Greater federal involvement in combatting the most severe urban challenges

Many of Canada's larger cities face problems that are so enormous in scope that local governments cannot handle them alone. Affordable housing and brownfield sites are two shining examples of large impediments that are driven by market failure. The lack of affordable housing for the low-income Canadians reflects the fact that are too many people that have too little income to pay for what developers can build. And, while redeveloping brownfield sites provides considerable potential to generate income and wealth - in fact, it has been estimated that successfully developing as many as 30,000 sites in Canada could lead to $7 billion per year in net benefits to society - the huge costs of cleanup and liability rule out private sector involvement in many cases.31 Thus, even though both areas are eligible for funding under existing federal infrastructure programs, the severity of these problems indicates that additional creativity and leadership are required. The good news is that the federal government is already taking steps to address both problems in cooperation with local and provincial governments.

In the TD Economics' June 2003 report, Affordable Housing in Search of a New Paradigm, we argued that the ultimate solution lies in raising market incomes at the low end of the income spectrum. In the meantime, however, subsidies can form part of an interim solution, with capital grants (rather than tax incentives) the most efficient form of assistance to stimulate the creation of new supply of affordable housing. Indeed, the cost-sharing affordable housing agreements underway between the federal and provincial-territorial governments are set on capital grants funding, which we support. Although the implementation of these agreements has contained its fair share of problems - for example, some provinces have been slow to step up to the plate with matching contributions - we do believe that the mechanisms in place offer potential to put a severe dent in the housing crisis.

The federal government has also demonstrated leadership in tackling the challenge of brownfield sites. In 2003, the NRTEE issued a report entitled, Cleaning Up the Past and Building the Future, which contained a number of well-thought-out recommendations and strategic directions for Canadian governments at all levels to follow.31 These included measures to provide effective liability protection for developers, remove tax impediments and implement financial incentives to spur revitalization of the brownfield areas. Encouragingly, provinces have also shown a desire to work with the federal and local governments on this issue, led by legislation passed in both Ontario and Quebec aimed at promoting brownfield development. It may be useful for governments to consider some of the U.S. financial instruments put in place to regenerate blighted lands that we discussed on page 17, although care should be taken to ensure that any incentive passes the "but for" test (i.e., development would not have occurred "but for" the subsidy).