Ottawa eyes construction stimulus, not rebates, to help economy

If you're expecting Ottawa to send you a tax-rebate cheque as part of a plan to boost the Canadian economy, don't hold your breath.

A U.S. program instituted earlier this year that mailed tax rebates to Americans to stimulate spending did not work, according to a budget consultation paper released by Canada's Department of Finance this week.

Very little of the rebate cash was spent on American goods or in U.S. stores. Instead, people used the extra money to pay down debt or buy imported products.

"This impact is lost when fiscal stimulus is not spent (i.e., it is saved or used to pay down debt) or is used to buy imported goods and services. For example, only about 30 per cent of the U.S. tax-rebate cheques mailed out in 2008 were spent by U.S. consumers" as intended, the Finance Department noted in its paper, designed to illicit public advice in advance of the government's late-January budget.

Boosting Canada's construction sector might be a better option than tax cuts to stimulate the economy, the paper said.

That is because a larger percentage of every dollar injected into this sector is spent on Canada goods.

Seen as more effective

"Only 20 per cent of investment in residential and non-residential buildings is imported through such inputs as building materials. Consequently, stimulus directed at domestic activities, like construction, is more effective in boosting growth here in Canada," the discussion document stated.

Ottawa is under intensive public pressure to implement a fiscal stimulus package of some sort in its next budget.

So far, Ottawa has relied on previous tax reductions, maintaining a zero deficit and ensuring enough funds exist for lenders to continue to lend as its main avenues to improve the country's economic fortunes. The Bank of Canada has also slashed interest rates on borrowing.

In the Finance paper, Ottawa said it is looking at:

Housing investment.Accelerated public infrastructure spending.Improved training incentives.Industry-specific support.Enhanced assistance for credit markets.Porter's prognosis

Other countries and regions, however, appear more interested than Canada in using deficit financing as way of generating economic activity and keeping people working.

The European Union, for instance, has just endorsed a plan that would see its 27 members spend a total of $264 billion US through a combination of new spending plus accelerated infrastructure expenditures and possible tax relief to help economies on that continent.

These days, an increasing number of economists agree that governments need to play a more direct role in helping the economy, instead of merely waiting for deep interest-rate cuts to generate activity.

In a recent commentary, Doug Porter, deputy chief economist with BMO Economics, said Ottawa should inject $16 billion, or one per cent of Canada's GDP, in new spending to help the economy.

It is "the right thing to do," he said in his paper.

Interestingly, however, Porter said the government should look at the very type of tax-based relief that the Finance Department appeared to reject to get the cash into the hands of Canadian individuals and companies.

In his paper, he detailed five measures that could boost Canada's economy:

A temporary payroll tax break.A temporary sales tax cut.A one-time payment to seniors on public pensions.Spending vouchers.A one-time extra federal transfer payment to Canada's provinces.

Porter recognized that each of these proposals has its own flaws. But, in these extraordinary times, he said the government needs to generate more spending in the economy — and quickly.