A pervasive economic fallacy in assessing the cost of public funds

Une erreur économique omniprésente dans l'évaluation du coût des fonds publics

Marcel Boyer

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Abstract: In the assessment of the cost of public funds, there is a pervasive economic fallacy that is frequently repeated in public policy circles: because the cost of borrowing is higher for a private-sector firm than it is for a public-sector firm, the cost of carrying out an activity (investment, production, distribution, provision of goods and services, and borrowing) will necessarily be lower ceteris paribus in the public sector than in the private sector. The statement is erroneous because part of the government's cost of borrowing, namely the risk borne by citizens, customers, and taxpayers, is hidden from the casual observer of market interest rates or yields. The all-inclusive borrowing cost, more generally the all-inclusive cost of capital, is the same for both the public and the private sectors. I discuss four specific real cases in which the error is present: the Quebec Generations Fund, the Quebec CDPQ Infra-Reseu express metropolitain project, the Infrastructure Ontario methodology to assess the riskiness of costs, and the BC Hydro Site C hydroelectric megaproject. I also discuss a general fifth case, namely government support programs for businesses (grants, loans, guarantees, subsidies, etc.), which are generally justified on the fallacious claim that the cost of financing is lower for the government than for the private sector. I propose an auction process by which the true cost of business support programs could be made transparent. I conclude with an appeal for a more rigorous use and management of public funds because miscalculation, misinformation, mismanagement, and fallacious analysis will eventually backfire.

Keywords: Cost of Capital; Public Debt; Site C Project; Generations Fund; REM; Infrastructure Ontario; Coût du capital; Dette publique; Fonds des générations; Projet du site C (search for similar items in EconPapers)
Date: 2022-03
New Economics Papers: this item is included in nep-ppm and nep-reg
Note: View the original document on HAL open archive server: https://hal.science/hal-04039054v1
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Published in Canadian Public Policy, 2022, 48 (1), pp.1-10. ⟨10.3138/cpp.2021-035⟩

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Related works:
Journal Article: A Pervasive Economic Fallacy in Assessing the Cost of Public Funds (2022)
Working Paper: A Pervasive Economic Fallacy in Assessing the Cost of Public Funds (2020)
Working Paper: A Pervasive Economic Fallacy In Assessing the Cost of Public Funds (2020)
Working Paper: A Pervasive Economic Fallacy In Assessing the Cost of Public Funds (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04039054

DOI: 10.3138/cpp.2021-035

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