A Pervasive Economic Fallacy In Assessing the Cost of Public Funds

Marcel Boyer

No 20-119, IAST Working Papers from Institute for Advanced Study in Toulouse (IAST)

Abstract: In the assessment of the cost of public funds, there is a pervasive economic fallacy, which is frequently repeated by officials in both the private and public sectorsas well as in academia: since the cost of borrowing is higher for a private sector firm than it is for a public sectorfirm, the cost of carrying out an activity (investment, production, distribution, provision of goods and services) will necessarily be lower ceteris paribusin the public sector than in the private sector.The statement is erroneous because part of the government’s cost of borrowing is hidden from the casual observer of 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 private sector. I discuss fourspecific real cases where the error is present, the first three more succinctly and the last more more extensively: the QuebecGenerations Fund;the Québec CDPQInfra REM project;the Infrastructure Ontariomethodology to assess the riskiness of costs; the BC Hydro’s Site C hydroelectric megaproject.I discuss also a general fifth case, namely governement support programs for business (grants, loans, guarantees, subsidies, etc.). Those are often justified on the fallacious claim that the cost of financing is samller 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. Iconcludewith an appeal for amore rigorous use and management of public fiunds.Iexpect that miscalculation, misinformation, mismanagement, and fallacious analysis will backfire, as always.

Date: 2020-12-14
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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 (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)
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Persistent link: https://EconPapers.repec.org/RePEc:tse:iastwp:125006

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