A 2010 report by the Vancouver-based Fraser Institute, a conservative think tank, found a “negligible” benefit from government spending and a “small” boost from tax relief in the second half of 2009, based on a review of GDP data for the period. The Fraser Institute economists argue instead that a rebound in exports drove the recovery. “Government stimulus spending did not have a material impact on Canada’s economic recovery,” according to the study.
Finance Canada did not track how many jobs were created by each project. Instead, it used a broad economic model that tried to calculate the employment impact. It reported that the stimulus “created or maintained” 248,000 jobs, beating the original goal of 220,000 jobs. The government’s model was validated by outside economists at the Conference Board of Canada, National Bank of Canada and the University of Toronto.
Measuring stimulus involves a debate about what economists call multipliers. The IMF argued in 2008 that an increase in government spending equal to 1 per cent of gross domestic product would actually produce a 1 per cent increase in GDP – meaning the multiplier would be one.
Finance Canada’s model showed that some stimulus, such as spending on infrastructure, had a multiplier of 1.5 per cent in 2010, whereas business tax cuts only produced a multiplier of 0.2 per cent. Finance stated that because of the “considerable uncertainty surrounding the size of fiscal multipliers, prudent estimates have been used.”
Mr. Page said the PBO attempted to create its own economic model to test the effectiveness of having a stimulus plan versus not having one, but the project proved to be too difficult.
“You just can’t do it,” he said. “It’s almost impossible. You’re in unprecedented waters when banks are seizing up and collapsing.”
The central argument against infrastructure spending as a way to lift a struggling economy comes down to timing.
Canada’s economy had begun to recover by the spring of 2009, long before there could have been any impact from the stimulus-laden budgets of the federal and provincial governments, argued Finn Poschmann, vice-president and research director at the C.D. Howe Institute in Toronto. “Significant deficit spending after 2009-10 was certainly unnecessary from an economic perspective in Canada,” he said.
In a report this week, the Fraser Institute faulted Ottawa and the provinces for keeping the stimulus tap on and piling on debt long after the emergency was over. The federal government alone will amass nearly $70-billion in deficits between 2011 and 2015 – all of it after the recession was done.
Some argue that the government’s stimulus plan accomplished a very important goal that can’t be measured – it calmed fears of an economic collapse after the bank failures in U.S. and Europe.
“When nobody’s certain of the downside, activity kind of freezes,” said Royal Bank of Canada chief economist Craig Wright. “So in some sense, fiscal policy, not just in Canada but around the globe, kind of stepped in and to a degree underwrote the worst-case scenario. It kind of drew a line under how bad things could get and I think that had an indirect impact on confidence.”
That view gets at the fundamental problem in measuring the impact of stimulus. Those who believe it had a positive effect point to factors – like confidence – that can’t really be measured. Economists like to evaluate a policy by considering what they call the counterfactual – by trying to answer the question, what would have happened if the policy had not been there?
As a relatively small economy with deep international trade links, Canada probably could have avoided major spending programs as long as other nations stimulated their economies.
Economist Don Drummond argues such a “free rider” approach would have made Canada a pariah among the G20. Mr. Drummond was chief economist for Toronto-Dominion Bank at the time and is now Matthews fellow at Queen’s University.
He said there is no simple, easy answer to the question of whether the billions spent in Ottawa and provincial capitals made a difference.
“You can’t answer whether that would be a good or a bad thing until you can answer that counterfactual question: Would we be in a freefall and how would the Canadian economy have been different if we didn’t have that stimulus?” he said. “And I don’t care if it’s the Fraser Institute or the government, no one can directly answer that question.”
Even if there was some benefit, Mr. Drummond argues that it was short-lived and quickly reversed by several years of austerity as governments cut spending to shrink deficits. Some of the spending on infrastructure was valuable, he said, but the requirement that projects be “shovel ready” meant that projects that could have produced greater long-term benefits were overlooked.