An economic stimulus plan for Canada’s economy and its people

January 13, 2009

In the weeks leading up to the January 27 federal budget, Jim Flaherty is hinting that he will turn, once more, to the traditional Conservative fix for everything: tax cuts.

Not only is this response yesterday’s news, it is the wrong answer for today’s problems.

Tax cuts are not the kind of economic stimulus that would re-ignite consumer confidence, and there’s proof of that south of the border.

A study of the U.S. tax rebates of May 2008 found that only 20% of those tax cuts ever got spent. The rest went to debt payment, savings, or purchase of imports. The study found that a dollar of tax cuts in the U.S led to only 10¢ in stimulus.

There is no reason to believe that the Canadian situation would be categorically different.

With Canadians carrying record debt loads, tax cuts are more likely to fund debt repayment or go into rainy-day savings funds rather than stimulate the economy. During this time of economic turmoil we cannot afford to engage in such ineffective stimulus measures.

Let us be clear. The scale of economic turmoil is unlike anything Canadians have seen in the years since the Second World War.

Banks are lending less, companies are producing less, and consumers are spending less. The only part of the equation that can offset economic decline is government spending.

The situation before us presents a fork in the road: We can proceed, business as usual, with more tax cuts, and hope that markets will pick up the ball.

Or we can do everything in our power to prevent a sharp economic downturn, by creating jobs and protecting purchasing power.

A consensus has formed in major international bodies like IMF, UN, G20 and OECD that a coordinated stimulus of 2% of GDP is needed.

It’s time for Canada to step up to the plate rather than trying to free ride on the U.S. stimulus plan, which is substantially more than 2%.

We recommend the federal government inject $33 billion, or 2.1% of GDP, into the Canadian economy in 2009-10. And we recommend a great deal of that stimulus go to protect Canadians hurt by a sagging economy.

Canadians who arrive home with a pink slip in hand need more than a tax cut. They need a job, and failing that, decent Employment Insurance and other social supports.

Job one is to strengthen the automatic stabilizers in the system. The federal government needs to fix Employment Insurance, expanding its reach, raising benefits to 60% of insured earnings and extending benefits to 50 weeks.

Instead of across the board tax cuts, the government should target tax initiatives to where they’ll be most effective, including increasing the Canada Child Tax Benefit and doublingthe refundable GST credit.

A number of provincial governments are taking leadership with targeted poverty reduction strategies. The federal government should be an active partner, to make Canada a global leader in poverty reduction, beginning with a $2 billion poverty transfer to the provinces to help reach this goal.

The federal government should also inject $14.7 billion to get long-deferred and shovel-ready infrastructure projects moving forward in 2009. That would create jobs precisely when we need them and deal with crumbling infrastructure problems that have been ignored for more than a decade.

While much of the infrastructure spending focuses on physical infrastructure, we cannot forget about social infrastructure like higher education, child care and social housing which are also good stimulus investments.

Labour market contractions provide an opportunity to retrain and prepare for future challenges. Now is exactly the right time to invest in green municipal infrastructure and create a green manufacturing fund to help commercialize promising new technologies along with green job retraining and other forward looking programs.

Some worry this will put Canada in a long-term deficit situation but this type of investment virtually pays for itself.

It would create 407,000 jobs and, as verified by the forecasting model of Informetrica Limited, generate 3% of GDP – a $1.50 of economic activity for every dollar of stimulus. Compare that to a stimulus of only 10¢ return for every dollar of tax cuts.

The dramatic political events of December have raised concerns about the ability of the federal government to move beyond crass politics and make decisions that yield the best value for money and benefit the majority of Canadians, not just a powerful minority.

The proposals we outline here would provide much stronger immediate impact, higher returns on investment, and a lasting legacy for future generations. No tax cut package can promise that.

If we are looking for strategies that will reap rewards for decades to come, the solutions are at hand.

Armine Yalnizyan is a Senior Economist with the Canadian Centre for Policy Alternatives. David Macdonald is the Coordinator of the Alternative Federal Budget Project with the Canadian Centre for Policy Alternatives.