Ontario Construction News staff writer
Stimulus spending will not ‘kickstart’ economy, will increase government deficits and debt
New government spending in response to the recession will likely have little effect on economic growth—yet will produce more government debt, finds a new study by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank.
Study authors Jake Fuss and Tegan Hill say economic research in both Canada and the U.S. indicates stimulus programs to recover from recessions built around such initiatives as subsidizing the construction of new infrastructure projects generate less than $1 of new economic growth for every $1 spent by governments.
By contrast, giving broad-based, long-term tax relief to individuals and businesses generates up to $5 of economic growth for every $1 spent.
“In the coming months, as governments contemplate trying to kickstart the economy with more spending, they should recognize that evidence indicates this approach is ineffective and results in more government debt,” said Fuss, Fraser Institute economist and co-author of Is Fiscal Stimulus an Effective Policy Response to a Recession?
For example, during the 2008-09 recession, the U.S. stimulus package caused government debt to increase while failing to increase economic activity. Instead, most individuals and businesses chose to save the temporary payments from government.
In fact, according to much of the U.S. research, each dollar of government stimulus spending produced less than one dollar of economic activity. The study also finds that government spending can “crowd out” private-sector economic activity (investment, for example) that would otherwise have happened.It’s important to understand that increased government spending often is financed by reductions in spending in other sectors of the economy such as private consumption and investment. Simply put, government spending is not a free lunch.
The resources for government spending must come from somewhere, the report said.
“Before implementing any fiscal stimulus packages, Canadian policymakers must consider the potential implications on both the economy and government balance sheets. Past history suggests stimulus will not improve the Canadian economy and may even be a detriment to it.”
Consequently, fiscal stimulus based on spending increases will likely produce lower economic growth and hinder recovery rather than help it, the study concludes.
The Fraser Institute’s concern is that as federal and provincial governments shift their focus from emergency funding to economic recovery, they will turn to inefficient and costly stimulus initiatives.
“Before implementing any fiscal stimulus package,” Hill said, “policy-makers must consider the potential implications on both the economy and government balance sheets, particularly as governments across Canada face large deficits and mounting debt.”
The Fraser Institute study concludes the best way to jumpstart Canada’s economic recovery coming out of the COVID-19 recession is deficit-financed, broad-based tax cuts, paid for by reducing government spending over the long term, as opposed to deficit-financed stimulus programs, paid for by increased government spending and higher taxation over the long term.