Can Government spend its way out of a recession?

By MPP Toby Barrett

This year’s budget indicates the McGuinty government has increased spending 70 per cent since taking office. Expenditures for fiscal year 2010-11 will come in at a whopping $125.9 billion.

Those numbers tell a tale – a tale of a government that has maxed out its credit card and is forwarding the bill to our children and our grandchildren. However something we learned during the recession of the Bob Rae era- government can’t spend its way out of a recession.

This year’s edition of the McGuinty budget’s tax and spend plan, confirms that government is on course to double Ontario’s debt to $289.3 billion by 2012-2013, with seven more years of deficit spending predicted.

A day before the 2010 budget announcement, the McGuinty Government congratulated themselves in announcing that their original deficit projection was off, bringing the deficit for the 2009-2010 year to $21.3 billion – only in Dalton McGuinty’s Ontario could a $21.3 billion dollar deficit be considered good news. This is still by far and away the largest deficit in Ontario history, and, even with the recalculation, still greater than all of the other provinces combined.

This time last year – Dalton McGuinty told us that the deficit would only be $14.1 billion. One year later it is almost 50 per cent higher.

The change in the government’s deficit projection is attributed to increased government revenues, “across the board,” including corporate and sales taxes – reflecting in large part the rebound from extremely low levels of auto production.

As I said in my previous column on the provincial economy – it is clear this government does not have a revenue problem, it has a spending problem.

Spending is the driver of deficits and of debts.

Deficits occur when a government borrows money because the revenues it collects are insufficient to finance spending. This is different from debt which is basically the accumulation of deficits plus the interest on the debt over time.

It is not difficult to recognize that deficits mean more debt – and more debt means more interest to be paid, and less resources for health, education and other government services.

In considering where the money is being spent, I wonder to what extent has Ontario’s ‘shovel-ready’ plan been effective in stimulating activity? I suspect, very little. The end result has been increased redistribution of wealth rather than increased economic activity.

There is evidence that deficit-financed and tax-financed spending do not stimulate the economy; instead they discourage private sector investment.

The view is that successful stimulus initiatives – those that increase economic growth – focus on tax cuts while unsuccessful ones focus on government spending.

During six days of Finance Committee hearings I came to realize that, although roads were being paved and arenas planned for construction, there was little in the way of creating full-time, permanent jobs as a result of stimulus/shovel ready spending.

As well, government spending levels are expected to be maintained at present high level even as stimulus spending winds down.

The private sector, encouraged by low interest rates and not government stimulus spending, is behind any the positive signs of economic recovery thus far.

Thus, the economic evidence regarding stimulus spending indicates stimulus spending fails while tax relief works. The key to improving Ontario’s economic competitiveness is to focus on tax relief that improves the incentives for Canadians to work, save, invest and be entrepreneurial.