Yes, spend on highways, but only what’s affordable

Hey there, time traveller!
This article was published 07/08/2019 (2318 days ago), so information in it may no longer be current.

Chris Lorenc has a strange understanding of what it means to control government spending.

In a rebuttal to a column I wrote last week on the need to limit provincial government debt, the president of the Manitoba Heavy Construction Association suggested I was calling on the province to stop spending on highways altogether.

“Does that mean we don’t repair crumbling highways?” Lorenc asked in a Free Press column he wrote this week, suggesting that I wanted government to “just stop spending” on highways.

Of course, I wrote nothing of the kind. It’s a silly assertion.

What I did write is that infrastructure spending is important, but that it needs to be affordable. I even argued there’s an economic case to be made to increase existing levels of highway spending, the exact opposite of what Lorenc alleged I wrote.

Controlling government spending means just that: controlling it, making sure government can afford what it’s spending. It doesn’t mean “stop spending.”

Manitoba has budgeted $350 million this year for highway infrastructure. It’s lower than it was during the final two years of the former NDP government. But it’s close to the annual average the province was spending between 2009-10 and 2013-14. It’s more than triple what it was from 2003 to 2006.

The MHCA conveniently ignores those years and focuses solely on the last two years of NDP spending. It does so to argue that the current government has “slashed” highway spending. When someone calls them on it and suggests government needs to control its capital budget, Lorenc accuses them of wanting to “stop spending” on highways.

Lorenc goes on to argue that there’s “good debt” and “bad debt” when it comes to government expenditures. Spending money on strategic highway infrastructure is “good debt” because it promotes trade and returns a dividend to government through higher tax revenues, he argues.

He compares it to borrowing money to buy a home, which he says is good debt, versus using a credit card for everyday purchases, which he contends is bad debt.

Trouble is, that analogy only works when the borrower can afford the home. When homeowners take out mortgages they can’t afford, they tend to default on their loans and lose the house. Suddenly “good debt” becomes “bad debt.”

The Manitoba government, under the previous NDP administration, took out mortgages it couldn’t afford. As a result, the provincial government was subject to several credit rating downgrades. Had spending and borrowing levels continued at that rate, the province’s credit rating would have fallen further. The cost of borrowing would have continued to escalate and the province’s finances would have spiralled downward to greater depths of fiscal instability.

That’s precisely why governments need to control how much debt they take on, whether it’s for highways, flood mitigation, schools, hospitals or any other capital expenditure.

The province doesn’t pay for capital with cash raised from taxes. That’s what the previous NDP government tried to sell to the public when they raised the PST. In reality, the money raised from the PST hike went into general revenues.

We saw in the mid-1990s what happens to governments when they allow their finances to deteriorate to those levels. They’re forced to slash spending at all levels, including on highways. It’s a scenario governments would do well to avoid.

Lorenc also suggests increased highway funding could be financed through a higher sales tax. He says Manitobans should have been given the option of deciding in a referendum whether they wanted the PST reduced to 7 per cent “or keep it and dedicate the $300 million in revenues it raises to road renewal and repair.”

Actually, the current government did have a mandate to reduce the PST. They ran on it in 2016.

Lorenc is mistaken, though, on how capital expenditures are funded by the provincial government. Highway spending, like all capital, is financed through borrowing. The capital expense is amortized over the life of the asset. The cost is spread out over time. Those are the rules under public sector accounting

The province doesn’t pay for capital with cash raised from taxes. That’s what the previous NDP government tried to sell to the public when they raised the PST. In reality, the money raised from the PST hike went into general revenues. The increase in highway spending under the former administration was financed through borrowed money, which was added to the provincial debt.

We need good infrastructure. And nobody is advocating we “stop spending” on highways. But governments don’t have access to unlimited credit. When the bond rating agencies come calling, they don’t care if government has good debt or bad debt. It’s just debt.

tom.brodbeck@freepress.mb.ca