Canada’s new government should consider universities when spending on infrastructure

Memorial University has been financially squeezed by Newfoundland and Labrador’s deficit-plagued government. This year, the government responded to a decrease in oil royalties by slashing MUN’s funding by about $20 million. Given that there is little hope that oil prices will rebound in the near future (which would increase royalty revenue), the government may well further reduce its support for the university.

This puts Memorial in a difficult position; the university has both many lofty ambitions that require extensive funds and limited options for replacing lost revenue. After all, the prospect of tuition hikes seems politically toxic for any government daring to allow them.

Meanwhile, Canadian voters recently handed the federal Liberals a majority government after a campaign in which this party promised to run budgetary deficits to fund infrastructural investments. The new Prime Minister, Justin Trudeau, has justified his support for such measures by pointing to the fact that the Canadian economy shrank in the first half of 2015. He seems to believe that spending on infrastructure would stimulate the Canadian economy.

Such a policy draws obvious inspiration from economic theories of stabilization, which deal with how governments can rebalance economies that stray from their regular levels of growth. Economists distinguish between the actual size of an economy—the value of what it produces in a given time period—and the potential size of an economy, which is what an economy would produce if its factors of production (such as land, labour, and capital) were employed at normal levels. Many argue that when the economy falls below its potential level, it will rebound quite slowly (if ever) unless governments or central banks provide some kind of economic stimulus that prompts factors of production to become normally employed again.

But it is unclear whether Canada’s economic climate demands fiscal stimulus from Ottawa at all. According to the latest Monetary Policy Report from the Bank of Canada, which manages our country’s monetary policy, the Canadian economy should return to its potential level by 2017. This is in part due to the stimulus already provided by the Bank with the goal of offsetting the past year’s unsettling oil price shock. In any case, the economy is growing again at a rate that will likely ensure economic growth in 2015 as a whole.

We should be more concerned, then, about boosting growth over a longer horizon than rebalancing the economy in the short run. Jack Mintz, an economist at the University of Calgary’s School of Public Policy, recently made this argument.

“We don’t need infrastructure spending to stimulate the economy” said Mintz, who instead suggested that the federal government should focus on investments that increase productivity.

How does this relate to MUN’s funding woes? The potential size of our economy depends on our supply of workers, their productivity, technology, and other factors. It would seem like quite a natural investment for a government aiming to boost growth in the medium and long term, then, to invest in productivity-enhancing educational institutions like Memorial. Universities, after all, hone skills that increase future workers’ potential economic contributions. They also facilitate research that government and industry can draw on to improve their operations.

By aiding in their infrastructural projects, the federal government would allow universities to focus their spending on other areas. This would be most useful if universities could expect new funding to last more than a few years, the length of time Trudeau has suggested for a federal infrastructural investment plan. So it may well be best for the Liberals to abandon their plans to spend a lot in the short term to stimulate the economy and instead arrange a longer-term investment plan for universities.

Of course, identifying the best way to conduct infrastructural investment requires not only great deals of information and analysis, but also value judgments about the proper end-goal of investing. With that being said, universities and other postsecondary educational institutions seem like worthy recipients of federal investment as long as our goal is to ensure the vitality of our economy in years to come. University officials, student leaders and debt-laden provincial politicians should therefore look to Ottawa in their efforts to guarantee that postsecondary institutions receive adequate support.