Ottawa’s scheme to stoke econ­omy A BUST

Winnipeg Free Press - Section H - - VIEW FROM - Charles Lam­mam and Amela Karabegovic

THE fed­eral gov­ern­ment’s tele­vi­sion ads seem om­nipresent with their mes­sage that Canada’s Eco­nomic Action Plan is stim­u­lat­ing the econ­omy, cre­at­ing jobs, and mov­ing the coun­try out of re­ces­sion.

But is it re­ally? Did the gov­ern­ment’s var­i­ous stim­u­lus ini­tia­tives re­ally do all that the gov­ern­ment claims?

There’s lit­tle doubt Canada’s eco­nomic out­look has im­proved dra­mat­i­cally from last year with the lat­est data from Statis­tics Canada show­ing that the Cana­dian econ­omy turned a cor­ner mid­way through 2009. In ad­di­tion, the Bank of Canada and ma­jor pri­vate sec­tor banks are fore­cast­ing pos­i­tive eco­nomic growth for 2010.

To gauge whether gov­ern­ment stim­u­lus ac­tu­ally had an im­pact on the eco­nomic turn­around in 2009, we ex­am­ined Statis­tics Canada data on the con­tri­bu­tions of gov­ern­ment con­sump­tion (i.e., spending), gov­ern­ment in­vest­ment (i.e., in­fra­struc­ture), and pri­vate sec­tor ac­tiv­ity to the im­prove­ment in eco­nomic growth at two crit­i­cal junc­tures.

And the data show that gov­ern­ment stim­u­lus had a neg­li­gi­ble ef­fect on Canada’s eco­nomic turn­around. Put sim­ply, the stim­u­lus didn’t work.

Be­tween the sec­ond and third quar­ter of 2009, GDP growth im­proved by 1.1 per­cent­age point from -0.9 per cent to 0.2. Of this 1.1 per­cent­age point im­prove­ment in GDP growth, gov­ern­ment con­sump­tion and gov­ern­ment in­vest­ment each con­trib­uted only 0.1 per­cent­age points. Pri­vate sec­tor in­vest­ment con­trib­uted 0.8 per­cent­age points and was the driv­ing force be­hind the eco­nomic turn­around from the sec­ond to third quar­ter of 2009.

De­spite gov­ern­ment at­tempts to stim­u­late ren­o­va­tions in the hous­ing sec­tor through the high-pro­file Home Ren­o­va­tion Tax Credit, Statis­tics Canada data show that in­vest­ment in res­i­den­tial struc­tures did not con­trib­ute to the change in GDP growth be­tween the sec­ond and third quar­ter of 2009.

Sim­i­larly, the fed­eral gov­ern­ment’s tem­po­rary busi­ness tax re­lief to stim­u­late the pur­chase of new com­puter equip­ment did not ac­count for a sig­nif­i­cant part of the pri­vate sec­tor in­vest­ment that drove the eco­nomic turn­around dur­ing this pe­riod.

On the other hand, one goal of the fed­eral stim­u­lus pack­age was to stim­u­late pri­vate sec­tor con­sump­tion. While in­creased pri­vate sec­tor con­sump­tion did con­trib­ute to im­proved eco­nomic growth from the sec­ond to third quar­ter of 2009, it was slight.

To the fed­eral gov­ern­ment’s credit, the $4.5-bil­lion re­duc­tion in per­sonal in­come taxes con­tained in its stim­u­lus pack­age likely had an im­pact on con­sump­tion, given the per­ma­nent na­ture of the tax re­lief. This sup­ports aca­demic re­search sug­gest­ing the gov­ern­ment should have in­tro­duced wide­spread tax re­lief to im­prove eco­nomic growth, not in­creased spending. Un­for­tu­nately, less than 10 per cent of the fed­eral stim­u­lus plan was ded­i­cated to per­ma­nent tax re­lief.

Be­tween the third and fourth quar­ter of 2009, GDP growth in­creased by 1.0 per­cent­age point from 0.2 per cent to 1.2 per cent growth. At this junc­ture, gov­ern­ment con­sump­tion and gov­ern­ment in­vest­ment con­trib­uted noth­ing to the 1.0 per­cent­age point im­prove­ment in eco­nomic growth. In­creased net ex­ports were solely re­spon­si­ble for the im­prove­ment dur­ing this pe­riod.

Most in­dica­tive of the gov­ern­ment’s stim­u­lus mis­take is that be­fore the re­ces­sion, dur­ing the re­ces­sion, and well into the re­cov­ery of 2009, the gov­ern­ment’s con­tri­bu­tion to GDP growth has been markedly con­stant. In other words, whether the econ­omy was shrink­ing, stagnant, or grow­ing, the con­tri­bu­tions of gov­ern­ment spending and gov­ern­ment in­fra­struc­ture in­vest­ment to eco­nomic growth had lit­tle ef­fect on changes in GDP growth.

This, of course, con­tra­dicts the gov­ern­ment’s claim that “In­fra­struc­ture mea­sures in the Action Plan… have con­trib­uted to the eco­nomic re­cov­ery in Canada.” But the ac­tual re­sult is un­sur­pris­ing given that more than 40 per cent of the fed­eral gov­ern­ment’s stim­u­lus pack­age was ear­marked for in­fra­struc­ture ini­tia­tives, which take time to plan and im­ple­ment.

Looking for­ward, the fear is that spending on in­fra­struc­ture will oc­cur as the econ­omy nat­u­rally be­gins to grow, mean­ing the gov­ern­ment will com­pete with the pri­vate sec­tor for re­sources, re­sult­ing in in­creased costs and fewer pri­vate sec­tor projects.

De­spite the gov­ern­ment’s rhetoric, the stim­u­lus pack­age didn’t work and was a mis­take that will bur­den Cana­di­ans with a legacy of debt for years to come.

PHIL HOS­SACK / WIN­NIPEG FREE PRESS ARCHIVES

Stim­u­lus spending made for­mer premier Gary Doer ap­plaud but a study shows the fed­eral action plan didn’t fuel Canada’s re­cov­ery.

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