelsofgovernment.

TheBroadbentInstituteisencouragingalllevelsofgovernmentsacrossthecountrytomaintainthisfocusondevelopingthenation'sinfrastructure(CentreforSpatialEconomics,2015).ThisreportexaminestheeconomicbenefitsofthreepossiblepublicinfrastructurespendingplansinBritishColumbia.Thethreeplansinvolve5-yearcumulativespendingcommitmentsbytheprovincialgovernmentof$5,$7and$10billionrespectively.

WhileitisexpectedthatthisspendingwillimprovethequalityoflifeinBritishColumbia–forexamplebyreducingtrafficcongestion,greenhousegasemissions,orreducingroadclosuresandpropertydamagefrominfrastructurefailure–itisalsoimportanttounderstandtheeconomicandfiscalconsequencesofthisspending.ThisstudyusestheC4SE’sprovincialeconomicmodelingsystemtoprovideanassessmentofthenear-termandlong-runeconomicandfiscalimpactsofthisspending.

EconomicTheory:LinkingPublicInfrastructureandEconomicPerformance

Economicstudiesoverthelasttwenty-fiveyearshaveconsistentlyfoundapositivelinkbetweenpublicinfrastructureandproductivity.Whiletherearemanycriticsofpublicspending,withmediareportsoftencitingexamplesofpublicinfrastructureprojectsthatprovidelittleornobenefittobusinessortothepublic,theseexamplesaretheexception.

Publiccapital,consistingofroads,bridges,sewersystemsandwatertreatmentfacilitiesamongotherpublicinfrastructureassets,constitutesavitalinputforprivatesectorproduction.Nonetheless,itsimpactonbusinesssectorproductivitygrowthortotaleconomygrossdomesticproduct(GDP)isdifficulttomeasure.PubliccapitalinNorthAmericatendstobepubliclyownedsonomarketsexistforitsoutput.Therearenoclosesubstitutesforpubliccapitalintheprivatesector,thusmakingitinfeasibletouseprivatesectorinformationasaproxyforthepublicsector.Asaresult,estimatesofpubliccapital’simpactarenoteasilyobtained.


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In1989DavidAschauer(1989)usedproductionfunctionestimatestoigniteadebateabouttheroleofpubliccapitalinprivateproduction,anditsroleintheproductivityslowdownintheUnitedStatesduringthe1970s.Wylie(1996)adoptedtheapproachtakenbyAschauertoestimatetheelasticityofpubliccapitalinCanada.Usingaproductionfunction,andCanadianaggregatedatafrom1946to1991,hefindsthatgovernmentcapitalhasapositiveelasticity.HeconcludesbyarguingthathisresultssupportthefindingfortheUnitedStatesthatpubliccapitalplaysanimportantroleinbusinesssectoroutputandproductivitygrowth.Foravarietyofreasons,therehavebeenmanycriticsoftheseeconometricstudies.Forexample,thecriticismsrangefromfailingtoaccountfornon-stationarityinthedata,toomittedvariablebiasandsimultaneitybias.Inadditionthemagnitudesofthecoefficientestimates–thebenefits–areimprobablylarge.

Morerecentempiricalworkreplacestheproductionfunctionwithitsdual:thecostfunction.1NadiriandMamuneas(1994)usethecostfunctionapproachtoinvestigatetheimpactofpubliccapitalonthecoststructureoftheUSindustriesandobtainedsmaller,morecredible,estimatesofthebenefitsfrompubliccapital.HarchaouiandTarkhani(2003)applyasimilarapproachtoNadiriandMamuneas(1994)usingCanadiandata.

Finally,analternativenon-parametricapproachtoproductivityanalysisistakenbyBaldwin,GuandMacdonald(2010)basedonagrowthaccountingframework.Itfocusesonprivatesectorinputsandoutputs.Inputsthataredifficulttomeasureorinclude,suchaspubliccapital,arefoldedintoestimatesofmultifactorproductivity(MFP).Criticsofearlierstudiesthatadoptedthisapproachsaythatitisunclearhowlargeaneffectpubliccapitalhasonproductivitygrowthorwhethertheimpactvariesovertime.ThemorerecentresearchbyBaldwin,GuandMacdonald(2010),however,specificallyincorporatespubliccapitalusingthebenefitsestimatedbyHarchaouiandTarkhani(2003)andothers(Macdonald2010).

HarchaouiandTarkhani(2003)estimatetheeffectsofpubliccapitalonbusinesssectorproductioncosts,levelofoutput,demandforlabour,capital,andintermediategoodsusingCanadiandatafor37industriesfortheperiod1961-2000usingatranslogcostfunction.Theauthorsfoundthatanincreaseinpubliccapitalhasaninitialdirectproductivityeffect:itreducesthecostofproducingagivenlevelofoutputinalmostallindustries.Thiscost-reducing‘productivityeffect’ofpubliccapitalvariesinmagnitudeacrossindustries(seeAppendixAforatablereproducingtheirresults)withthelargestbenefitsaccruingtothetransportation,wholesale,retailandotherutilitysectors.Theeconomicimpactofpubliccapitalonthevariousindustriesdoesnotstopwiththedirectproductivityeffect.Costreductionspermitproductstobesoldatlowerpriceswhichcanbeexpectedtoleadtohighersalesandoutputgrowth.Theauthorsrefertothisasthe‘outputeffect’ofpubliccapital.

Thecost-reducingandoutput-expandingimpactsofpubliccapitalaffectthebusinesssector’sdemandforlabour,capitalandintermediateinputs.Theinitialproductivityeffectofanincreaseinpubliccapital

1Inaproductionfunction,firmsproducetheiroutputusingvariousinputs(capital,labour,materials,etc.)soastomaximizetheirprofits.Acostfunctionhasfirmsminimizingthecostofinputstoproducetheiroutput.Thecostfunctionisreferredtoasthedualoftheproductionfunctionbecausethetwoapproachesyieldthesameoutcomeintermsofinputsandoutputs.


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resultsinareductioninthedemandforlabourandintermediateinputsbutanincreaseinthedemandforprivatecapitalinallindustries.Whenindustryproductionlevelsincreaseduetothe‘outputeffect’ofpubliccapital,thechangeinthedemandforlabourandintermediateinputsisreducedwhilethedemandforprivatecapitalincreases.Thus,theoutputeffectofpubliccapitalreinforcesthe‘crowdingin’ofprivatecapitalformationsothatpubliccapitalcanbeseenashavinganimportantroleincontributingtoinvestment-ledeconomicexpansions,andimplyingthatpubliccapitalisacomplementtoprivatecapital.2

ThispaperusesthefindingsfromHarchaouiandTarkhanitoestimatetheeconomicbenefitsofthethreepublicinfrastructurespendingoptionsusingtheC4SE’sprovincialeconomicmodelingsystem.Thenextsectionsdiscussthestudymethodologyandassumptionsfollowedbytheresults.ResultsarepresentedintermsofimpactsuponGDP,employment,governmentrevenuesandfiscalbalancesovertime.Spendingmultipliersandreturnoninvestmentstatisticsaregeneratedtoprovidesummarymeasuresoftheresults.Thepaperconcludeswithsomeobservationsbasedontheresults.

2Criticsofpublicspendingcontendthatitcanactasasubstituteforprivatespendingthus‘crowdingout’privatespendingandreducingtheoverallimpactofpublicspending.The‘crowdingin’ofprivatespendingisthereverseofthisphenomenonwhereprivatesectorspendingrisesthroughthemultipliereffectofpublicspending.


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MethodologyandAssumptions

ThissectionreviewsthemethodologyandassumptionsrequiredtoassessthebenefitsofpublicinfrastructurespendinginBritishColumbia.Thebenefitsofapublicinfrastructureprogram–whichaccrueprincipallytotheconstructionsector3–arisefromthedirectprogramspendingandbeyond,withpubliccapitalpromotingeconomicgrowthandproductivity.Thereadershouldnotethatcurrentgovernmentspending(excludingdebtservicecharges)isnotdirectlyaffectedbyinfrastructurespending.Employmentinpublicadministration,publiceducationorhealthcarerises-orfalls-basedonchangesinprovincialpopulation-basedneedsandnotindirectresponsetotheconstructionofnewfacilities.Thestudy,therefore,assumesthatanyimprovementsoradditionstothestockofinstitutionalbuildingseitherreplacedecommissionedbuildingsormeetanticipatedincreasesindemandarisingfromchangesinpopulation.

TheprivateindustrycostelasticitiesestimatedbyHarchaouiandTarkhaniareusedtoreduceproductioncostsbythebusinesssectorintheC4SE’sprovincialeconomicmodelingsystem.AtableoftheirelasticitiesofcostswithrespecttopubliccapitalbybusinesssectorisreproducedinAppendixA.Thebenefitstoindustryintermsofreducedcostcontinueoverthedesignlifeofthepubliccapital.Maintainingthepublicinfrastructuresothatthenetcapitalstockvalueispreserved,therefore,allowsthesebenefitstopersistthroughoutthesimulationperiod.Alackofrepairandreplacementspendingafterthe5-yearprogramperiodwould,however,leadtoadeteriorationinthecostbenefitstoprivateindustry.Anotherimportantassumptionisthattheuseofpubliccapitalbyoneindustrydoesnotprecludeorreducethevalueofitsusebyanyotherindustry.

AScenario-basedApproachtoModelingUncertainty

TheprivateindustrycostelasticitiesestimatedbyHarchaouiandTarkhaniareconsideredplausiblebymanyeconomists.Theirworkcorrectsthemethodologicalconcernsofearlierstudiesandproduceselasticitiesthataresignificantlysmallerthanthosefromearlierempiricalstudies.Thereisstill,however,debateanduncertaintyoverthepreciselevelofbenefitconferredtoprivateindustryfrompubliccapital.

Uncertaintyisaddressedthroughasetofscenarios.Thefirstscenario,referredtoasthebaselinescenario,doesnotincludeanypublicinfrastructurespending.Thisisthebenchmarkagainstwhicheachoftheothershockscenariosiscompared.Apairofscenariosareprovidedtoevaluatetherangeofbenefitsoflowerindustrycosts:thefullbenefitscaseandthehalfbenefitscase.4ThehalfbenefitscasescenariohalvesHarchaouiandTarkhani’sbusinessindustrycostelasticitiesandreflectsthepossibilitythatsuchalargespendingprogram,whileaddressingmanyvitalinfrastructureneeds,mayalsoincludeanumberofprojectsoflowereconomicnecessityorvalue.Economistsrefertothis

3AtableofsectoralimpactsisincludedinAppendixC4Athirdshockscenarioisthezerobenefitscasewhichassumesthatpublicinfrastructureprovidesnobenefittoprivatebusiness.Theresultsfromthisscenarioareanextremecaseanddonotrepresentalikelyoutcome;sotheyarenotshowninthisreport.


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phenomenonas"diminishingmarginalreturnoninvestment."Thefullbenefitscaseisbasedonthefullvalueoftheestimatedcostelasticities.


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Results:TotalEconomicImpact

Thissectionofthereportpresentsthetotaleconomicimpactofthepublicinfrastructurespendingprogramdescribedintheprevioussection.TheanalysisisconductedusingtheC4SE’sprovincialeconomicmodelingsystemwhichisamulti-region,multi-sector,dynamicstochasticgeneralequilibriummodelofCanadaanditsprovinces.ThemodelisdescribedinmoredetailinAppendixB.

Theanalysisconsistsofsevenscenarios.Thebaselinescenariodoesnotincludeanyadditionalpublicinfrastructurespendingandisthebenchmarkagainstwhicheachoftheotherscenariosiscompared.Theothersixscenariosreflectchangesineconomicactivityarisingfromthepublicinfrastructurespendingprogramandaregroupedintothreesetsofshockscenarios.Theotherscenariosarethehalfandfullbenefitscaseswhichassumerespectivelythatthe5-yearcumulative$5billionpublicinfrastructureprogramprovideseitherhalforallthebenefitstoprivatebusinessestimatedbyHarchaouiandTarkhani.Thehalfandfullbenefitscasescenariosarethenrepeatedwith5-yearcumulativespendingprogramsof$7and$10billion.

Table2

Theresultsareconductedunderthemaintainedassumptionthatongoingprovincialpublicinfrastructurespendingissufficienttomaintainthestockofpubliccapitalatthelevelabovethebaselineattainedattheendofthe5-yearplanspendingperiod.Thisspendingensuresthattheboosttocompetitivenessforbusinessesintheprovincefromtheinitialinvestmentininfrastructuredoesnotdiminishovertime.Withoutthispost-planspending,thestockofpubliccapitalaffectingbusinesssectorcostswoulddecline-aswouldtheirestimatedcost-savingsbenefits.Assumingapermanentpost-planlevelofpublicrenewalspendinghasfiscalimplicationsoverthelongterm,butitalsoprovidesaperspectiveofthelong-runbenefitsarisingfromanew,stable,higherlevelofpublicinfrastructureintheprovince.

Table2summarizestheeconomicbenefitsfromthesescenariosbycomparingactivityinthesixpublicinfrastructurespendingscenariosagainstthebaselinescenario.

Short-runAverage(5year)

Long-runAverage(20years)





GDP(millionsof2016dollars)Halfbenefitstoprivatebusiness 1726 573 2417 803 3452 1147Fullbenefitstoprivatebusiness 1790 1098 2506 1537 3580 2195

Non-residentialInvestment(millionsof2016dollars)Halfbenefitstoprivatebusiness 1302 227 1822 318 2603 454Fullbenefitstoprivatebusiness 1350 366 1890 512 2700 732

Employment(thousands)Halfbenefitstoprivatebusiness 9.8 -2.2 13.7 -3.0 19.6 -4.3Fullbenefitstoprivatebusiness 9.2 -2.0 12.9 -2.8 18.4 -4.0

DifferencefromtheBaselineScenario

Spendingof$5billion Spendingof$7billion Spendingof$10billionBritishColumbiaPublicInfrastructureSpending:SummaryofEconomicImpacts


9

ThetotalimpactsforthefullandhalfbenefitscasesinTable2includethedirectincreaseinpublicinfrastructurespendingplustheindirectimpactonBritishColumbiasupplierstotheconstructioncompaniesofeverythingfromofficesuppliestoconstructionequipmentusedintheconstructionprocessplustheinducedimpacts.Inducedimpactsincludetheimpactontheeconomyfromemployees(atthedirectandindirectlevelofimpact)spendingtheirincomes-andthentheincomethatprocessgeneratesbeingre-spentbyitsrecipients.Theprovincialeconomicmodelingsystemalsoconsiderschangesinbusinessinvestmentspendingarisingfromtheshiftsintheeconomy,changesinwages,prices,interestandexchangerates,andchangesinpopulationaspeoplemovebasedonprevailingeconomicconditions.Thesefactorscombinetoensurethatthetotalimpactislargerthanthedirectincreaseinspending.

TheaverageannualimpactonGDP,measuredinmillionsof2016dollars,duringthe5-year$5billionspendingprogramisbetween$1.7and$1.8billionforthehalfandfullbenefitscaseshigherthaninthebaselinescenario.Non-residentialfixedinvestmentalsorises,relativetothebaseline,overthisperiodwithaverageannualincreasesofbetween$1.3and$1.4billion.Itisworthnotingthattheaverageannualincreaseinfixednon-residentialinvestmentishigherthanthepublicinfrastructureprogramspendingof$1.0billionayear(expressedin2016dollars)forboththeshockscenariosasalsofoundbyHarchaouiandTarkhani.Theincreaseinaverageannualemploymentrelativetothebaselineisbetween9and10thousandforthetwoshockscenariosashigherproductivityinthefullbenefitscasescenarioslightlyreducestheincreaseinemploymentrelativetothehalfbenefitscasescenario.Intermsofperson-yearsofwork,the$5billioninfrastructurespendingprogramgeneratesbetween46and49thousandoverthe5yearsofprogramspending.

Afterthe5-year$5billioninfrastructureprogramends,reductionsinbusinesscostsincorporatedinthehalfandfullbenefitscasesleadtoaverageannualincreasesinGDP(measuredin2016dollars)relativetothebaselineofbetween$0.6and$1.1billionayear.Thelong-runimpactonnon-residentialinvestmentspendingfollowsthesamepatternasGDP.Thehalfbenefitscaseraisesaverageannualinvestmentby$0.2billionrelativetothebaselinescenariowhilethefullbenefitscaseraisesitby$0.4billion.Finally,thelong-runimpactonemploymentisdownbyaboutaround2,000forboththeshockscenariosrelativetothebaseline.Asaresult,labourproductivityisupforbothshockscenariosrelativetothebaseline.

Theoutput,investmentandemploymentimpactsforthe5-yearcumulative$7and$10billionpublicinfrastructurespendingplansvaryproportionallytothoseforthe$5billionplandiscussedabove.


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Table3

ThefiscalimplicationsfortheprovincialgovernmentarepresentedinTable3.Provincialgovernmentrevenues,measuredin2016dollars,riseanaverageof$0.3billionayearrelativetothebaselineforbothshockscenariosduringthe5-year$5billionspendingprogram.Afterthe5-yearprogramends,theaverageannualchangeinprovincialgovernmentrevenueisquitesmallrelativetothebaseline.Therevenueresponseforthe$7and$10billionspendingplansvariesproportionallytothoseforthe$5billionplan.

Theprovince’sfiscalbalance,onaPublicAccounts(PA)basis,improvesslightlyasashareofGDPforbothshockscenariosrelativetothebaselineduringthe5-year$5billionspendingprogram.However,theaverageannualbalancedeteriorates,asashareofGDP,0.2%afterthe5-yearspendingprogramendsastheamortizedcostoftheinfrastructurespendingisrealized.

EconomicMultipliersandReturnonInvestment

Economicmultipliersandreturnoninvestmentmeasuresareoftenusedtosummarizetheeconomicbenefitsofpublicorprivateactivities.5EconomicmultipliersarepresentedinTable4andmeasuretheshort-termbenefittotheeconomy-intermsofGDP,jobs,investmentorgovernmentrevenue-ofadollarofpublicinfrastructurespending.Returnoninvestmentstatisticsaregeneratedtosummarizethelong-runbenefitsofpublicspendingandarealsopresentedinTable4.Theprincipaldifferencebetweenthetwotypesofstatisticsisthatmultipliersareameasureofcontemporaneousbenefitwhilereturnoninvestmentstatisticsexpressthenetpresentvalueofbenefitsoverthelong-termasamultipleofcosts.

Short-runMultipliers

TheGDPmultiplierisgeneratedbydividingthechangeinrealGDPrelativetothebaselineforthe5-yearinfrastructurespendingperiod6bythechangeinpublicinfrastructurespending.ForGDP,theshort-runmultiplieris1.78.Thismeansthattheeconomyexpandsby$1.78forevery$1.00spentonpublicinfrastructure.

5Aneconomicmultiplieristhefactorbywhichthegainsinonemeasure–suchasGDPoremployment–aregreaterthanthefactor(investmentspending)thatcausedit.Thereturnoninvestmentisaperformancemeasureusedtoevaluatetheefficiencyofaninvestment.6ThemultipliersshowninTable4aregeneratedfromtheaverageofthefullandhalfbenefitscaseimpacts.







BCGovernmentRevenue(millionsof2016dollars)Halfbenefitstoprivatebusiness 291 18 408 25 582 36Fullbenefitstoprivatebusiness 290 58 406 81 580 115

BCGovernmentPADeficit(shareofGDP)Halfbenefitstoprivatebusiness -0.04 0.18 -0.06 0.24 -0.09 0.32Fullbenefitstoprivatebusiness -0.04 0.16 -0.06 0.20 -0.10 0.27

BritishColumbiaPublicInfrastructureSpending:SummaryofFiscalImpacts

DifferencefromtheBaselineScenario

Spendingof$5billion Spendingof$7billion Spendingof$10billion


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Table4

Theimpactonemploymentistypicallyexpressedintermsofjobspermilliondollarsspentonpublicinfrastructure.Theshort-runemploymentmultiplieris9.6jobspermilliondollars.

Thenon-residentialinvestmentmultiplieris1.35andmeasurestheextenttowhichinvestmentintheprivatesectorand,toalimitedextent,otherpartsofthepublicsectorexpandsinresponsetotheincreaseineconomicactivityfromthepublicinfrastructurespendingprogram.Thismeasure’svalue,ofmorethanone,providesevidenceofthe‘crowding-in’effectofpublicinfrastructurespendingwhereitencouragesadditionalprivateinvestment.

BritishColumbia'provincialgovernmentrevenuerises$0.29per$1.00ofprogramspending.Asthesemultipliersorrevenuerecoveryratesarelessthanone,theprovincialgovernmentfinancestheprogrambyrunninghigherdeficitsorlowersurpluses.

Long-runReturnonInvestment

ThelongertermbenefitsofpublicinfrastructurespendingareassessedthroughaReturnonInvestment(ROI)statistic.ROIcalculationscanbedefinedinavarietyofways.Thedenominatoristhenetpresentvalueofexpenditureorinvestmentovertimeassociatedwithaparticularoutcome.Thenetpresentvalueoftheoutcomeoverthesimulationperiodisthenumerator.Thebenefitassociatedwithavarietyofdifferentoutcomemeasurescanbeassessed.ThemostcommonoutcomesfromeconomicbenefitstudiestendtobeGDP,employmentandgovernmentrevenue.

DiscountRates

Thefutureisuncertain;sopeopleplacemoreimportanceonwhattheyhavetodayrelativetowhattheymayhaveinthefuture.Uncertaintyandpotentialrisksriseasyoulookfurtherintothefuture.Thisnotionof"discounting"thefutureisusedtoexpresshowmuchlesssomeonewouldaccepttodayinplaceofhigherbutuncertainfuturereturns.

Inthecontextofthisanalysis,theannualcostsandbenefitsgeneratedbytheProvincialEconomicModelingsystemovertheprojectionperiodareconvertedtocurrentdayvaluesusingadiscountrate.Inmanycasestheyieldonlong-termgovernmentbondsisusedtorepresentthediscountrate.Thisrateaccountsfortherisksfrombothinflationanduncertaintyaboutthefuture.However,theeconomicmeasuresconsideredinthisreportexcludetheimpactsofinflationsoalowerdiscountratecanbeused.Intheseinstancesadiscountrateofjust3%isusedbuthigheruncertaintysurroundingthepotential

HalfBenefits

FullBenefits

GDPper$ofspending 1.78 1.42 2.09NRinvestmentspendingper$ofspending 1.35 0.84 1.04Jobsper$millionofspending 9.6 1.1 1.1BCGov'ttaxrevenueper$ofspending 0.29 0.14 0.19

BritishColumbiaPublicInfrastructureSpending:SummaryofBenefitsLong-runReturnon

InvestmentImpactperdollarofpublicinfrastructurespending

Short-runTotalImpact

Multiplier


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benefitsfrompublicinfrastructuremayalsowarranttheuseofahigherdiscountrate.Thebenefitsbasedonhigherdiscountratesdonotmateriallyaffecttheconclusions.

ThecostsandbenefitsinthisstudyareassessedovertheprojectionhorizonintheProvincialEconomicModelingSystem(from2016to2040).Arithmeticallyextendingtheprojectionhorizonoutbeyond2040leadstostronger,positiveresultsatalldiscountratesfortheGDP,employmentandgovernmentrevenueROIstatistics.However,thisalternateapproachwasnotadoptedbecauseofthepotentialthatglobaleventsorother,disruptivetechnologiescouldariseinfuturedecadesaffectingtheassumedlong-termreturns.

TheROIstatisticsinthisstudyshowthenetbenefittosocietyfromthepublicinfrastructurespendingprogram.ThefirstROIstatisticshowsthediscountedvalueofGDP,measuredin2016dollars,perdollaroffunding(alsoexpressedin2016dollars).Thesecondstatisticshowsthediscountednumberofjobspermilliondollarsofspending.ThefinalROIstatisticsshowsthenumberofdollarsofadditionalProvincialtaxrevenue,expressedin2016dollars,perdollarspent.

Table4showstheROIstatisticsassociatedwiththefullandhalfbenefitspublicinfrastructurespendingscenarios.Theanalysisrevealsthat:

o TheoverallROIisexpressedintermsofdiscountedgrossdomesticproductdividedbydiscountedspendingtobuildandmaintainthenewpublicinfrastructure.Discountingfuturecostsandbenefitsby3%yieldsaROIofbetween$1.42and$2.09perdollarofspendingforthehalfandfullbenefitscasesrespectively.

o AROIcanalsobeexpressedintermsofjobsgeneratedper$1millionofspendingtobuildandmaintainnewpublicinfrastructure.Bothspendingscenariosgenerate1jobper$1millionoffundingata3%discountrate.

o Thereturnonpublicinvestmentisexpressedintermsofdiscountedprovincialgovernmenttaxrevenuesdividedbydiscountedprogramspendingtobuildandmaintainthenewpublicinfrastructure.Discountingfuturecostsandbenefitsby3%yieldsaprovincialtaxrevenueROIofbetween$0.14and$0.19perdollarofspendingforthehalfandfullbenefitscasesrespectively.

Overthelong-term,thegovernmentwillcollectbetween$0.14and$0.19inrevenueforeverydollaritspends.Thepublicinfrastructurespendingdoes,however,stimulateprivatesectorinvestmentandgeneratesignificantincreasesintheprovince’sGDPandproductivity.


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SummaryandObservations

AsustainedpublicinfrastructurespendingprogramcanlaythefoundationforfuturegrowthandprosperityinBritishColumbia.Productivepublicinfrastructurereducescostsforprivatebusinesses;providingacompellingcaseforpublicfundingofthiscapital.TheC4SEbelievesthatthefullbenefitscaseresults,basedonthecostelasticityestimatesfromHarchaouiandTarkhani,arecredibleandrepresentthebenefitsthatshouldaccruefromspendingonpublicinfrastructure.Butthereisariskthatalargeinfrastructureprogramcouldyieldlowerbenefitssothatthehalfbenefitscaseprovidesaprudentlower-boundtotheanalysis.

Theshort-runeconomicbenefitsincludeaGDPmultiplierof1.78,9.6jobsgeneratedpermilliondollarsspent,and$0.29ofprovincialgovernmentrevenuerecoveredperdollarspent.Theincreaseindomesticeconomicactivity,particularlynewconstructionsectorjobs,canbeattractiveinaslowgrowthenvironment;promptingvariousproponentsofpublicinfrastructurespendingtoarguethatitcanbeusefulincounteringthebusinesscycleovertheshort-term.TheC4SEconsidersthistobeaweakreasonforthisspendingandthatpublicinfrastructurefundingdecisionsshouldbebasedonlong-termneedssoastodeliverlastingbenefits.Correctlytimingfiscalpolicytocountertheeconomiccycleisdifficult.Ifprojectsarerushedsoastoboostshort-termdemandwithlimitedthoughtgiventotheirlong-termutilitytotheeconomy,thenthereisasignificantriskofnotrealizingtheoutcomesdescribedbythefullbenefitscasescenariosincethespendingyieldslesslong-termbenefitstooutputoremploymentwhilesaddlingtheeconomywithadditionaldebt.Infrastructurespendingmustbedirectedtowardsprojectsthatyieldlong-termbenefitstotheeconomy.

Overthelong-run,thereturnoninvestmenttoGDPfromspendingonpubliccapital,assuminga3%discountrate,liesbetween1.4and2.1forthehalfandfullbenefitscasescenarios.Thismeansthateverydollarinvestedininfrastructureresultsinanincreaseofupto$2inrealGDPoverthelong-term.Thisresultisstrongenoughtojustifyapublicinfrastructurespendinginitiativeandstillremainshighwhenhigherdiscountratesareassumed.Provincialgovernmentrevenuerecoveredisbetween$0.14and$0.19forthehalfandfullbenefitscasescenarioshelpingtomitigatethelong-runfiscalimpact.

Somecriticsmaynotethatthelong-runincreaseinemploymentofjust1jobgeneratedpermilliondollarsspentonpubliccapitalislowandthatthemoneywouldbebetterspentonotherpriorities-ornotspentatall.Thisresultarises,inpart,fromthedesignoftheC4SE'sprovincialeconomicmodelingsystemwherechangesinwageratesandmigrationforcetheunemploymentratetoadjusttowardsitsnaturalrateovertime.Whileemploymentgainsmaybelimited,businessesaremoreproductiveandcompetitiveandworkersearnhigherrealwages:upbetween0.4and0.5%afterthe5-yearspendingprogramendsinthehalfandfullbenefitscasescenariosrelativetothebaseline.

TheincreaseinpubliccapitalcanalsohelpachievesomethingelsethathaseludedpolicymakersinCanadaoverthelastfewyears:gainsinprivatesectorinvestmentspending.Apublicinfrastructureprogramboostsprivateinvestmentinboththenearandlong-termandcan,therefore,playanimportantroleincontributingtoaninvestment-ledeconomicexpansion.


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Insummary,thebenefitsofapublicinfrastructurespendingprograminclude:

o Higherprivatesectorinvestment,o Amoreproductiveeconomy,ando Ahigherstandardofliving.

Althoughthisstudyreportsthatsignificanteconomicbenefitscanberealizedfromtheprovince'spublicinfrastructureplan,spendingontheseassetsisalsorequiredtoachieveothersocialobjectivesthathavenotbeencapturedorquantifiedinthisanalysis.Thesebenefitsincludethosetohouseholdsfromlowertransportationcongestioncosts,improvedbusinessnetworkingopportunities,reductionsinpollutionandgreenhousegases,andsocietalgainsfromeducation,healthcareandotherpublicassets.

Inclosing,thisstudyalsoprovidesacautionarytaleforpolicyanalysts.Thecostsofneglectingourpublicinfrastructurearenotzero.AsnotedbyInfrastructureCanada(2011),allowingourpublicinfrastructuretocontinuetodecayimposescostsofatleastequalbutoppositeconsequencetothebenefitsestimatedinthisstudy.ThecompetitivenessofprivatebusinessesinBritishColumbiaaretiedtothequalityofitspublicassets,especiallygiventheshortfallofinfrastructureinvestmentinpreviousdecades.Therefore,asignificantandsustainedpublicinfrastructurespendinginitiativeisrequiredifhouseholdsandbusinessesaretocontinuetoenjoyahighstandardofliving.


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References

Aschauer,D.A.1989.“IsPublicExpenditureProductive?”JournalofMonetaryEconomics23(2):177–200.

Baldwin,J.,W.Gu,andR.Macdonald.2010.“IntegratedProductivityAccounts:ContributionstotheMeasurementofCapital.”TheCanadianProductivityReviewCatalogueno.15-206-X,no.027,EconomicAnalysisDivision.Ottawa:StatisticsCanada.

Baldwin,J.,H.Liu,andM.Tanguay.2015."AnUpdateonDepreciationRatesfortheCanadianProductivityAccounts."TheCanadianProductivityReviewCatalogueno.15-206-X,no.039,EconomicAnalysisDivision.Ottawa:StatisticsCanada.

CentreforSpatialEconomics,The.2015."TheEconomicBenefitsofPublicInfrastructureSpendinginCanada."Ottawa:BroadbentInstitute.

Harchaoui,T.M.,andF.Tarkhani.2003.“PublicCapitalanditsContributiontotheProductivityPerformanceoftheCanadianBusinessSector.”EconomicAnalysisResearchPaperSeriesCatalogueno.11F0027MIE,no.017,Micro-EconomicAnalysisDivision.Ottawa:StatisticsCanada.

InfrastructureCanada.2011.“BuildingCanadaPlan.”Ottawa:InfrastructureCanada.RetrievedJune9,2015fromhttp://www.infrastructure.gc.ca/prog/doc/booklet-livret03-eng.html.

Macdonald,R.2008."AnExaminationofPublicCapital'sRoleinProduction."EconomicAnalysisResearchPaperSeriesCatalogueno.11F0027M,no.050,Micro-EconomicAnalysisDivision.Ottawa:StatisticsCanada.

Nadiri,M.I.,andT.P.Mamuneas.1994.“InfrastructureandPublicR&DInvestments,andtheGrowthofFactorProductivityinUSManufacturingIndustries.”NBERWorkingPaperSeries,W.P.#4845.

Wylie,P.J.1996.“InfrastructureandEconomicGrowth,1946–1991.”CanadianJournalofEconomics,XXIX,SpecialIssue,S350-S355.


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AppendixA:ContributionofPublicCapitalattheIndustryLevel

ThefollowingtablecanbefoundinHarchaouiandTarkhani’spaper(Table5,p.17)andprovidesasummaryoftheirempiricalresults.Theindustrycostelasticities,ηCG,werederivedfromnationaldatafortheperiod1960-2000andindicatethepercentagechangeinthetotalprivatecostofproducingagivenlevelofoutputthatisassociatedwitha1%changeinthevalueofthepubliccapitalservicesandwereusedtoadjustindustrycostsintheC4SE’sprovincialeconomicmodellingsystem.Theimpactoncostsislargestfortransportationandthewholesaleandretailtradesectors.Theweightedaverageaggregateimpactonbusinesscostsistolowerthemby0.06%forevery1%increaseinpubliccapital.

Table5

ηCG 1/η 1/η* ηYGAgriculturalandrelatedservice -0.047 1.071 1.224 0.052Fishingandtrapping -0.001 0.981 1.024 0.001Loggingandforestry -0.014 1.012 1.091 0.014Mining -0.025 1.053 1.154 0.026Crudepetroleumandnaturalgas -0.037 1.091 1.193 0.041Quarryandsandpit -0.010 0.912 1.012 0.009Servicesincidentaltomineralextraction -0.012 0.946 1.029 0.011Food -0.037 1.026 1.141 0.038Beverage -0.035 1.044 1.159 0.037Tobaccoproductsindustry -0.019 0.984 1.043 0.019Rubberproducts -0.030 1.037 1.067 0.031Plasticproducts -0.017 1.047 1.093 0.018Leatherandalliedproducts -0.011 1.022 1.034 0.011Primarytextile -0.020 1.022 1.101 0.021Textileproducts -0.016 1.054 1.146 0.017Clothing -0.021 1.061 1.087 0.022Wood -0.031 1.034 1.053 0.032Furnitureandfixture -0.013 1.023 1.064 0.013Paperandalliedproducts -0.034 1.067 1.125 0.036Printingpublishingandallied -0.030 1.065 1.140 0.032Primarymetal -0.052 1.047 1.157 0.055Fabricatedmetalproducts -0.049 1.075 1.171 0.053Machineryind.(exceptelectricalmach) -0.053 1.125 1.234 0.060Transportationequipment -0.057 1.097 1.177 0.063Electricalandelectronicproducts -0.003 1.146 1.241 0.003Non-metallicmineralproducts -0.022 1.033 1.097 0.023Refinedpetroleumandcoalproducts -0.042 1.097 1.153 0.046Chemicalandchemicalproducts -0.035 1.058 1.197 0.037Othermanufacturing -0.002 1.012 1.074 0.002Construction -0.070 1.034 1.223 0.072Transportation -0.093 1.046 1.279 0.097Pipelinetransport -0.052 1.012 1.189 0.023Storageandwarehousing -0.015 1.022 1.086 0.015Communication -0.069 1.097 1.124 0.075Otherutility -0.061 1.012 1.087 0.062Wholesaletrade -0.118 1.055 1.191 0.125Retailtrade -0.121 1.063 1.221 0.129BusinessSector -0.062 1.058 1.176 0.066Source:HarchaouiandTarkhani,Table5,p.17

TranslogCostFunctionElasticities


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Note:ηCGistheprivatecostelasticitywithrespecttoprivatecapital;1/ηistheinternalreturntoscale,ortheeffectonoutputofa1%increaseinallinputs(privatecapital,labourandmaterials)exceptpubliccapital;1/η*istheoverallreturntoscale,ortheeffectonoutputofa1%increaseinallinputsincludingpubliccapital;ηYGisthemarginalproductivityofpubliccapital,ortheeffectonoutputofa1%increaseinpubliccapitalholdingotherinputsconstant.


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AppendixB:C4SEProvincialEconomicModelingSystem

TheC4SE’sProvincialModelingSystemisadynamic,multi-sector,regionaleconomicmodelofthecountry.Itincludesabottom-upsetofmacroeconomicmodelsfortheprovinces,theterritoriesandtherestoftheworld.Thenationalmodellinkseconomicactivityinoneregionwithactivityintheotherregionsthroughtrade.Theprovincialmodelsincludedetailedincomeandexpenditurecategoriesanddemographicandlabourmarketinformation.Thepurposeofthemodelingsystemistoproducemedium-tolong-termprojectionsoftheprovincialeconomiesandconductsimulationstudiesthatrequireindustryanddemographicdetail.

Thismodellingsystemconsistsofasetofprovincialandterritorialmacroeconomicmodelsthatarelinkedthroughtrade,financialmarketsandinter-provincialmigration.Theimpactonthesupplychain–intermsofoutputandemployment–isfullycapturedbythemulti-sectormodel,whichincorporatesthepurchasingpatternsfromthecurrentinput-outputtables.But,incontrasttoaninput-outputmodel,adynamicmacroeconomicmodelalsoconsiderstheimpactonsupplier’sinvestmentdecisionsthatoccurasaresultofthechangeineconomicactivity.

Themodelproducesimpactsonemployment,labourincome,valueaddedoutput,productivity,investmentandexportsforatleastfourteenindustrysectors(seelistbelow).Italsoproducestheimpactsongovernmentrevenuebylevelofgovernmentandsourceofrevenue.Thedynamicnatureofthemodel,however,makesitmorechallengingtodevelopasinglesummarymeasurethatprovidesa“rule-of-thumb”result.Theneedforsuchameasureissatisfiedbygeneratinganaverageimpactoverseveralyearsofthesimulationor,whenappropriate,aReturnonInvestmentstatistic.

C4SEModel–IndustrySectors

AgricultureOtherPrimary(detailvariesbyprovince)Manufacturing(detailvariesbyprovince)ConstructionUtilitiesTransportation&WarehousingWholesale&RetailTrade

Finance,Insurance&RealEstateProfessional,Scientific&ManagementServicesAccommodation&FoodHealthServicesOtherServicesEducationServicesGovernmentServices

Themodelincorporatespartialpolicyresponsestoeconomicdevelopments.Intermsofmonetarypolicy,theBankofCanadaadjustsinterestratesusingaTaylorRulereactionfunctionthatrespondstoinflationrelativetoitstargetrateandtheunemploymentraterelativetothenaturalrateofunemployment.TheexchangeratereactstoCanada-USinterestratedifferentialsandchangesinthepurchasingpowerparityvalueofthedollar.Intermsoffiscalpolicy,governmentspendingis,formanycategories,afunctionofpopulation,whilegovernmentrevenuereactstochangesinthetaxbase.

Thefollowingsectionsprovidethereaderwithmoreinformationonthestructureoftheindividualprovincialmodelsandthenationalmodelthatunitestheprovincialandterritorialmodels.


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ProvincialModels

Theprovincialandterritorialmodelsareverysimilarinstructure–theparametersineachmodeldiffertoreflectdifferencesintheeconomicexperienceofeachregion.

Theprovincialmodelsaresimilarinnaturetoageneralequilibriummodel,butfullproductandfactorsubstitutionisnotimplemented.Atpresent,substitutionisrestrictedtotheenergyproductsandvalue-added.Forpurposesofmanageabilitythereisonlyonewagerateandonesetofcostofcapitalmeasures–constructionandequipment–inthemodel.Changesinthesemeasuresoflabourandcapitalcostscauselabourandcapitalintensitiestochangeacrossallsectorsoftheeconomy.

Themodel'seconomyisorganizedintofourbroadsectors.Firmsemploycapitalandlabourtoproduceaprofit-maximizingoutputunderaCobb-Douglasconstant-returns-to-scaletechnology.Householdsconsumethedomesticandforeignproductsandsupplylabourundertheassumptionofutilitymaximization.Governmentspurchasethedomesticandforeignproductsandproduceoutput.Foreignerspurchasethedomesticproductandsupplytheforeignproduct.

Therearetwomainmarketsinthemodel.Thesemarketscorrespondtothedomesticandforeignproductsandthelabourmarket.Eachofthesemarketsisconcernedwiththedeterminationofdemands,supplies,andprices.Likemostsub-nationalmodels,theBritishColumbiamodelassumesthatmostpricesaresetinnationalmarkets.ThepresenceoftheNationalmodelinthesystemmeansthatinterestrates,exchangeratesandthepriceofsomegoodsandservicesareaffectedbychangesineconomicactivityinBritishColumbiaandtherestofthecountry.

Insub-nationaleconomies,themovementoflabourisakeyfactorintheadjustmentofthelocaleconomytochangesineconomicconditions.TheC4SE’smodelallowsnetmigration–andthereforethetotalpopulation–toadjustovertimetoreflectchangesineconomicconditions.Iftheeconomyandemploymentisgrowing,thenthedemandforlabourrisesandnetmigrationrises.Thisfeatureisanimportantconsiderationwhenexaminingeconomicimpactsoveroneormoredecades.

NationalModel

ThedesignofthenationalmodeliswhatmakestheC4SE’ssystemunique.Thenationalblockaddsuptheeconomicactivityacrossthecountryandusesthisinformationtohelpdetermineprices,interestrates,exchangeratesandtherest-of-countryexternaldemandforgoodsandservices–allfactorsthatareexogenoustotheotherprovincialmodellingsystems.

Toseewhythisisimportant,consideranincreaseinoneprovince’seconomy.Thisraisesthatprovince’sdemandforimports.Inthissystemeachoftheotherprovincesseesanincreaseindemandfortheirexportstothatprovincewhich,inturn,raisestheirowneconomies.Theincreaseineconomicactivitywillputupwardpressureprices,interestratesandtheexchangerate.Theentirenationaleconomy,therefore,adjustsovertimetotheinitialshock.


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AppendixC:SectoralImpacts

HalfBenefits

FullBenefits

HalfBenefits

FullBenefits

HalfBenefits

FullBenefits

HalfBenefits

FullBenefits

HalfBenefits

FullBenefits

HalfBenefits

FullBenefits

AllIndustries(basicprices) 1,583 1,642 531 1,016 2,216 2,299 743 1,422 3,165 3,284 1,061 2,031Agriculture 6 7 5 10 9 10 6 14 13 14 9 21OtherPrimary 73 82 47 109 103 115 65 153 146 164 93 218Manufacturing 66 77 68 157 92 108 96 219 131 154 137 314Utilities 26 27 10 17 37 38 14 24 53 54 20 35Construction 748 766 132 181 1,047 1,072 185 253 1,496 1,531 265 361Transportation&Warehousing 56 60 39 92 79 84 54 128 113 120 77 183Trade 177 188 77 148 248 263 107 207 354 375 153 295Finance,Insurance&RealEstate 161 161 47 92 225 225 66 128 322 322 95 183Information,Professional,Scientific,Managerial 128 134 64 128 179 188 90 179 255 268 129 255Accommodation&FoodServices 32 31 10 20 44 43 14 28 63 62 20 39EducationServices 7 6 -2 -3 9 9 -3 -4 13 12 -4 -5Health&SocialServices 5 5 -1 -2 7 7 -1 -3 11 10 -2 -4OtherServices 93 94 35 70 131 132 49 97 187 188 70 139GovernmentServices 4 4 -1 -2 6 6 -1 -2 8 8 -2 -3

Note:sectorimpactsinthistablearereportedatbasicprices;allotherGDPimpactsusedinthisstudyarereportedatmarketprices

Spendingof$5billion Spendingof$7billion Spendingof$10billionBritishColumbiaPublicInfrastructureSpending:SectoralImpacts

DifferencefromtheBaselineScenarioinMillionsof2016Dollars

Short-runAverage Long-runAverage Short-runAverage Long-runAverage Short-runAverage Long-runAverage

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THE ECONOMIC BENEFITS OF PUBLIC INFRASTRUCTURE … · The Economic Benefits of Public Infrastructure Spending in British Columbia 1 Executive Summary There is a broad consensus that