by Brian Pehora
Justin Trudeau’s last budget turned on the proverbial spending taps for infrastructure projects, something for which Canadian municipalities — especially in the North — have been pleading for years.
The federal government has also reduced the amount of money communities and provinces or territories need to put up for these projects, with Ottawa now willing to pay half, instead of one third.
But this model still requires lower orders of government to jump through hoops to win the blessing of Ottawa mandarins for projects.
That’s why the territories should consider creating a new way to fund building projects that could lift economies, create jobs and help to solve some of our persistent infrastructure problems.
Like any nation-building project the money needs to be borrowed from somewhere. The primary benefit of borrowing it from a bank owned by the residents of Yukon, the Northwest Territories and Nunavut is that northerners will see savings on project financing costs versus borrowing the money from one of Canada’s chartered banks.
To create a public bank the territorial governments need to raise at least $5 million. The initial capital for the Bank of Northern Canada (BNC) could come from some combination of investments from northern employee pension funds, deposits from residents or a bond issue. With a bank charter, BNC can loan the initial capital out many times over limited only by capital requirements enforced by the Office of the Superintendent of Financial Institutions Canada.
The BNC would loan money to territorial governments, First Nations and municipalities to fund much needed infrastructure projects. These might include providing a fibre optic backbone to improve telecommunications, expanding public transit, building public housing and upgrading water plants to reduce the number of boil water advisories.
Far from being an untested idea, two examples provide proof that public banks have been successful in providing benefits to its citizen owners. The state-owned Bank of North Dakota, created in 1919, provides infrastructure loans to local governments. It also helped the state during the recession of 2008 by extending lines of credit to local banks while other out-of-state banks refused to issue loans. North Dakota depends heavily on the oil and gas industry but the drop in oil prices has not affected the bank’s profitability of late. Last year the bank posted a record profit.
Starting in 1938 our own Bank of Canada provided near-zero-interest loans to the Government of Canada which used the money to build highways, the St. Lawrence Seaway, subway lines and airports. The loans also financed Canada’s healthcare system and the Canada Pension Plan. The federal government stopped borrowing from the Bank of Canada and started borrowing from private banks at higher interest rates in 1974. The Pierre Trudeau government made the move under pressure from the public and the Bank of International Settlements who believed that borrowing from central banks was the cause of the fiscal chaos of the mid 1970’s.
Since the mid-seventies the stated goal of central banks has been to keep inflation at low levels and conventional economists have warned about the dangers of “turning on the government printing press” while turning a blind eye to limitless amount of money created by private banks and credit card companies who have long replaced governments as the principle controllers of the money supply in Canada and around the world.
While in general the inflation fighters have been successful, a major failure has been the inability to hold housing prices to affordable levels while at the same time saddling governments with crushing levels of debt. Debts then, as now, are then used to justify curtailing infrastructure spending.
However, the idea of specialized infrastructure banks has come back in vogue. During the last election campaign the federal Liberals proposed the creation of a Canada Infrastructure Bank that would finance projects across the country. It did not show up in the Trudeau government’s first budget this spring, but could show up in the second phase of the government’s infrastructure spending program.
While the creation of the BNC presents the territories with an opportunity to catch up with the rest of Canada it must be carefully structured to avoid problems associated with government run operations. The bank, like the Bank of Canada must be independent of governments to avoid the temptation of over borrowing to finance vote-winning projects at election time. BNC should set interest rates at the going rate but adjust the rate to inflation, which might mean negative interest rates.
Territorial finance ministers will solve the problem of where infrastructure financing will come from by creating the BNC but this is not free money – it still needs to be repaid. Borrowers’ budgets can support loan repayment since governments will be collecting more taxes as a result of higher levels of employment due to increased economic activity flowing from government managed building projects. Setting very long periods of amortization will also make paying off the loans easier.
Public banking is an idea looking for a place to happen. It should happen here.
Brian Pehora, a freelance journalist in Whitehorse, has written widely about Arctic and Northern Canadian issues.