Federal stimulus spending a futile response to Alberta’s economic challenges
The federal government will launch an economic stimulus program with initial efforts focused on Alberta and Saskatchewan, two provinces hit hard by the recent fall in oil prices. Specifically, the government is considering quickly spending $1 billion for infrastructure projects in the two provinces.
The federal government’s decision to proceed with stimulus spending is a futile response to the economic problems facing Alberta. For starters, a significant body of academic literature casts serious doubt on the ability of government stimulus spending to boost economic activity.
But even if you are a firm believer that governments are generally able to deliver stimulus spending in a timely, effective manner that helps boost growth during economic downturns, it still isn’t clear that economic stimulus is an effective strategy for dealing with the particular type of trouble Alberta is now going through. Stimulus spending is meant to increase consumer demand—but inadequate demand is not the primary problem in Alberta and Saskatchewan. Rather, both provinces have been hit by a supply-side shock that simply can’t be addressed through stimulus spending, namely the precipitous decline in the price of commodities, particularly oil and gas.
Instead of pursuing economic stimulus spending, if the provincial and federal governments want to help Alberta’s economy, the best thing they can do is enact policies that enhance Alberta’s competitiveness and attractiveness for investment and entrepreneurship. Unfortunately, both governments have been doing exactly the opposite. Rather than make the best of a difficult economic environment by focusing on competitiveness, both the provincial and federal governments have made matters worse by reducing competitiveness through harmful economic policies.
Consider that both governments have recently hit Albertans with substantial increases to the personal income tax—one of the most economically harmful components in our tax mix. As a result, the top combined marginal rate faced by Albertans has increased by 23 per cent in just a few months. And this increase came alongside additional economically harmful measures such as a 20 per cent hike in the provincial general corporate tax rate and the announcement of a multi-billion dollar carbon tax. These federal and provincial policy actions will cause short- and long-term harms to the provincial economy.
The best thing that both the provincial and federal governments can do to help Alberta’s struggling economy isn’t to enact stimulus spending—it’s simply to stop adding to the problems facing the province by enacting policies that make Alberta a less attractive place to do business. If they want to help even more, they should reverse the policy choices of recent months that have increased the tax burden on Albertan consumers and businesses and done considerable harm to the province’s long-term economic prospects.