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Finance Minister Jim Flaherty presents an update on the government’s Action Plan at the University of Winnipeg. (John Woods)
Finance Minister Jim Flaherty presents an update on the government’s Action Plan at the University of Winnipeg. (John Woods)

Stimulus gamble: How Ottawa saved the economy – and wasted billions Add to ...

Mr. Duncan stared out the airplane window at the lights of Southern Ontario below. The North American auto industry was on the verge of collapse and the global financial system was failing. He wondered what other problems might be lurking out there.

“I remember looking at those homes and thinking, ‘Those people have no idea what’s coming,’ ” Mr. Duncan said, whose hometown of Windsor would bear the brunt of the depression in auto sales. “This would have reverberated up and down the 401 [highway], between Windsor and Ottawa.”

In the end, the demise of both Chrysler and General Motors in Canada was, as Mr. Duncan put it, “too big to contemplate.”

By the end of December, Ottawa and the province would agree to help rescue both companies – a pledge that would eventually cost taxpayers $13.7-billion and make them part owners of GM.

So far, $6.2-billion has been repaid, and the government still owns $4-billion worth of GM stock.

For the Conservatives, the bailout marked a philosophical U-turn. Paul Boothe, who negotiated the bailouts for Industry Canada, said the rescue went against the free market “political instincts” of the Harper government.

“I was convinced, but we had a bunch of explaining to get them to the same place,” said Mr. Boothe, now a business professor at the University of Western Ontario.

Like Mr. Duncan, Mr. Boothe was convinced both auto makers would pull out of Canada if the U.S. rescued the companies and Ottawa didn’t participate. “Our optimal strategy was to match the U.S.”

Even if GM and Chrysler abandon Canada in 2016 when their production commitments expire, the bailout “paid off,” said University of Ottawa economist Leslie Shiell, who has studied the impact of the bailout.

The bailout saved roughly 20,000 jobs at the two companies, and many more at parts suppliers. But it hasn’t guaranteed the industry’s longer-term survival as production shifts to the southern U.S. and Mexico, said Jim Stanford, chief economist at Unifor, a union that represents thousands of Canadian automotive workers.

“We are now in a desperate battle once again to preserve our share of investment,” Mr. Stanford said. “The bailout did not solve everything. ... It gave us some breathing room for a few years.”

Infrastructure versus tax cuts

Amid the high-stakes politics of a minority government at a time of severe economic distress, Mr. Flaherty had an extremely tight window to put together a budget that would allow the Conservatives to stay in power. The opposition parties were demanding stimulus and Canada had promised the G20 it would do its part. The discussion then turned to the size of the spending package and what it would include.

Conservative sources say some cabinet cabinet ministers still thought the stimulus could be kept relatively small. Some believed the spending of the previously announced seven-year Building Canada Plan targeted at infrastructure could simply be moved up. But the economic news worsened throughout December. Statistics Canada revealed the country shed 71,000 jobs in November, marking the biggest monthly drop since the 1982 recession. The comment pages were filling up with expert opinions second-guessing Ottawa’s wait-and-see approach.

For the Finance Minister, the realization sunk in that the government would need to run a very large deficit.

“It was basically go big or stay home. There was no point in doing a half-measure,” Mr. Flaherty said. “The uncertainty was enormous. With the Americans, with the Europeans, I was talking to my colleagues all the time every day around the world and nobody had a good read on what was going on. So that was particularly frightening.”

Infrastructure spending had obvious appeal, but many economists warned that these types of projects tend to be too slow to do much good. By the time money is spent, the recession is usually over.

Brock Carleton, the CEO of the Federation of Canadian Municipalities, continued to push for a major infrastructure plan. He had made his case directly to Mr. Harper on Nov. 20 in the Prime Minister’s Centre Block Office during a meeting that was attended by Mr. Flaherty and John Baird, the minister in charge of transportation and infrastructure.

In the end, the combined federal and provincial stimulus totalled nearly $64-billion, according to a final report on the Economic Action Plan released by Ottawa in March, 2012. That figure primarily covered a two-year period, although some spending was allowed to extend into the 2011-12 fiscal year. Infrastructure was the biggest category of stimulus spending, followed by industrial support like the auto bailout. Unemployment benefits and tax cuts largely accounted for the rest.

Getting the money out the door

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