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The Fraser Institute: Government Stimulus Spending Extended Beyond the Recession, Resulting in Deficits and Debt

VANCOUVER, BRITISH COLUMBIA -- (Marketwired) -- 02/06/14 -- Stimulus spending and programs, created as temporary responses to the 2008/09 recession, remained in place after their planned expiration date, producing unnecessary deficits and public debt, finds a new study published today by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank.

During the global economic decline, Canadian employment dropped by 431,000 (or 2.5 per cent) from October 2008 to July 2009, and the overall economy contracted by 3.3 per cent. In response, notes the study Post-Stimulus Spending Trends in Canada, the federal government and provincial governments enacted fiscal stimulus plans.

"These plans, comprised mainly of new infrastructure spending, were supposed to be only temporary-stimulus spending was to be withdrawn after two years and program spending was to be returned to pre-stimulus levels," said Sean Speer, study co-author and associate director of the Fraser Institute's Centre for Fiscal Studies.

But that didn't happen. For example, in 2009 the federal government launched its two-year stimulus plan, also known as Canada's Economic Action Plan, which contained $45.4 billion in new spending and tax relief initiatives.

Program spending spiked in 2009-10 by $36.2 billion in year one and remained elevated in year two. This 17.1 per cent increase in program spending was supposed to end after two years, but the Harper government has not yet fully withdrawn this spending, and as a result, produced longer and larger deficits.

The government now estimates it will have accumulated $68.5 billion in deficits from 2011-12 (the first post-stimulus year) to 2015-16, when it expects to balance the budget.

"Had the federal government kept its promise and lowered spending growth beginning in 2011-12 to pre-recession trends, it would have balanced the budget a year earlier and taken on less debt," Speer said.

The provinces have also maintained stimulus spending-levels despite original plans.

The Ontario government, for example, launched in 2009 a two-year fiscal stimulus plan, which included $32.5 billion in infrastructure spending and subsidies. These spending increases, proposed as "temporary," were extended. Consequently, based on current projections, Ontario will have accumulated $47.8 billion in deficits from 2011-12 (the first post-stimulus year) to 2017-18, the year it expects to balance the budget. Speer's study also looks at similar stimulus spending trends in Alberta and British Columbia.

"Due to extended stimulus spending, which was supposed to last only two years, Canadian governments have increased deficits and delayed balanced budget plans. Many of these governments blame revenue shortfalls for their deficits, but spending is the real cause of their current deficits and debt accumulation," Speer said.

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The Fraser Institute is an independent Canadian public policy research and educational organization with offices in Vancouver, Calgary, Toronto, and Montreal and ties to a global network of 86 think-tanks. Its mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. To protect the Institute's independence, it does not accept grants from governments or contracts for research. Visit www.fraserinstitute.org.

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