Deficits won't stimulate the economy

MONTREAL, March 10, 2016 /CNW Telbec/ - Increasing budget deficits in order to boost the economy, which many economists are calling on the federal government to do, is a policy that is doomed to fail, shows an MEI publication released today.

While Ottawa's deficit gets deeper by the day—the most recent update puts it at $18.4 billion for the current year, not including the several billion dollars of promised infrastructure spending that will be added on later—several economists are recommending that the government spend even more in order to "stimulate" the Canadian economy.

This is a short-term perspective that fails to take into account several important considerations, explains Mathieu Bédard, Economist at the MEI and author of the publication.

"In the aftermath of the 2008 financial crisis, it is the OECD countries that reduced both their public spending and their revenues that succeeded in achieving the fastest average annual growth. Conversely, countries that chose to increase both their spending and their tax burdens experienced very slow growth, and even economic contraction if Greece is included in the calculation. These facts, empirically demonstrated, directly contradict the doctrine of economists promoting deficits as tools of economic recovery."

Indeed, a study from the University of California in San Diego shows that an increase in public spending reduces private spending rather than stimulating it, and has the effect of creating jobs solely in the public sector, but no sustainable employment in the private sector.

"At any rate, beyond the studies on the matter, there is an important fact to keep in mind: Canada is not in a recession, nor was it in a recession in 2015, and will not be in one in 2016 either, as the Bank of Canada confirmed again yesterday, regardless of the size of the federal deficit," says Mathieu Bédard.

The difficult choices which the Quebec government has recently had to face in order to return to a balanced budget should serve as a warning to the federal government, says Michel Kelly-Gagnon, President and CEO of the MEI. "Returning to a zero deficit, even in periods of growth, is always a difficult exercise that invariably provokes an outcry. In other words, after a stimulus package, getting back to a balanced budget is not simply a matter of issuing a decree."

"The best way to stimulate growth is to remove obstacles for entrepreneurs and innovators by reducing taxes and the regulatory burden," he adds. "Increasing government spending will just pull resources out of the private sector which is the last thing the Canadian economy needs."

The Viewpoint entitled "The Federal Government's Deficits Will Not Stimulate the Canadian Economy" was prepared by Mathieu Bédard, Economist at the MEI. This publication is available on our website.

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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its studies and its conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.

SOURCE Montreal Economic Institute

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