The Fraser Institute

The Fraser Institute

March 23, 2010 06:28 ET

The Fraser Institute: StatsCan Data Show Government Stimulus Efforts Did Little to Fuel Canada's Economic Turnaround

VANCOUVER, BRITISH COLUMBIA--(Marketwire - March 23, 2010) - Government stimulus packages, including the federal government's $47.2 billion Economic Action Plan, contributed little to Canada's economic turnaround in 2009, concludes a new study released today by the Fraser Institute, Canada's leading public policy think-tank.

The study found that government spending and infrastructure investment contributed only 0.2 percentage points to the change in GDP growth between the second and third quarter of 2009 and nothing between the third and fourth quarter. Private-sector investment and increased exports were the driving forces behind the change in GDP growth.

"Although the federal government has repeatedly claimed credit for Canada's improved economic performance in the second half of 2009, Statistics Canada data show that government spending and investment in infrastructure had a negligible effect on the country's improved economic growth," said Niels Veldhuis, Fraser Institute senior economist and one of the study's co-authors.

The Fraser Institute study, Did Government Stimulus Fuel Economic Growth In Canada? An Analysis of Statistics Canada Data, gauges the effect of government stimulus by examining 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.

The global economic downturn pushed the Canadian economy into recession in the fourth quarter of 2008. In response, Canadian governments at both the federal and provincial levels implemented a variety of fiscal stimulus packages in the hopes of kick-starting economic activity.

The recession carried over into 2009, marked by three consecutive quarters of declining GDP. While the economy shrank in the second quarter of 2009 (-0.9 per cent), it turned a corner and grew in the third quarter by 0.2 per cent. In other words, GDP growth improved by 1.1 percentage points from -0.9 per cent to 0.2 per cent between the second and third quarter of 2009. The study examines these critical junctures, where economic growth changes from quarter to quarter, in order to assess the success or failure of government stimulus.

Measuring the impact of government stimulus

The study found that of the 1.1 percentage point improvement between the second and third quarter in 2009, government consumption and government investment in infrastructure 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.

Between the third and fourth quarter of 2009, GDP growth increased by 1.0 percentage points, from 0.2 per cent to 1.2 per cent growth. At this juncture, the study found that government consumption and government investment contributed nothing to this 1.0 percentage point improvement in economic growth, while increased net exports were primarily responsible for the improvement.

The study also notes that throughout the period before and during the recession, and well into the economic recovery in 2009, government consumption and government investment's contribution to GDP growth was markedly constant. In other words, whether the economy was shrinking, stagnant, or growing, the government's contribution to economic growth had little effect on changes in GDP growth.

"Contrary to the federal government's claims, the analysis shows that government spending and investment in infrastructure simply did not contribute to the improvement in economic growth," Veldhuis said.

"This really should be of little surprise since the federal government earmarked 40 per cent of its stimulus package for infrastructure initiatives, which take time to plan and implement. The fear now is that spending on infrastructure will occur as the economy naturally begins to grow, meaning that government will be competing with the private sector for resources, resulting in increased costs and fewer private-sector projects."

Although part of the government stimulus included some temporary business tax relief for the purchase of new computer equipment, this move accounted for an insignificant part of the private-sector investment that drove the economic turnaround between the second and third quarter of 2009.

"The government's high-profile Home Renovations Tax Credit, which was designed to stimulate renovations in the housing sector, had a negligible impact on the increase in GDP growth in the second half of 2009," Veldhuis said.

The study notes that stimulating private-sector consumption was one of the goals of the Economic Action Plan and increased private consumption did contribute to the turnaround in economic growth from the second to third quarter of 2009, although not from the third to fourth quarter.

The $4.5 billion reduction in personal income taxes in the Economic Action Plan likely had an impact on consumption, given the permanent nature of the tax relief. This supports academic research suggesting the government would have been better off introducing widespread tax relief to improve economic growth, rather than increased spending. Of the entire federal stimulus package, less than 10 per cent was for permanent tax relief.

"With the Canadian economy now recovering, it is critical to measure government attempts to stimulate the economy and determine their effect. What we now see is that the stimulus packages put in place by Canadian governments in 2009 created massive government deficits, resulting in increased debt while contributing little to the economic turnaround," Veldhuis said.

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The Fraser Institute is an independent research and educational organization with locations across North America and partnerships in more than 70 countries. Its mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. To protect the Institute's independence, it does not accept grants from governments or contracts for research. Visit

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