briefing notes

Canadian Economic Policy Department of Economics Dr. A. Noce
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Briefing Note #2
Due Date: On or before August 9, 11:59 p.m.
Task:
1. You are a senior economist in the Department of Finance and are tasked to brief the Minister
of Finance on the current state of Canada’s debt and debt-to-GDP ratio. Furthermore, you want
to provide the Minister with key considerations for the planning of next year’s budget. That is,
outline key considerations for the Minister who may have spending plans for next year’s budget
that are likely to be similar to the spending and revenue plans that have been carried out in the
past 4 years.
2. Your briefing note is “For Information Only”; however, ensure that it has a well-developed
“Key Considerations” section.
3. Along with your task outline in point 1 above, develop your briefing note “Issue” after reading
the two articles below. You are free to look at additional resources.
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Published on Fraser Institute (https://www.fraserinstitute.org)
Article 1: Mr. Prime Minister, the good times won’t last forever
Appeared in the National Newswatch, May 27, 2019
Throughout its mandate, rather than acting to reduce the federal budget deficit, the Trudeau government
has made “investments” in the form of more and more spending. Of course, this plan relies on a wave of
good fortune, with positive economic growth and higher-than-expected revenues each year, to finance the
government’s proclivity for spending. However, recent information from the Parliamentary Budget
Officer (PBO) and Statistics Canada casts serious doubt on the viability of this plan moving forward.
Canadian Economic Policy Department of Economics Dr. A. Noce
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According to the PBO, the 2018-19 deficit in Ottawa will be $800 million higher than projected in the
government’s latest budget released in March. The PBO projects a drop in expected revenues. In other
words, the government can’t count on its original revenue projections—let alone higher-than-expected
revenues—to fund its penchant for spending.
But last year’s higher-than-anticipated deficit should not come as a surprise. Prime Minister Trudeau has
spent more money (on a per-person inflation-adjusted basis) than any prime minister in Canadian history.
In fact, federal per-person program spending reached an all-time high at $8,869 in 2018-19. For context,
the previous per-person high ($8,847) was recorded during the Great Recession in 2009.
Of course, more spending means more new debt. By the end of his term this fall, Prime Minister Trudeau
will have increased federal debt (again, per person and inflation-adjusted) by 5.6 per cent , which is more
than any other prime minister who did not experience a world war or recession while in office. Put
differently, Justin Trudeau is the only prime minister since 1895 to increase the per-person debt burden
without presiding over a global conflict or economic downturn.
Four consecutive federal deficits have meant that each Canadian has acquired $1,725 more in federal debt
since this government took office. Therefore, it’s important to realize that future generations will
ultimately pay higher taxes tomorrow to finance today’s debt growth. And so it’s worth asking, what has
this record accumulation of spending and debt brought us?
For starters, recent sluggish economic growth. StatsCan has revealed that the Canadian
economy contracted by 0.1 per cent in February. Falling resource production in mining and oil and gas
caused those sectors to shrink again for the sixth consecutive month. Output in the finance and
manufacturing sectors dropped as well. Overall, the economy has now shrunk in four of the past six
months .
In light of this news, there’s now a heightened risk of recession occurring in the near future. And that
could pose serious problems for Canada’s fiscal situation moving forward.
In our recent study , we estimated that the federal deficit could potentially eclipse $34 billion before any
stimulus measures if an economic downturn occurred this year. And the negative effects on federal
finances could last much longer. Depending on the severity of the recession, the accumulated deficit over
the next five years could total between $115 billion and $142 billion. As a result, the debt burden for
Canadians—the people who pay the interest on Ottawa’s debt—would continue to grow.
Massive and repeated spending increases, accompanied by rapidly accumulating debt, have defined this
government’s fiscal policy. Clearly, it can’t continue down its current path of hoping the good times will
roll forever. Economic growth is now waning and government revenues will not always exceed
expectations. The strategy of trying to balance the budget on a wing and a prayer is destined for failure.
Article 2: Stimulus spending will likely harm Canadian
economy—not help it

Canadian Economic Policy Department of Economics Dr. A. Noce
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Appeared in National Newswatch, June 25, 2020
As the federal and provincial governments shift their focus to economic recovery, there will be
heightened calls for fiscal stimulus in an attempt to kick-start the economy. However, a
new study by the Fraser Institute demonstrates that, based on past experience, stimulus
measures will almost certainly be ineffective.
Fiscal stimulus refers to additional government spending and/or tax relief used in an effort to
mitigate the impact of a recession and speed up economic recovery. The theory assumes that
stimulus measures can influence people to spend more and create a positive ripple effect in the
economy.
Let’s see how this theory holds up.
During the 2008-09 recession, the federal government enacted a two-year $47 billion stimulus
package focused mainly on spending measures, such as public infrastructure and subsidies to
business, with the hopes of improving economic growth. Although the economy did recover,
a 2010 study found that government spending on infrastructure had little to no effect on
Canada’s economic growth during the recovery. Instead, the data demonstrated that privatesector investment and increased net exports were the drivers of economic recovery.
Stimulus efforts in the United States provided similar results. Stanford University professor
John Taylor analyzed the impact of providing temporary tax rebates to American households to
stimulate consumer spending and thereby grow the economy during the last recession.
His research showed that the stimulus measures were ineffective at increasing spending because
households largely chose to use the rebates for savings or paying down personal debt. Indeed,
the U.S. stimulus package during the 2008-09 recession had little to no effect on economic
growth and instead only resulted in additional government debt.
In both the U.S. and Canadian experience in 2008-09, infrastructure spending was used in an
effort to kick-start the economy. The problem with this approach is that infrastructure projects
that are deemed to be “shovel ready” actually take significant time to plan and implement. In
Canadian Economic Policy Department of Economics Dr. A. Noce
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fact, experience shows that the economic recovery had already begun before the shovels hits the
ground. By the time government infrastructure spending occurred, it was competing with the
private sector for resources, resulting in increased costs and fewer private-sector projects.
Evidence from University of California San Diego professor Valerie Ramey and Harvard
University professor Robert Barro emphasizes the issue with stimulus spending, using a concept
called the “fiscal multiplier”, which shows the impact that each additional dollar of government
spending has on the economy. In theory, a multiplier greater than 1.0 indicates that stimulus
works because a $1 increase in government spending will increase overall economic output by a
value greater than $1. Their research, however, demonstrates that the multiplier for stimulus
spending is likely below 1.0, indicating that stimulus spending actually crowds out private
economic activity that would otherwise have occurred and therefore does not stimulate the
economy.
Further, research from late Harvard University professor Alberto Alesina found that increased
government spending is associated with lower economic growth. Specifically,
his research showed that a 1.0 percentage point increase in government spending relative to the
size of the economy is associated with a 0.75 percentage point reduction in economic growth.
Simply put, increased government spending and stimulus measures could actually be a
hindrance rather than a help to Canada’s economy.
Before implementing any fiscal stimulus, Canadian policymakers must consider the empirical
evidence, which raises significant doubts about whether fiscal stimulus can achieve its objective
to kick-start the economy. Indeed, past experience suggests stimulus will not improve the
Canadian economy and may even be a detriment to it.