Former Bank of Canada governor Stephen Poloz says spending on transportation infrastructure will remain important even in a future where working from home is firmly entrenched, in part because of its powerful contribution to productivity.
Poloz was a keynote speaker on day one of the Ontario Road Builders’ Association 2022 Summit, being held virtually over four days starting Jan. 26. Poloz is now a special adviser with Osler, Hoskins & Harcourt and author of the upcoming book The Next Age of Uncertainty: How the World Can Adapt to a Riskier Future.
“Infrastructure is a key part of our growth trend line,” said Poloz. “That’s putting money in the economy and getting something out of it. You’re not just throwing money around but you’re getting a new bridge or new transit system, and you create jobs at the same time, which is a good thing to do if the economy is soft.”
Spending on infrastructure is investment that delivers returns for 50 years or longer Poloz said. And those returns translate directly into the growth of the economy not just because of the spending but also because of its economic enabling effect and link to productivity.
In a future where governments are more indebted than ever, Poloz commented, they may need to take on a different role to get important infrastructure built.
“Governments can use their financial capacity to de-risk a project as opposed to just paying for it. That’s a big difference and uses way less money,” Poloz said. “If they’re using their money to post a PSG, performance security, on projects, that just means not spending any money at all, they’re just there in case something goes wrong. And yet they take a major element of risk out of the equation.”
Even if half of Canada’s workforce works from home, Poloz said, there are still strong cases to be made for infrastructure investment. For one, there was major post-war spending on hospitals and roads which means required upgrading. Also, with fewer people on the roads and using transit, Poloz said, there will be less congestion. The infrastructure becomes more predictable to use which adds to well-being. A focus on more suburban living requires a shift in transportation analysis, he argued, not an end to transit and road spending.
Meanwhile, he pointed out, Canada will continue to attract hundreds of thousands of immigrants a year. That means the baseline demand for infrastructure will keep rising.
In sum, said Poloz, “The value proposition around infrastructure continues to strengthen through this story despite the fact that some will say it’s not going to be used as much as before.”
In further economic analysis, he made a case that Canada’s oil and gas industry may stay productive for decades even as green energy expands.
“There’s every reason to believe that Canada can remain a major producer and exporter of energy, and other derived products, for the foreseeable future,” said Poloz. “I mean, after all, there’s all kinds of plastic on the Starship Enterprise.”
Over 80 per cent of the world’s energy needs today are fossil based, and three billion people in the world today have no electricity available to them for basic needs, Poloz stated. A switch to electric will not take care of their needs — “That just isn’t a thing that can happen.
“On top of all this, the global demand for energy will grow by at least 50 to 60 per cent over the next 30 years.”
Canada can still pursue its net-zero goals for 2050 given that reality, Poloz said, but it is worth remembering that it’s not “zero” but “net-zero.” Canada can continue to have a lucrative oil and gas sector and aim for net-zero through extensive use of carbon-capture, he suggested.
Mentioning his new book, Poloz outlined a half dozen sources of increased risk in the future, such as rising income inequality, political polarization, indebtedness, the struggle to reach net-zero and an aging population — but rising inflation and supply chain problems won’t likely be among them.
The December inflation rate, calculated at 4.8 per cent, mainly reflects the trough with low prices that the economy was in during the first year of the pandemic, Poloz said.
As for the supply chain, businesses always find ways to adjust their practices, Poloz said.
“There’s just too much money at stake for people who run supply chains for them not to fix them.”