According to a recent study, new government spending in response to the recession will likely have little effect on economic growth.
The study was carried out by the Fraser Institute, a non-partisan Canadian public policy think-tank, and they actually say it will be a near opposite. The Institute has found that stimulus spending will produce more government deficits and debt.
"In the coming months, as governments contemplate trying to kickstart the economy with more spending, they should recognize that evidence indicates this approach is ineffective and results in more government debt," says Jake Fuss, Fraser Institute economist.
The Institute references the 2008-2009 recession, which showed that the U.S. stimulus package caused government debt to increase while failing to increase economic activity. Instead, most individuals and businesses chose to save the temporary payments from the government. According to U.S. research, each dollar of government stimulus spending produced less than one dollar of economic activity.
"The study also finds that government spending can 'crowd out' private-sector economic activity (investment, for example) that would otherwise have happened," says the Fraser Institute.
The Institute has found that fiscal stimulus based on spending increases will likely produce lower economic growth and impede growth, rather than helping it.
"Before implementing any fiscal stimulus package, policymakers must consider the potential implications on both the economy and government balance sheets, particularly as governments across Canada face large deficits and mounting debt," says Tegan Hill, Fraser Institute economist and study co-author.
