Public Investment in Canada

Public Investment in CanadaAuthor(s): M. C. UrquhartSource: The Canadian Journal of Economics and Political Science / Revue canadienned'Economique et de Science politique, Vol. 11, No. 4 (Nov., 1945), pp. 535-553Published by: Wiley on behalf of Canadian Economics AssociationStable URL: http://www.jstor.org/stable/137543 .

Accessed: 12/06/2014 13:17

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].

.

Wiley and Canadian Economics Association are collaborating with JSTOR to digitize, preserve and extendaccess to The Canadian Journal of Economics and Political Science / Revue canadienne d'Economique et deScience politique.

http://www.jstor.org

This content downloaded from 185.2.32.109 on Thu, 12 Jun 2014 13:17:43 PMAll use subject to JSTOR Terms and Conditions

http://www.jstor.org/action/showPublisher?publisherCode=black

http://www.jstor.org/action/showPublisher?publisherCode=cea

http://www.jstor.org/stable/137543?origin=JSTOR-pdf

http://www.jstor.org/page/info/about/policies/terms.jsp


PUBLIC INVESTMENT IN CANADA*

pRIOR to 1930 discussion of public investment was conducted largely on the basis of an assumption of full employment within a closed economy.

Consequently it centred around the productiveness of public investment as opposed to that undertaken in the privately-operated sector of the economy, the appropriate methods of financing the projects undertaken, and the legitimate spheres of operation of public bodies. The usefulness of public investment projects was believed, in the main, to be confined to their long term contribution to the productiveness of ,the economy. In practice, even well into the nineteen-thirties, governments, with exceptions, undertook public projects when finances were buoyant and borrowing relatively easy,1 and curtailed them, in attempts to balance budgets, when depression became serious.

After 1930 both in the thought and practices of some central governments2 and in economic writing the pendulum swung the other way. Main emphasis was laid on the current employment and income giving effects of public investment. This change in emphasis received additional impetus after the advent of The General Theory of Employment, Interest and Money3 when economic discussion became much more concerned with the level of employment than the distribution of the factors of production among alternative uses.

The transfer of attention from the long term aspects of public projects to their effect on current employment and income maintenance was accompanied by the shortcomings of practice and thought which are inevitable in an undeveloped field. While a good deal was written and spoken about the desirability of well thought out and well planned investment, insufficient attention was given to its attainment and in practice resort was had to many undertakings whose value, from either a short or long term viewpoint, was dubious. The shortcomings were largely associated with ,failure to cope adequately with the institutional and administrative problem involved. Further, there was a penchant for fastening on single devices to meet the overall employment problem.

The institutional and administrative problems were of many types. First, though analysis based on the idea of the multiplier, the relation, and related con- cepts, proved very valuable in developing the pure theory of employment, it was not sufficient, in itself, to give direction to the policy maker. For action must be taken within an established institutional framework, partly set by legal provisions, partly by long custom and the attitudes of the people. And- the influences of the institutional factors may be at least as important as those

*The opinions expressed herein are those of the writer only; no responsibiliity for them is attached to the department in which he is employed!.

1In Canada after 1929 this was largely a matter of necessity with provincial and local governments who did not have access to adequate financial resources, either through taxation or borrowing.

2Reference may be made to the policy of the Canadian government of undertaking a few projects in 1930 and 1931 and to the public works programme initiated by the United States in 1933.

3J. M. Keynes, General Theory of Employment, Interest and Money (London, 1936). 535



The Canadian Journal of Economics and Political Science

purely economic in nature. Second, the appropriate public bodies, in cases, did not have the necessary powers-legal, financial, or other-to carry out the projects that could be best managed by them. In some cases even, as with the proper planning of projects, there Iwas neither ithe personnel nor the realization of requirements for selection of appropriate amounts and kinds of under-

takings. Third, insufficient attention was given to the way in which public investment undertakings fitted into the industrial and geographic structure of a

country's economy. Probably the inclination to fasten on single devices was the outcome of

the strict adherence to economic theory to the exclusion of consideration of institutional factors and to lack of adjustment of policies to the particular circumstances of an individual country. If the theory that unemployment is caused by a tendency for investment to fall short of potential savings be

accepted, it may have seemed logical to provide the required offset through public investment and deficit financing.4 In practice, a large number of con- sistent types of action, of which a public investment programme was only one, were necessary. In addition in many small less industrialized countries, highly dependen't on foreign Itrade, a decline in activity was brought on, in the first instance, by loss of foreign markets. Hence an approach different from that

appropriate to a large highly industrialized and nearly self-contained economy was necessary.

As an outgrowth of the experience and economic discussion during the past fifteen years a fairly wide measure of agreement has been reached on a number of economic principles. The long term problem of maintaining high employment is seen as lone of maintaining total spending by final users on cur- rently produced goods and services. If total spending equivalent to a high employment level of income is maintained, production of goods and services will be directed toward those commodities which will be taken off the market.5 It is widely agreed, on the basis of a good deal of supporting evidence, that consumer expenditure, with any given pattern of income distribution, bears a definite dependent functional relationship to the level of disposable income and possibly its rate of change. However, private investment, while partly depending ron the current level of business activity, undergoes wide fluctuations largely independent of the current level of economic activity. And expenditure may also fall with a decline in income from loss of foreign markets. It is believed by many economists, though far from all, that a deficiency of expenditure may be made up by some form of government expenditure-on investment goods, consumer goods, or on transfer payments 'to the private sector of the economy which, in turn, increases private ouitlay on either investmen't or consumption.

4If main interest is centred in developing savings offsets, all that is necessary is to increase the government deficit. However, owing to the importance of consideration of the structure of the economy in any employment programme and the fact that private investment declines much more than other private spending during periods of depression, a need for public investment as well as deficit financing seems indicated.

5This assumes a period sufficiently long to allow movement of labour and industry both

industrially and geographically. For the need to increase the mobility of labour and capital, see Sir William Beveridge, Full Employment in a Free Society (London, 1944).

536



Public Investment in Canada

Differences of opinion arise regarding the appropriate direction that an enlarged government outlay might take. Some writers, who believe in the mature economy thesis, that there is a chronic deficiency of private investment outlets to absorb the amounts of savings that will be made, place main reliance on a permanently higher level of government outlay, which gradually rises as the economy grows. Others maintain that the mature economy theory is not definitely established, that historically, in previous times, there have been extended periods of unemployment, somewhat akin to the nineteen-thirties, which were followed by recovery; the period following 1873 is cited.

Whichever view is taken it would appear that even with a permanently higher level of government expenditure wide swings in the amount of capital investment undertaken ;are still apt to take place. Also in a country like Canada there are apt to be wide fluctuations in foreign current account credit items. This will require offsetting action on the part of the government which may involve both fluctuating expenditure and changes in taxes.

It would be desirable, if possible, to have increased government expenditures in depression come in outlay, directly or indirectly, on both consumer and producer goods. Social security measures can permanently raise the amount of consumption out of a given income; they can, along with adjustment of tax rates, provide greater stability in the amount of disposable income of individuals; and government expenditure on direct purchases or on subsidization of private purchase of consumer goods may be varied. But it is neither easy nor de- sirable6 to adopt techniques that will bring fluctuations in consumption sufficiently wide to take care of the whole problem.

Alternatively, public investment projects to a wide extent can be varied in time much more readily. A long term public investment programme can be divided between regular requirements that must be undertaken regardless of economic conditions and a special part that might be timed to offset fluctuations in private outlay. This would not be as an alternative to other devices but as a very important supplement.

There is another important reason for combating unemployment through public investment. During a period of prosperity a definite structure of the economy is established. In a country such as Canada, in depression export industries and investment goods industries have been much more adversely affected than consumer goods industries. To provide short run stimulus, the most effective expenditure may be made ithrough the channels which have suffered a most serious decline. It is largely through these channels that public investment might be made to provide stimulus. In addition, if the former structure is expected to be appropriate once some measure of prosperity returns, the use of resources to bring about wide shifts in production would be wasteful if they can be used equally as well in the type of production appropriate for the long period. To a very considerable extent it would be possible to use advantageously the

6If private investment declines drastically, it would not be desirable to fill the entire gap by increased consumption expenditure as investment outlay is of such importance for the future.

537



Tlhe Canadian Journal of Economics and Political Science

resources released from private investment activity to contribute to public investment projects.

The remainder of this paper applies principally to Canada. In public investment is included expenditure on physical assets. Only passing reference is given to the field of investment in personal qualities, in health, education and skills, although these intangible forms of investment may be equally as productive as that in physical assets. Owing to limitations of space the question of Dominion- Provincial relations in the field is only touched upon. The discussion is divided into four sections under the headings: Past trends of public investment in Canada; Total investment and public investment 1926-41; Future forms of public investment; and Problems requiring early attention.

Past Trends of Public Investment in Canada. Public investment in Canada has been related closely to its geography, the type and distribution of resources, the stage of economic development, and the historical growth of the abilities, institutions, and attitudes of the people. The effect of these factors may be seen in the course that expenditure has followed.

By far the predominant item of expenditure has been the amount spent on the development of transportation facilities, on canals, docks, wharves, dredging, steam railways, highways, and streets. Much of the early outlay of steam rail-

ways for opening new territory was financed by public outlay either in cash or land grants and help was given by guarantees of bonds. There was also direct expenditure on railways by both provincial and federal governments-as late as the nineteen-thirties in the case of the Hudson Bay Railway. And since shortly after the last war one of the great railway systems has been publicly owned. On waterways large expenditures have been made from the early nineteenth century to the nineteen-thirties when the Welland Canal was completed.

Until the outbreak of the War of 1914-18 a large part of the expenditure on roads was local in nature and was undertaken by the municipalities. Re-

quirements for high standards were not great and, although street building increased the amount substantially, the outlay did not match that on waterways and

railways. Beginning about 1912, with the development of motor transport, the

provision of adequate provincial highways and of a better type of local road has meant greatly increased outlay on this type of project.

The other main types of public investment in the earlier period were on

public buildings, on means of providing municipal services, and on public utilities other than those for transportation. The requirements for buildings were relatively greater in the early period of growth. With the expanding population and economy there was relatively great need for new legislative and ad,mini- strative buildings, new schools, new hospitals, and the other means of performing the services of the government. With the decline in the rate of growth of population and substantial conclusion of geographical and industrial extension of the frontier, these needs became less pressing than before. Governments did not enter the public utility field, aside from transportation, to any great extent until after the turn of the nineteenth century. Since then until the nineteen- thirties large outlays were made. Mention may be made of the Ontario Hydro

538




Electric Power Company development, and government expenditure on telephone systems, particularly in the West.

The predominance of outlay on transportation in Canadian public investment is indicative of the concentration of government attention on the development of the productive capacity of the country. . The opening of new territory and the attempt to make markets available to the developing industries required, in the main, the development of transportation facilities. This was particularly so in a country of Canada's size and with her distribution of resources. Further, the importance of foreign trade in which raw materials and food were exchanged for finished products exerted a double influence. The first was the attempt to connect the various parts of the country so that they would not be Idealing in isolation with other countries; the second was the attempt to provide access to the seaboard for all sections.

The change in the types of public investment outlay had an important influence on the governments involved. Railway expenditure, while undertaken partly by provincial governments, was in the main the responsibility of the Dominion. Local roads, before the motor transport era, were undertaken largely by the municipalities, as was the development of community services. With the increased importance of motor transport beginning about 1912 and the decline in the relative importance of the railways, public investment became very much more a concern of the provinces. This tendency was accelerated after the War of 1914-18 when the Dominion government ceased its policy (except in the case of the C.N.R.) of concentrating on the development of the productive assets of the country. That function in large measure was taken over by the provinces in road and highway and utility programmes.

Turning to the present, the public investment requirements are changing. Unquestionably, outlay on transportation facilities will continue at a high level with more emphasis put on replacement and improvement of existing facilities than on entirely new development, except in the northern parts of the country. Experience in the United States has been that with an increased volume of heavier traffic, replacement and improvement costs have been maintained at a high level and have frequently been more important than purely new development. For local governments the emphasis is changing from the provision of the mini- mum of the so-called essential services to an attempt to provide facilities that will further increase economic opportuniity and improve the health and welfare of the community. Provincial and Dominion governments are turning more to resources development, such as conservation and improvement of agricultural and forest resources, an orderly development of mineral properties, and organi- zation and extension of transportation facilities. The provinces themselves are increasing the outlay on power facilities.

Two main conclusions may be drawn from the Canadian experience. The first of these is that the emphasis on public investment may now be extended beyond transportation to other fields, into larger investment in resources, housing, community development, and so forth.7 The second is that the changing require-

7To some degree the great distances in Canada require relatively larger expenditures on transportation than in other countries. This might seem to indicate this type of outlay might

539




ments have led to transfer of responsibility among Dominion, provincial, and municipal governments. The division of responsibility and authority among the various levels of governmenit has led sometimes to difficulty in expanding investment activity when the need was greatest, as responsibility has not been related to financial ability. The change from railway development to road and highway construction and provision of power and communication facilities transferred the main responsibility from the Federal government to the provinces. When large projects connected with canal and railway development were completed, the part played by the Dominion government became substantially less than before. As a result in the late nineteen-thirties it played a relatively small role in total public investment. On the other hand, with the great development of motor transport, provision of roads and highways for inter-urban travel has expanded very greatly. The main roads and highways in which high standards are required are predominantly the responsibility of the provinces. The municipalities have been somewhat more fortunate as their type of outlay has been of a more continuing and constant nature.

Total Investment and Public Investment 1926-4.1. If public investment is to be used both as a means of providing productive assets for future use and as a means olf maintaining current employment and income, an examination of the types of project suitable for public development and the way in which it fits in with private investment is necessary. The purpose of the three tables which follow is to indicate the volume of various types of investment and the amount undertaken by public bodies, to give some further break-down of public investment and to indicate the part which has been undertaken by the various government bodies in the Canadian federal system. The situation is fairly evident from the tables themselves, but for purposes of this paper it is worth pointing out the nature of a few items.

In Table 1 ithe following points are worth noting: (i) while there is at present no comparable figure of gross national product with which to compare the figure of gross investment, the proportion in periods of prosperity is high. The Rowell-Sirois figures of national income paid out to individuals are $4,719 million for 1929 and $3,824 million for 1937. (ii) Of the items in total investment, provision of durable physical assets is by far the largest. Machinery and equipment are a relatively large part of the production of durable physical assets. (iii) Inventory changes are of a smaller quantitative amount in any one year but the swings from years of large increase to years of great decrease are of the same order of size as the changes in investment in main components of durable fixed assets. (iv) The net capital export or import has been larger in amount than the inventory change as an absolute item and shows even wider fluctuations than do inventory changes. The net capital movement does not show the very wide movement that itook place in the foreign current account credit and debit items. For instance, the improvement in the international capital

continue to dominate public investment. But the effect of distance may be exaggerated. Its effect is mainly felt in inter-urban and inter-regional travel and the high standards necessary for more densely populated areas largely offsets the effects of more sparse settlement and greater distances.

540




position from 1929 to 1933 conceals a very great decline in the current account credit items accompanied by an even more drastic decline in the debit items. (v) By 1937 the durable producer goods items had not recovered to nearly the 1929 position. Offsetting this was a greatly improved position with respect to inventory accumulation and the foreign capital movement. (vi) Machinery and equipment items show large relative swings. Railway equipment, which is included with the public utilities, fluctuated equally violently from over $50 million in 1929 to less than one tenth that amount in 1933. Agricultural equipment followed a like course. The other great user of steel, the automo- bile industry, also had violent fluctuations in output.

In Tables 2 and 3 on Public Investment the following points stand out as relevant: (i) The predominant form of public investment, with the exception of 1941 was outlay on transportation facilities. In addition to the street and highway, bridge and subway outlay a large amount of the expenditure of publicly-owned utilities is on electric railways, steam railways, and bus facilities. (ii) Outlay on public buildihgs has been relatively small as compared with total building construction. The work on docks, wharves, piers, which is of a somewhat similar nature, increases the building construction substantially. (iii) In- vestment in resource development has been small. Most of this has been on conservation and maintenance and very little on development. (iv) Direct expenditure on machinery and equipment is very small compared with total outlay on this item. (Public utility equipment, which is not segregated from other utility capital expenditure is much more important in amount.) (v) By 1937 public investment in durable assets had become a much more important part of total outlay on durable assets than previously. (vi) The provinces in all years spent more on public investment projects than did the Dominion, but by 1937 their outlay had become relatively much larger than that of the Dominion. This was in part connected with the completion of the Welland Canal and Hudson Bay Railway by the early nineteen-thirties. (vii) With the exception of 1930, public investment followed much the same course over the business cycle as private investment. Direct municipal expenditure has been much more stable than that of the Dominion and provinces.

Future Forms of Public Investment. 'A decline in the level of economic activity in Canada is not apt to come about through a decline in consumption independent of the current level ,of income unless the effects of fiscal policy are to greatly reduce the amount of disposable income in the hands of individuals. It is much more likely to be brought about by a fall in the value 'of the current credit items on foreign account, or by a fall in private investment; both these may be initiated independently of the level of current income.

Public investment expenditure to minimize these declines can have a two- fold effect. In the first place it could help to stabilize and provide an overall stimulus to spending, including both the direct effects and secondary effects through the multiplier and the relation. In the second place public investment policy could be used to help directly the industries and areas which have been affected the most, thus making the stimulus most effective. At the same time

541



-n'

4-i bO

TABLE I

GROSS INVESTMENT AND REPAIRS AND MAINTENANCE, CANADA, 1926-41

(Millions of current dollars)

1926

Public investment in durable physical assets Direct government ..................... Utilities (railways, telephones, electric and

power and other).....................

Sub-total (items 1 and 2)........

Private investment in durable physical assets Residential, commercial, industrial, and

institutional ......................... (of which machinery and equipment)..... Agriculture, mines, woods operations...... (of which agricultural machinery and

equipment) .......................... Utilities (railways, telephones, electric, and

power) ..............................

98

56

1927

121

84

1928 11929

141

95

168

145

1930 1931

208

131

172

1932

119

98 33

1933119341 1935

881 110

20' 19

126

31

1936 1937

125

40

184

62

1938

167

62

1939

167

53

1940

326

64

1941

501

61

154 205 236 313 339 270 152 1081 129 157 165 246 229 220 390 562

412 445 537 612 485 323 188 138 192 226 2911 409 344' 345 473 662 (182) (205) (248) (297) (231) (131) (80) (67) (98) (122) (156)i (227) (192): (183) (296) (387)

99 121 155: 1481 123 54 36 29. 45 62 74 95 100 97 117 133

(49) (69) (93)1 (71) (57) (16) (17) (9) (20) (19) (28) (44) (49)! (47) (64) (70)

111 1181 1441 191 161 122 60 311 39 36 41 66 60 57 50 62 _________________41 6 6 60 57________________ 5 0 62_________________________

622 6841 8361 951 769 499 284 198, 276 324 4061 57C

Item no.

1 2

3

4

5 6 7

8

"Th

03

0

Ca)

0;r

0

0j

0

04

857 9 Sub-total (items 4 + 6 + 8) ..... 640 5041 499



TABLE I-Cont.

Total investment in durable physical assets (items 3 and 9)......................

Change in business inventories*...........

Sub-total (items 10 and 11)......

Change in grain in commercial channels*.... Net balance of international payments,

current transactions..................

Total gross investment (excluding farm inventories) (items 12 to 14) ............

Change in farm inventories* ..............

Gross investment (items 15 and 16)......... Total repairs and maintenancet............

Total gross investment and repairs and maintenance (items 17 and 18)...

1926 1927 1928 1929 1930 19311932

776 889 1,072 1,264 1,108 769 436 123 118 150 92 91 -6-73

899 1,007 1,222 1,356 1,199 763 363

-7 36 85 12 -9 -21 13

127 -10 -321 -311 -337 - 174, -96

1,019 1,033 1,275 1,057 853 5681 280 66 51 5 -144 66 -1 20

1,08511,084 1,280 9131 919 567 300 383 407 447 4701 423 371 283

1,468 1,491 1,727 1,383 1,342 938 583

1933

306 -139

167

7

--2

172 -29

143 256

Source: Dominion-Provincial Conference on Reconstruction, Public Investment and Capital Formation (Ottawa, 1945). For details of method see the source. *Inventory changes are the value of the physical change in inventories. Government-financed inventories are included in items 11 and 13. tIncludes only machinery repair parts in the case of manufacturing and agricultural machinery and some construction materials used by home owners and on the farm. In other cases includes both repair materials and labour.

1934 1935

405 481

171 14 14

422

11

68

501 -12

489 288

495

125

620 13

1936 1937 1938 1939 1940 1941

571 816 27 107

598

-133

244

709 -45

923

-83

180

1,020 -22

733 35

768

86

100

954 32

719 50

769

116

126

1,011 50

1,030 155

1,185

92

149

1,426 77

633 664 998 986 1,061 1,503 308 333 380 372 361 368

3081~

1,419 252

1,671 x .-

6 " cz 0S

491 n

2,168 ".

-39 2

2,129 t 437 Q'

Item no.

10

11

12

13 14

15

16

17 18

19

,871 2,56i

I I

I---I I

I I r

. t4 1 l'l 7 !-4' -riN I /! 99 i t CI (1 #I -D P17 0C OA 1 I OI Ifo AnC I n"-. I' IS fw r I '-,j # # I" * F IiI I ,. ?X I . t^U IJ ' 4L 1,t J 777 399




it would be necessary to take care that investment policy be not allowed to prevent desired adjustments in the structure of the economy.

Declines in export are most apt to hit the great raw material and food producing industries first-agriculture, logging, processing basic forest products, mining, and fishing. The secondary effects are felt by those who supply both consumer and producer goods to those in the export industries. Aside from other policies to maintain incomes of these groups, a public investment programme to maintain their earnings directly would strike closest to the sources of decline. Maintenance of incomes of these producers would help maintain their expenditure on consumption. It would also almost certainly affect their investment outlay;

TABLE II

GRoss INVESTMENT AND MAINTENANCE IN DURABLE PHYSICAL ASSETS, BY TYPES, ALL PUBLIC AUTHORITIES, SELECTED YEARS, 1926-41

(Millions of dollars)

Item Type of expenditure 1926 1929 1930 1933 1937 1941 no.

Dominion and provincial direct 1 Streets, highways, and bridges............... 32 59 78 33 115 60 2 Docks, wharves, rivers, canals, dredging, etc... 24 34 37 13 14 7 3 Buildings and grounds ..................... 11 22 31 11 19 190 4 Other ........................... .... 6 17 22 7 10 45

Municipal direct 5 Streets, highways, and bridges............... 29 40 41 28 30 32 6 Public buildings and other works*............ 21 29 30 22 21 20

7 Public construction (items 1 to 6)t ............. 8 Planning and administrative expenses...........

9 Public works (items 7 and 8) ................. 10 Natural resources ............................. 11 Machinery and equipment.....................

12 Sub-total (items 9 to 11)t........... 13 Less duplications ............................

14 Direct investment in durable physical assets and maintenance, all governments (item 12 less 13)

15 Publicly-owned public utilities, investment, and maintenance .............................

16 Total investment and maintenance, durable physical assets (items 14 and 15)t...............

122 202 238 112 208 355 10 16 19 9 17 29

132 218 257 121 225 384 13 20 23 13 22 19 21 34 39 20 33 191

166 272 319 154 280 594 8 14 17 9 19 14

158 258 302 145 261 580

138 241 216 76 132 143

296 499 518 221 393 723

Source: Dominion-Provincial Conference on Reconstruction, Public Investment and Capital Formation (Ottawa, 1945).

*Includes Hudson Bay Railway 1926, 1929, 1930. For remaining years Hudson Bay Railway is with publicly-owned public utilities.

tTotals may not be the exact sum of parts owing to rounding.

544



Public Investlm ent in Canada

in agriculture in particular, a closer dependent relationship of investment to income received exists than in more industrially developed activities.

Policy to offset a decline in private domestic investment, whether a result of diminished exports or whether initiated independently, should also follow the principles of striking as near the source as possible and through the established channels of expenditure. This practice will require attention to how both the construction industry and suppliers of producers' durable goods are affected. A programme which means the use of the same types of labour and materials as

TABLE III GROSS INVESTMENT AND MAINTENANCE IN DURABLE PIIYSICA, ASSETS, PURPOSE

CLASSIFICATION, ALL PUBLIC AUTHORITIES, SELECTED YEARS, 1926-41

(Millions of dollars)

Item Type 1926 1929 1930 1933 1937 1941 no.

Direct Dominion* Gross investment........................... Maintenance ...............................

Total .............................

Direct provincial Gross investment........................... Maintenance ...............................

Total .............................

Direct municipal Gross investment.......................... Mlaintenance ...............................

Total .............................

Publicly owned utilities, all governments Gross investmentt ......................... Maintenance...............................

Total .............................

All public authorities Gross investment. .......................... Maintenance...............................

35 12

59 21

79 20

26 10

35 416 14 8

47 80 99 36 49 424

29 60 79 28 114 55 21 31 35 19 34 34

50 91 114 47 148 89

33 49 50 34 35 30 28 37 39 28 29 36

61 86 89 62 64 66

56 145 131 20 62 61 82 96 85 56 71 82

138 241 216 76 133 143

153 313 339 108 246 562 143 185 179 113 148 160

Total ............................. 296 498 518 221 394 722

Source: Dominion-Provincial Conference on Reconstruction, Public Investment and Capital Formation (Ottawa, 1945).

*Excludes investment projects originally undertaken by United States authorities but later acquired by the Canadian government. Includes outlay on Hudson Bay Railway 1926, 1929, and 1930.

tExcludes Hudson Bay Railway 1926, 1929, and 1930 as it is included with direct government.

1 2

3

4 5

6

7 8

9

10 11

12

13 14

15

545




those that have been used in private industry or which would stimulate private investment expenditure would be more effective and efficient than one providing large outlays on capital projects using different materials and labour than those undertaken by the private sector of the economy.

Total public investment expenditure must be regarded in the form of two types of programme. The first would be a regular programme which except in very unusual circumstancess proceeds regardless of the current level of economic activity and which would increase with the expansion and industrialization of the economy. In the future, on account of the increase in population and the great industrialization that has occurred during the war, this would likely mean a larger regular programme than that undertaken previously. The second part of the programme would be one that can be varied in amounts to contribute to the stability of employment and income within the economy. Ex- penditures would be small when economic activity is high and would increase whenever the level of prosperity is lower. The long term need for public investment is sufficiently great to warrant a greatly expanded outlay on both types of programme.

An examination of the course that public investment may follow will indicate how the programme can fit in with these principles. The need for traditional types of government expenditure in the future will continue to be high. Con- tinued highway and road programmes at higher levels than in the past are required. A large part of such a programme would of necessity go on regardless of the current economic condition. A good part of it, however, might be timed to fit in with total employment policy.

Increased road expenditure in depressed periods will not provide for any large expenditure through the same channels which private investment has followed. It would, however, provide employment and income for the primary producers who are apt to have been most hard hit. In addition, it can provide a general stimulus by absorbing large numbers of unskilled labour and by using equipment which would maintain activity in the machinery industry.

Expenditure on construction of public buildings and of docks, wharves, and piers is the same type of activity as that undertaken in general building. The amounts in the past, relative to total building construction, have been small. Nevertheless, an appropriate policy of fitting in new building construction with the cycle of business activity could be made to play some part.

The possibility of public investment offsetting declines in private investment are very much better in the case of the other types of traditional expenditure- that on public utilities. Capital expenditure in this field, in Which approximately half the facilities are publicly owned, exceeded $140 million in 1929.9 In the past expenditures have followed the same course that private investment did. If

8If pressure on the labour market threatened to lead to serious inflation it might be necessary to curtail the regular public investment programme temporarily.

9The division of utilities into public and private in Table I was made on the basis of status in 1941, and each utility was recorded in the same group throughout the entire period 1926-41. Hence a small part of the expenditure shown for the publicly owned utilities in the earlier years of the period was made by companies which were private at that time but which were later taken over by public authorities.

546




timing in the utility programme could be made to coincide with that deemed desirable for other government investment, the effect would be to provide much more stabi,lity in a relatively large section of the total investment field; any action to obtain acceptance of the same practice by the privately-owned utilities would help that much more. It is of particular advantage to maintain investment in these fields since they use large amounts of equipment, and the iron and steel primary and machine-producing industries are apt to be most hard hit and difficult to help directly in other forms of public investment expenditure.

A possibility for enlarging public utility investment, whether it be public or private, is in extension of electrical facilities, particularly rural electrification. In addition, in air transport development, of which the possibilities are unknown at present, an entirely new field is opening.

Beyond these well-developed traditional fields of public investment, there are four growing but relatively untouched avenues 'which well might be made to help provide stability in the total investment programme.10

The first of these which provides a large field for expansion is resource conservation and development on a substantially increased scale. Projects of this nature have the advantage that in large measure they would be so located as to maintain the income of the great primary producers. The effect would be salutary even though the outlays are not apt directly to provide for use of large quantities of the materials ordinarily going into private construction.

The need of outlay on maintenance of forest tracts, reforestation and general silviculture is demonstrated by the rate at which the resource is declining ;11 the possibilities are largely untapped. In agriculture a great !deal has to be done in the matter of prevention of soil erosion, development of irrigation and water projects, and, particularly in the prairies, the rehabilitation of large sections of dry land. The prospects for development in mining and fisheries' are equally as bright. Large sections of the country are not even surveyed or mapped as yet. And both inland and coastal water bodies require purification, fish restocking, and opening of water passages. Many of these expenditures should proceed in any event, but a substantial portion can be timed to fit into cyclical policy.

An extensive resource development programme has the additional advantage that it does not compete with any form iof private investment; rather, as may be readily seen in connection with improvement of mineral resources, it 'opens up many new opportunities. Government policy which leads to surveying areas, location of mineral deposits, and the opening up of the region through provision of transportation facilities would provide very substantial outlets for new private investment.

Foreign investment is a second field into which the government might enter. In the past both the total volume of exports and net foreign investment have

10Conservation and development of natural resources is included in this group for, though several million dollars per year have been spent in the past, the amounts involved have been small compared with what might be considered adequate if only from the view point of the productive assets provided.

"See Advisory Committee on Reconstruction, Report no. 2, Conservation and Development of Natural Resources.

547




suffered declines in the initial phase of a cycle. With the high Canadian pro- pensity to import, a policy to maintain domestic investment will encounter substantial leakages through imports if exports are not also maintained. If export credits were made for consumer or raw material purchases, the effect would be to maintain income in the present great export industries. If foreign loans were made for capital purposes, particularly for machinery and equipment, employment and incomes in a type of industry in which direct government investment can be made only on a very limited scale, would be provided.l2

The third new field of outlay is investment in housing. After 1929 housing investment suffered a much greater decline and experienced a smaller measure of recovery than many other types of investment. Any activity undertaken by the appropriate level of government will provide direct investment expenditure through channels already established. A large part of the programme should be determined by social need and should be continuing but it might be accelerated in depressed periods when resources are freed from other activity. Further, a good deal could be done in the line of stimulating private residential investment through financial assistance or by other means.

Investment in inventories is the last type of new investment that might be undertaken on a large scale. Action would require both accumulation and de- cumulation at appropriate times. Although the extent to which government inventory changes could offset the changes in private inventories in the same lines in which the private inventory changes take place is distinctly limited, some improvement may be made if the policy is extended beyond wheat to other durable foods and raw materials.'3 Extension might be made to some of the basic manufactured products also where the product is to a considerable degree standardized.

Investment and disinvestment in inventories need not mean any great net investment over a large period of years once the policy had been initiated. On the other hand there would be some necessity for growth as the economy develops and the period of expansion might go on over several years as new fields are entered.

It is left to the reader to decide for himself what the possibilities are in terms of volume. That they are substantial for the traditional types of expenditure may be seen in part from the amounts shown for the various types of capital outlay in the years of high activity. For the less developed kinds of public expenditure the evidence is not as clear. However, even with the present re- stricted information it would appear that in resource conservation and development, outlay many times that undertaken in the past should be made over a period of years. A housing programme of fifty thousand units would involve, at current prices, more than $200 million. In depression a substantial portion might be financed by the government. Inventory accumulation of farm products would depend to quite an extent on the amount of current production, which is highly

12As ability to make foreign loans depends on the willingness of the countries to accept them, the matter is only partly in the hands of the Canadian government.

13A floor price programme for durable commodities may involve inventory holdings unless the commodities are sold at less than cost.

548




variable owing to climatic conditions; and there is no experience in holding stocks oof base metals or standardized manufactured materials. The possibilities of making export credits available to other countries are also doubtful since a depression in Canada is apt to be associated with depression abroad. However, in these latter two categories, even though possibilities of expenditure may be small they can still play a part.

Although this paper deals only with investment in physical assets, mention may appropriately be made of the highly productive investment outlays that may be made in the field of development of personal qualities. Expenditure which im- proves the health of Ithe community, while the main need is for purely social reasons, also increases the capacity to produce. The usefulness of education which develops the skill and abilities of the people of a nation is more readily evident. While the increase in productive capacity does not show up in tangible form, its contribution is nevertheless real. Obviously educational and health expenditures are not subject to a wide degree of timing; the need is rather for a high level of outlay at all times.

The main contribution of educational and health expenditures is social, but public ou;tlay will extend the area of stability and some small additional contribution in depression might be made through outlay on retraining and in grants for further academic work. Illustrative of the last point, Canadian university students, who to a very large degree finance themselves by working in the summer, can get no job at all or cannot earn sufficient to maintain themselves through the university session in periods like those of 'the nineteen-thirties. In these cases increased grants, along the lines of those given by the National Youth Admini- stration in the United States during the nineteen-thirties, might be made, or possibly jobs at useful work might be provided in the summer months.

Problems Requiring Early Attention. If the contemplated programme is to be anything more than a vague idea, of which a hasty attempt at execution might do untold harm, a number of problems must be solved. One of these is some re- conciliation between responsibility and financial capacity of the various governments in the Canadian federal system. The weakness of the pre-war situation was illustrated in the nineteen-thirties when the provinces, who had a good deal of necessary work to undertake, did not have 'the financial means 'to proceed. There is further the problem of getting the public utilities to time expenditure in the way desired. A working arrangement to co-ordinate the action of all forms of government is essential. As a Dominion-Provincial conference has been arranged to begin between the time this paper is written and 'the time it will appear in print, further comment herein would be out of date before this article appears.

A second prime requirement is establishment of criteria to determine the extent and direction of the investment programme. It involves comparison of productiveness of public capital outlay with that in the private sector of the economy, selection among types of public investment itself, and ascertainment of the extent to which beneficiaries pay for the product they enjoy.

In the pricing system of a private fully-competitive society, the direction that investment will take is determined by the market. Investment will take place only in lines in which the prospects of recovery of the value of the capital asset

549




plus some rate of return, through the price for which the product is sold, would seem adequate. And it will proceed only so far in each direction as will bring about a balance of 'the attractiveness of the prospects of recovery of outlay and rate of return for each line. If the direction of production and distribution of income in a private competitive society is considered appropriate, the price criterion gives proper direction to investment. Actually, of course, non- competitive situations, lumpiness iof large investment undertakings, delay between making of an investment decision and putting it into effect, and errors in judgment mean that practice deviates very substantially from the theoretical norm. Further, the direction of production and distribution of income through the pricing system is not generally accepted as being as appropriate either in theory or practice as it once was.

There are two reasons, even in a stable economy, and if it were practically possible, why public investment could not follow the same price criteria as private investment. On the one hand any investment may add to the real incomes of others besides the owners of the new capital; it may make an immeasurable contribution to the whole economy. This may mean that public investment might push farther or less far than if operated only on a price criterion. On the other hand the distribution of income under the pricing system may not be regarded as satisfactory. Income is redistributed on a large scale at present through the operations of public finance. It would not be inconsistent or in- appropriate to effect part of the redistribution through the services provided by the public investment projects.

If the economy is not stable, and unemployment exists, still greater deviations from normal pricing criteria could be justified. For the employment of idle resources does not mean they are taken from alternative productive uses. And the net cost of a project to the treasury may not equal the actual expense incurred, if the income paid out eliminates the necessity of making government payments such as those for direct relief. In addition 'the amount of idle resources set to work may substantially exceed those engaged directly in connection with the project.

Although strict adherence t.o the pricing principle cannot be maintained, determination of the extent to which beneficiaries pay for services received provides extremely useful information on which to base sound judgment. Only if it is known how far public practice deviates from pricing criteria may the full implications of a policy be realized.

In the past, one great sector of public investment, that in public utilities, has been made largely on the basis of the same criteria that directs investment in the private sector of the economy. True, the price of the product is not usually competitive but set by commissions and the full costs of investment may not have been recovered from a price charged, but usually it has been.possible to ascertain the extent to which normal pricing criteria are followed and how great deviations from Ithis criterion have been.

In the remainder of the public investment field the possibilities of extension of the use of pricing criteria vary. Some fit in very well, for instance, direct public expenditure on or public assistance to housing, in which costs can be

550




readily related to the payment of direct beneficiaries for services. Expenditure on most transportation facilities can be treated likewise, for a very large part is paid through fees, licenses, and fuel taxes or through special assessments for increased capital value of private property, and it should be possible to relate this to the benefits provided to those who pay. The post office also can be included.

On the other hand it is very difficult to determine the extent to which some projects contribute to the general economy of the country and to specific beneficiaries. Even in these cases, however, something may be done. Examples may be shown for forestry in charges for reforestation, in agriculture for thbe recovery of part of irrigation costs, for fisheries in fees for use of physical installations and for licenses, for mineral development assessments for privileges of operation in particular regions and in royalties.

The selection of appropriate methods of financing is a third problem to be faced, even though it is impossible to reach definite conclusions on many issues in the present state of knowledge. Financial techniques must fit in with total expenditure but policy should depend to an extent on the type of government spending since public investment provides future productive assets, whereas other types of spending do not.

The choice of the method of financing public investment determines, to quite a degree, the employment and income-giving effects of the projects. An increase in private investment means an increase in the amount of spending without reducing the amount of income available for consumer expenditure. A public investment programme financed by a deficit has the same effect, if designed in a way not to arouse the fears of potential private investors. On the other hand if public investment is financed by taxation it absorbs the spending power of the private sector of the economy.

The choice will be governed partly by the current employment situation, and partly by consideration of the effects of the undertaking on the future. Opinions of the extent to which public investment can be accompanied by a deficit differ. One group14 would contend that an increase in debt is proper in so far as offset by equivalent productive assets. Another15 contends that the amount 'of debt that might be incurred is established by ability to pay debt charges from increased revenue made possible by the increased taxable capacity of the community. A third group16 would contend that increase in debt is of little importance at present since financing charges can be paid for through further deficits.

Although research can help provide much information neither experience nor 'material available for statistical analysis provides sufficient evidence to make a definite selection among these contentions. It is evident, however, than an increase in debt charges need not prove more burdensome than at present so long as national income increases proportionally. Beyond this it may be stated that

"4See Gunnar Myrdal, "Fiscal Policy in the Business Cycle" (American Economic Review, March, 1939, supplement).

"See R. A. Musgrave, "The Nature of Budgetary Balance and the Case for the Capital Budget" (American Economic Review, June, 1939).

16For instance, A. P. Lerner, "Functional Finance" (Social Research, Feb., 1943).

551




the alternatives to financing of projects by deficit may be unacceptable. If a deficit to finance public investment projects is not incurred, it may be necessary to accept one to pay for relief payments made necessary by unemployment.

The choice of a particular project at a particular time is the final problem to be raised. Whatever the degree of prosperity both the long run effects and the impact on current economic activity must be considered. But particular care must be exercised in periods of depression. If projects are to be worth while they must have been planned in advance; if they are to be an effective part of employment and income maintenance, they must be chosen with an eye to fit in with total employment policy.

Advanced planning is necessary for two reasons; first, intelligent selection on the basis of alternative long term value necessitates extended examination of the usefulness of each project; second, many projects' preparatory stages, from the time the idea is first conceived until the site is acquired and the blueprint prepared, require lengthy periods. If sound projects are not planned less useful but more easily prepared ones may be undertaken.

Formulation of a current employment policy necessitates information of a different sort. Projects of equal cost may provide varying amounts of general stimulus; they will affect different industrial groups and different regions in

varying ways; some will lead to much higher leakage through external trade than others. Employment needs may indicate a choice different to that based on

long term usefulness; in such cases there must be a balancing of both types of consideration.

* * *

The establishment of a broad public investment programme must be undertaken with care. Policy in Canada, in the relatively narrow field entered in the past, has been relatively fortunate in choice of useful projects; it has not been suitable for employment and income stabilization. Some further useful knowledge has been gained during the war; but, in large part, new fields will be entered, in which our knowledge or that gained abroad is only partially applicable.

A large continuing programme of investigation and research is necessary if the above problems are to be solved adequately. The immediate need is

particularly great, for it is certainly desirable and it may be necessary that the new programmes be initiated on a fairly broad scale before all the experience that governments might like to have is required. A wide programme of in-

vestigation and research could do much to get projects away on the right foot. Conclusion. This paper has placed emphasis on a number of points. These

may be summarized as follows: (i) A public investment programme to maintain employment and income can play an important part in stabilizing total investment and hence in contributing ito a total employment programme. In the past Canadian governments have not to any large extent integrated investment policy with the requirements of employment and income maintenance. A change of policy is required for the future. (ii) An investment programme of many parts must be integrated to fit in with the particular structure of the Canadian economy. (iii) A volume of sound public investment projects suffi-

552



Public Investment in Canada 553

ciently large to play the full part to be expected in total employment policy can be made available for many years to come. (iv) Emphasis has been placed on the necessity that projects selected have a long term value that contributes most effectively to the well-being of the economy. (v) Problems of federalism, selection of projects, and financing require a great deal of investigation if a sound programme is to be followed.

M. C. URQUIHART Ottawa.



Documents

Public Investment in Canada