Trudeau Handouts Not Providing Stimulus, Bloomberg Poll Finds

Trudeau: We Won't Do Better by Closing Off
  • Just 15% of additional benefits are going to new spending
  • Most Canadians are using money to pay bills, reduce debt

Two of Canadian Prime Minister Justin Trudeau’s marquee budget policies -- enhanced child benefits and income tax cuts -- are doing little to boost consumer spending, according to a new Bloomberg-Nanos survey.

Families receiving additional child benefits plan to use only 15 percent of the windfall for new spending, with most of it going to pay bills or reduce debt, the poll by Nanos Research Group for Bloomberg News found. There is little evidence the tax cuts are having much of an effect either, with just 8 percent perceiving a drop in income taxes.

The results cast doubt on whether the two fiscal measures -- worth C$12.3 billion ($9.6 billion) over the next two years -- will provide much of a stimulative boost to the nation’s sputtering economy, at least in the short term. The data are consistent with a household sector more keen to repair balance sheets than spend, complicating the government’s efforts to get the economy moving with additional stimulus.

It may just be a timing issue, said Nik Nanos, chairman of Ottawa-based Nanos Research, especially given all the warnings that Canadians have been hearing about their debt levels. Canadians have only received two months of the benefits, and may begin allocating more to new spending once existing bills have been paid, he said.

Hoped for Boost

“What is likely to happen is that stage one now will be paying bills and debt reduction -- after that the spending would likely increase,” Nanos said.

While the measures themselves weren’t initially designed to provide stimulus, policy makers had hoped they would give a boost to an economy that contracted in the second quarter by the most since 2009. A poor response from households could raise pressure on the Bank of Canada or the federal government to take further action. The poll of 1,000 people, carried out Aug. 22 to Aug. 25, comes ahead of Wednesday’s rate decision, when the Bank of Canada is expected to keep its benchmark rate at 0.50 percent.

Governor Stephen Poloz has signaled he’s holding off from rate cuts in order to assess the effects of Trudeau’s fiscal stimulus on the economy, including the impact of the child benefits.

Asked whether the government would give the economy another boost in coming months if growth disappoints, Finance Minister Bill Morneau said existing measures need time to take effect.

Feeling It

“We are working right now to give the economy a boost,” Morneau said in an interview this week in China, where he was attending Group of 20 meetings. “We delivered a budget in March but of course the Canada child benefit started coming in in July, so that is working its way into the economy right now. Canadian families are already feeling the benefits of what we’ve done.”

Canada has become a poster child for the use of fiscal policy, with Trudeau raising spending and deficits to levels not seen in decades outside of the 2009 recession. While the moves have won wide acclaim from investors, stakeholders like the International Monetary Fund and other leaders looking for new ways to kick start the global economy, the efficacy of fiscal stimulus is still contested by some economists.

The proceeds can go toward imports or be saved, and can sometimes even prompt rate increases if they overstimulate the economy, limiting any gains to growth. Still, Poloz has backed the Liberal Party’s fiscal plan, arguing that under the current environment of depressed demand, additional government spending is particularly potent.

In its budget this year, the Canadian government assumes national output will get a boost equivalent to about 80 percent of the child benefit payment enhancement. 

Yet the Bloomberg-Nanos numbers suggests consumers are in no rush to spend the additional money.

Erik Hertzberg/Bloomberg

Among Canadians who have noticed a child benefit increase, respondents said they would put an average 47 percent of the additional proceeds to pay existing bills; 19 percent would go to savings and 14 percent toward debt. New spending would account for 15 percent.

Trudeau’s government started delivering enhanced family benefit payments at the end of July, and data on how effective the measures will be in boosting growth won’t come until later this year.

The tax measures have gone largely unnoticed. In December, the government reduced the second income tax rate - between C$45,300 and C$90,600 -- by 1.5 percentage points. The poll found 36 percent of Canadians believe their income taxes have actually increased over the past year, while 41 percent say they’re unchanged and 8 percent say they’re down.

The survey of Canadians 18 years of age or older is accurate to within 3.1 percentage points.

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