ON JANUARY 27, 2009, PRIME Minister Harper’s government introduced its 2009 Budget Implementation Act. Often called Budget 2009: Canada’s Economic Action Plan (EAP), this was a $62 billion package of spending, transfers, and tax cuts intended to help the struggling Canadian economy to reverse a severe recession that began in late 2008. The minister of finance, Jim Flaherty, stated at the time, “It builds on our position of strength. It provides temporary and effective economic stimulus to help Canadian families and businesses deal with short-term challenges. Our investments will build Canada’s long-term capacity, so that when the global recession eases, we emerge even stronger.”

Others weren’t so sure that would be the case. They argued that at a time when Canadian families were suffering, the government should cut spending, not increase it. “Canadians will inevitably see higher taxes as a result of the federal government’s plan to stimulate the economy with deficit spending,” said financial commentator Evelyn Jacks. “Already, the federal and provincial taxes every Canadian pays on income and capital are by far the largest destroyer of wealth over a lifetime. These deficits won’t help,” Jacks said. Some economic analysts were concerned that the so-called temporary measures, such as enhancing employment insurance benefits, would be difficult to reverse and might lead to structural deficits. Others warned that the stimulus bill, as the EAP was often called, would drive up interest rates and increase the burden of our national debt.

Others had the opposite complaint—that the stimulus was too small given the economy’s troubles. Toronto mayor David Miller criticized the budget for creating a time-consuming application process for infrastructure funding. He and others also complained that not only might the money come too late, it generally had too many strings attached. Jean Perrault, president of the Federation of Canadian Municipalities and mayor of Sherbrooke, Quebec, said that cities and towns had already set their infrastructure budgets for 2009 and would be hard-pressed to come up with additional funding if they were required to match some or all of Ottawa’s contributions.

The passage of time did not resolve these disputes. On one hand, the bill did not jump-start the economy, as Harper had hoped: the recession did end officially in late 2009, but unemployment remained high above the pre-recession level, by which time the stimulus had largely run its course. On the other hand, interest rates remained low, contrary to what opponents of the stimulus had predicted. But the net effect of the stimulus remained controversial, with opponents arguing that it had failed to help the economy and defenders arguing that things would have been much worse without it.

Whatever the verdict—and this is one of those issues that economists and historians will probably argue about for decades—the Economic Action Plan of 2009 was a classic example of fiscal policy, the use of government spending and taxes to manage aggregate demand. In this chapter we’ll see how fiscal policy fits into the models of economic fluctuations we studied in Chapters 11 and 12. We’ll also see why budget deficits and government debt can be a problem and how short-run and long-run concerns can pull fiscal policy in different directions.