How Much Stimulus?

The more I read Budget 2009, the less stimulus I see.

The very first page of text in the Budget Plan commits to “inject fiscal stimulus of 2 per cent of gross domestic product (GDP)” (page 9).

For 2009-10, the Budget introduces new spending and tax cuts worth $18 billion, about 1.2% of GDP (page 217). But it accounts for these measures on a “cash basis”, which treats repayable loans to the auto industry as spending, and includes anticipated matching funds from provinces and municipalities. This approach inflates “total stimulus (with leverage)” to $29 billion, or 1.9% of GDP (page 69).

However, the Budget’s baseline is the 2008 Economic Statement (page 213), which included $8 billion of spending cuts and additional revenues in 2009-10. Subtracting this austerity from Budget 2009 leaves $10 billion of net stimulus, which is only 0.7% of GDP.

Between the two documents, the federal government has met one-third of what it acknowledges to be “Canada’s commitments at the recent G20 leaders’ summit.” One can only hope that provincial and municipal governments will provide the remaining two-thirds, by matching cost-shared federal initiatives and/or through their own initiatives. Given that the federal government can borrow at lower interest rates than other levels of government, it should have shouldered most (if not all) of the fiscal burden.

Furthermore, some of the federal measures will not actually provide much stimulus to the Canadian economy. It is doubtful what portion of the $5.8 billion of personal income tax cuts in 2009-10 (page 306) will be spent on Canadian-made goods and services. The 100% corporate capital cost allowance for computers and the elimination of tariffs on imported machinery and equipment (pages 167 and 169) will encourage businesses to buy more capital goods produced outside Canada.

Here is the USW response.