Trudeau government’s economic stimulus plan makes little sense

Finance Minister Chrystia Freeland says the Trudeau government will spend up to $100 billion for economic stimulus over the next three years to help Canada “build back better.” But this stimulus package could actually impede economic growth—because the government will spend the money after the economy has already recovered.

The Trudeau government won’t reveal the exact details of the plan until next spring, but the recent federal fiscal update indicated the plan will focus on job creation, infrastructure and the “green” economy. Again, most of the stimulus money will be spent after COVID is “under control” and there is no longer a “threat of further outbreaks or shutdowns.” The government has provided four different spending. In every one, more than 60 per cent of stimulus spending will occur after March 2022.

This is a puzzling way to accelerate economic recovery. Without stimulus measures, the government expects real GDP to possibly grow by 4.8 per cent next year and continue growing in the years after. The rollout of vaccines—not stimulus—will play a prominent role in driving that recovery by allowing businesses to open, enabling tourism and improving the flow of goods and services.

But it’s difficult to understand what the “stimulus” will achieve when the bulk of it will be spent two or three years from now. Indeed, the government’s economic stimulus is likely to become just another expense rather than accomplish its stated purpose.

Canada’s past experiences with stimulus measures help illustrate its ineffectiveness. During the 2008-09 recession, the Harper government implemented a two-year $47 billion stimulus package that relied heavily on infrastructure spending. A 2010 study, which analyzed economic data from Statistics Canada, found that government spending and investment in infrastructure had little-to-no effect on economic growth during Canada’s recovery. Instead, according to the data, private-sector investment and increased net exports drove the economic turnaround.

These results are not surprising. The long planning process for infrastructure projects means that actual spending usually starts after the economy has already recovered. Infrastructure projects also come with delays associated with permitting, environmental assessments and regulatory approvals that can significantly postpone the start of these projects. Moreover, the construction sector (and related sectors) remain a relatively strong part of the Canadian economy, so providing stimulus to these sectors makes even less economic sense.

What is surprising, however, is that stimulus spending may hinder the economy rather than help it.

Research from University of California, San Diego professor Valerie Ramey and Harvard University professor Robert Barro uses a concept called the “fiscal multiplier,” which shows the impact each additional dollar of government spending has on the economy. A multiplier greater than 1.0 indicates that a $1 increase in government spending will increase overall economic output by a value greater than $1—in other words, it indicates that stimulus works.

Their results, however, demonstrate that the multiplier is likely below 1.0. Put differently, stimulus spending could actually crowd-out private economic activity that would otherwise have occurred, which is the exact opposite of what Canadian businesses and our economy need in the coming years.

Simply put, the Trudeau government’s economic stimulus plan makes little sense. The bulk of the money will be spent after the economy has recovered and empirical research suggests stimulus spending may hinder the economy more than help it. This is not an effective strategy to build back better.