Monday, April 13, 2009
The biggest problem with fiscal policy is: with stimulus spending approved, the quickest and most efficient spending are often somewhat at odds. The Canadian government, with its approved fiscal stimulus, must make similar spending decisions on speed and efficiency. However, the Canada government has been saving since 1996, putting it in a relatively strong position compared to others. From the Globe and Mail:
About half of the combined federal-provincial stimulus this year is pegged to go toward infrastructure, and almost all of the provincial governments' $12-billion in recession-fighting dollars over two years is headed in that direction, says Derek Burleton, director of economic analysis at Toronto-Dominion Bank.
Still, doubts linger that governments will be able to spend the money quickly and efficiently enough to meaningfully ease the pain of recession.
One of the thorniest issues facing policy makers around the world is how to make sure the massive debts they're taking on to deal with the global crisis will actually be an effective fix. The issue is even trickier for Canada, since the source of the crisis lies mainly outside the country's borders.
Some commentators, including former Bank of Canada governor David Dodge and theorist Richard Florida at the University of Toronto's Rotman School of Management, have argued that stimulus focused so intently on bricks and mortar does not spread the money widely enough or with a long-term view about how to position Canada for the future.
"It would make far greater sense to invest precious infrastructure dollars in high-speed rail and broadband Internet lines to connect our communities than in roads and highways," Mr. Florida wrote in a recent essay. "We will begin to move toward a durable recovery only when we stop unnecessarily propping up the old economy."
Still, if the money is spent on schedule it should come at an opportune time - just as unemployment in the construction industry soars and private investment in residential and non-residential construction pulls back sharply, says Douglas Porter, deputy chief economist at BMO Nesbitt Burns. "There are some areas of the country that could really use this kind of infrastructure boost," he said.
For some governments, like Canada, debt reduction has been a top priority in the recent past. The chart above illustrates Canada's net federal debt position - total outstanding debt minus assets - as a percentage of GDP. Net debt as a share of GDP fell from 69.2% in 1996 to just 30.6% in 2008.
When the U.S. economy (Canada's biggest trading partner) had already fallen into recession, Finance Minister Flaherty said this about Canada's 2008 budget, titled Responsible Leadership for Uncertain Times: “Some would have us go down the path to higher spending, higher interest payments and higher taxes. That approach is misguided. Our Government is taking the path that requires focus, prudence and discipline.”
2009 will be in sharp contrast to the recent past. Deficit spending of federal and provincial governments is expected to total $57 billion CAD - 3.7% of GDP or the biggest ever - on stabilization spending and the stimulus bill. However, compared to other governments, whose economies are in worse shape, the Canada's prudent attention to finances puts it in a better position to respond to the economic downturn.
The chart illustrates the UK government net debt as a percentage of GDP, a comparable measure of debt to the Canadian chart. Where Canada's debt to GDP ratio has fallen steadily since 1996, UK national debt has generally trended upward since 2002.
Even though the Canadian government must make the same fiscal concessions as any other government - timing and efficiency - its recent and relative frugality puts it in a unique position to spend.