Stimulus impact of tax cuts negative in a zero interest rate economy: report

March 11, 2009

OTTAWA—Tax cuts are the worst possible economic stimulus with Bank of Canada interest rates heading to zero, and may well have a negative effect on the economy, says a report released today by the Canadian Centre for Policy Alternatives (CCPA).

The report examines how tax cuts will work with close-to-zero central bank rates and deflationary pressures and finds they may well be contractionary—causing GDP to fall— by reinforcing deflationary pressures and thereby increasing real interest rates.

“Policy makers need to be very careful in designing stimulus packages as Canadian interest rates fall to zero,” says co-author Doug Peters, former Secretary of State (Finance) and former TD Bank Chief Economist. “The possible negative effect of tax cuts should be of great concern since, operating quickly on the economy; they could hasten the sharp decline into recession.”

“The much greater effectiveness of infrastructure spending will likely be the key to a rapid shift out of recession,” says economic consultant Arthur Donner, co-author of the report. “The effects of spending programs will take some time to work, but could produce a sharp rebound from recession.”

“A zero or close-to-zero, central bank interest rate is unknown territory for the Canadian economy,” says Dr. Donner. “Policy makers should be careful to avoid backward-looking Hoover-Bennett policies that turned the recession of 1930 into the Great Depression.”


How Will the Budget Stimulus Work When Central Bank Rates Are Close To Zero? Why Tax Cuts Are the Worst Possible Fiscal Stimulus is available on the CCPA website:

For more information contact Kerri-Anne Finn, CCPA Senior Communications Officer, at 613-563-1341 x306.