Canada's Housing Bubble

Mar 23, 2010 CBC News

Billions of dollars of government stimulus spending didn't play much of a role in helping the Canadian economy rebound last year, according to a study from the Fraser Institute.

In a report released Tuesday, the Vancouver-based think-tank says private sector investment and growth in exports were the driving forces behind gains in the country's gross domestic product, not stimulus measures.

Shoppers at a Home Depot in Toronto

The institute, which champions free-market economic solutions, says government spending and infrastructure investment accounted for just 0.2 percentage points of the 1.1 per cent growth between the second and third quarters of 2009.

The report further asserts that stimulus spending played no role at all in the one per cent improvement between the third and fourth quarter, saying that an increase in net exports was the main reason for that 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," Niels Veldhuis, a Fraser Institute senior economist and one of the study's co-authors, says in a release.

Home reno tax credit's impact 'negligible'

The report's authors say they're not surprised by their findings, noting that infrastructure spending takes time to work its way through the system.

"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,” Veldhuis says.

The report also questions the stimulative value of the home renovation tax credit. The popular measure had a "negligible impact" on the increase in GDP growth in the second half of 2009, according to the authors.

Less than a tenth of the $47.2 billion in the stimulus package was earmarked for personal income tax reductions. The Fraser Institute argues that permanent tax relief would have been a far better method of economic stimulus than increased spending.

"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 says.

Other research sees more impact

The effect of government stimulus spending on GDP is a matter of some debate in economic circles.

For instance, a research study released earlier this month by the Conference Board of Canada concluded that the billions in infrastructure spending saved or created 70,000 jobs in Ontario last year.

The Conference Board estimated that the increase in infrastructure spending added 0.9 percentage points to Ontario's real gross domestic product in 2009. The board forecast a further 0.4 percentage point boost in 2010, along with the saving of another 40,000 jobs.

A study by economists at TD Bank last month is at odds with the Fraser Institute's position that the home renovation tax credit's impact on growth was "negligible."

TD said the credit "likely bolstered renovation activity by an additional $4.3 billion above what it would have been over January 2009 to January 2010 — which represents a 0.3 per cent boost to real GDP."

The Fraser Institute says its analysis is based on Statistics Canada figures on the economic impact of government spending and investment as well as private sector activity.