Where Stimulus Packages Come From

Now that both Canada and the US have adopted economic stimulus packages – the one in the broader context of a budget, the other part of a package involving both legislation and executive orders – I want to step back a moment and look at how these packages came about and think about their implications.

The Bush administration’s lump-sum tax rebates ended up stimulating more saving than spending. This isn’t a bad thing, as one necessity for ending the recession will be an increase in consumer savings so that, at some point down the road, consumers will be willing to spend again, especially on big-ticket items. The next round of tax cuts are intended to increase permanent income through small increases in take-home pay. Both the Canadian and US governments believe more of these income increases will be spent than saved, and they’re likely right, but the spending will go to small items, like food, restaurant meals, health care, home renovations, and entertainment. All this is fine for Loblaw’s, McDonalds, Shoppers Drug Mart, and Home Depot but won’t do much for the hard-hit housing, auto, or consumer electronics industries.

One noteworthy policy choice of the Harper Government is its use of leverage, hoping that, for example, provinces will spend 50-cent dollars on infrastructure, colleges and universities will spend 50 cent dollars on facilities, and that homeowners will spend 85 cent dollars on renovations. It will likely work to shift provincial government priorities from stimulus projects that cost 100 cent dollars, but the question is whether all the other players will be able to put enough money on the table to take advantage of the temporary subsidies.

The budget has lots of evidence of interest group lobbying, for example the expensing of hardware and software bought over the next two years, which looks like it came directly from the wish list of the Information Technology Association of Canada. Good on ITAC and other lobbyists.

There is also lots of regional politics in play. Help for the computer industry is clearly aimed at its employees, many of whom live in the 905-land constituencies where the Conservatives have begun to make inroads into the Liberal’s Fortress GTA. Who knows what the Southern Ontario Development Agency will do, but it shows a recognition that this region – in which the depressed auto industry is such a key employee – is another Conservative target for the next election.

Finally, there are lots of instances of solutions in search of a problem, spending projects on the wish lists of Parks Canada, Transport Canada, and other agencies. Again, good on them. A deputy minister who is doing his/her job should have a long wish list of projects that contribute to the public welfare that can be rolled out when – even with a Conservative government – the Department of Finance is looking for fiscal stimulus.

When the recession finally ends, the interesting question will be what to do about the deficit and the accumulated debt. Some of the deficit will disappear automatically, but to get rid of the rest and then to start paying down debt will require spending cuts, tax increases, or both. The policy choices then will depend on the political colour of our next government or two. But that’s another story.

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