Think tank questions link between stimulus money and economic recovery

VANCOUVER — Government stimulus packages contributed little to Canada’s economic turnaround in 2009, concludes a new study released today by the Fraser Institute.

The public policy think tank’s 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 study found that government spending, including the federal government’s $47.2 billion Economic Action Plan, 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.

According to the study, 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.

A quick recap from the Fraser Institute: the Canadian economy fell into recession in the fourth quarter of 2008. In response, Canadian federal and provincial governments implemented a variety of fiscal stimulus packages in 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 percent), it turned a corner and grew in the third quarter by 0.2 percent. In other words, says the Institute, GDP growth improved by 1.1 percentage points from -0.9 percent to 0.2 percent between the second and third quarter of 2009.

The Fraser Institute studied these junctures, where economic growth changes from quarter to quarter, in order to assess the success or failure 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 percent of its stimulus package for infrastructure initiatives, which take time to plan and implement,” Veldhuis added. “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.”

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.

“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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