Canada's Housing Bubble

Ottawa — Time is running short for the private sector to get off government life support.

The bulk of Canada's stimulus spending is now rushing into the economy. With no further spending in the works, Finance Minister Jim Flaherty now must hope private demand will take the baton and sustain a viable recovery before the government's cash injections peter out.

Eleven months after presenting his recession-fighting budget, Mr. Flaherty said in a report Wednesday that almost 60 per cent of $62-billion in federal and provincial economic stimulus measures will be spent this year, and fade out by the end of 2010.

Given the administrative delays with dispersing the money, the bulk of the stimulus made its way into the economy only over the past few months. That momentum likely will carry into the early part of next year, by which point Mr. Flaherty intends to close the taps.

The minister on Wednesday set a deadline of Jan. 29, 2010, to allocate the remainder of the federal portion, and insisted that no further measures would be forthcoming.

“It's fair to say that likely about now we're seeing the maximum effect,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.

Mr. Flaherty's insistence on sticking to his commitment to limit most of his stimulus spending to two years suggests the government is confident the private demand that evaporated during the financial crisis will return near the end of next year.

While most forecasters say that's a reasonable bet, there are risks that the consumer and business confidence needed to rejuvenate the economy will fade along with the government support.

The fortunes of Canada depend to a significant degree on a revival of demand from the United States for exports, and many economists predict that the world's largest economy's recovery from the financial crisis will be muted.

“The recovery will be very slow and very drawn out,” said Craig Alexander, deputy chief economist at Toronto-Dominion Bank. “The domestic side will be solid. The headwind will come on the export side. There will be a slow and gradual recovery in the U.S.”

The federal and provincial assault on Canada's first recession since the early 1990s includes tax cuts, enhanced unemployment benefits, automotive bailouts and infrastructure spending.

When measured as percentage of the economy, the combined Canadian spending amounts to one of the biggest stimulus programs in the Group of 20 nations at more than 4 per cent of gross domestic product.

That aggressive response has caused a significant deterioration of public finances. The gross debt of the federal government and the provinces will rise to 79 per cent of GDP in 2010, eighth highest in the G20, from 64 per cent in 2007, according to the International Monetary Fund.

Rising debt explains why Mr. Flaherty is so reluctant to increase stimulus spending. Finance's latest forecast says it will take at least five years to eliminate the deficit from fighting the recession.

The government's fourth report on the stimulus program didn't include an assessment of how much the spending is contributing to GDP.

The report said 70 per cent of the stimulus planned for the fiscal year ending March 31, 2010, is “flowing in the economy” as cash in taxpayers' pockets, direct project spending or work in anticipation of future government payments.

Much of the federal stimulus spending to date is represented by the $9.7-billion that Prime Minister Stephen Harper contributed to the rescues of General Motors Co. and Chrysler Group LLC.

Federal spending on roads, colleges and other infrastructure will be $8.5-billion this year and $7.5-billion in 2010, according to the Finance report. Some $6-billion in tax cuts will be split mostly evenly over the two years, while enhanced payments to the unemployed will jump to $4.1-billion in 2010 from $2.9-billion in 2009.

Because so much of the spending is happening at the end of 2009, the biggest impact of the stimulus program likely will show up in GDP numbers next year. Mr. Alexander reckons the government measures will account for a third of the 2.5 per cent economic growth he predicts for 2010.

“On balance, stimulus is doing what it was intended to do,” Mr. Alexander said. “But it does create challenges. It comes with a big cost. It's led to significant deficits.”