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Posted Thursday February 18, 2021


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Economy

Stimulus Spending if Necessary, but not Necessarily Stimulus Spending

Any further debt-financed stimulus should be temporary, essential, and targeted to improving the economy’s productive capacity, says a new report from the C.D. Howe Institute.

At their most recent meeting, the Fiscal and Tax Working Group discussed what form new fiscal stimulus should take, but remained unconvinced that a large stimulus package is appropriate at this time. In addition, with federal debt rising rapidly, members argued that any new permanent programs should be tax-financed.

The group of experts from the private sector and academia, co-chaired by John Manley, former federal minister of finance, and Janice MacKinnon, former minister of finance of Saskatchewan, noted that new spending should target the problems that are holding Canada’s productive capacity back – principally vaccinations and other measures to stop the spread of the virus, let people get back to work and resume other activities safely.

The group also examined the federal government’s proposal, outlined in its Fall Economic Statement, for $70 to $100 billion through 2023/24 in planned stimulus, and pointed out that the Statement neglects some important fiscal risks. For example, substantial hikes in EI premiums will be necessary in the future for the program to remain self-funding over time, dampening job growth. Canada could easily have another recession in this decade, significantly worsening an outlook that is already shaky. And many big-ticket government commitments were ignored in the Statement, giving the impression that at least some of the planned stimulus spending may be ongoing.

Present circumstances suggest that any stimulus should be geared to boosting the economy’s productive capacity: raising labour force participation, raising immigration, strengthening the foundation of the business sector, and raising business investment. A number of options were raised, including channelling support for workforce training directly to businesses, and support workers taking on work through an enhanced Canada Worker’s Benefit. Also, the federal government could support families through an expanded Canada Child Benefit.

The group noted that the pandemic has made the importance and benefits of the digital economy abundantly clear. One-time investments in the infrastructure required to connect all parts of Canada to high-speed and reliable internet networks should be part of any stimulus package. Because they can be truly temporary, other infrastructure investments, including in climate-change adaptation, and in Indigenous communities, are candidates for a growth-oriented stimulus package.

On the tax side, a temporary refundable investment tax credit could work. Getting more business investment in Canada will be critical given the country’s continued lagging in domestic investment relative to international competitors, especially the US. The GST could be cut to provide a temporary stimulus in the short-term; and increased to finance permanent initiatives in the long run.












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ISSN 0824-45
Copyright, 2021

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