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Chapter 1
Canada's Economic Action Plan

Introduction

On January 27, 2009, the Government introduced Canada's Economic Action Plan, an extraordinary response to the challenges of the global financial market crisis and the most synchronized recession since the end of the Second World War. The Action Plan aims to protect our economy from immediate threat while providing the solutions we need to secure our long-term growth and prosperity.

Canada's Economic Action Plan comprises five main elements:

• Action to Help Canadians and Stimulate Spending: Providing $8.3 billion for the Canada Skills and Transition Strategy to help Canadians weather today's economic storm and to provide them with the necessary training to prosper in tomorrow's economy. In addition, $20 billion will be provided in personal income tax relief over 2008–09 and the next five fiscal years.
• Action to Stimulate Housing Construction: Providing $7.8 billion to build quality housing, stimulate construction, encourage home ownership and enhance energy efficiency.
• Immediate Action to Build Infrastructure: Accelerating and expanding the recent historic federal investment in infrastructure with almost $12 billion in new infrastructure stimulus funding over two years, so that Canada emerges from this economic crisis with more modern and greener infrastructure.
• Action to Support Businesses and Communities: Protecting jobs and supporting sectoral adjustment during this extraordinary crisis with $7.5 billion in extra support for sectors, regions and communities.
• Action to Improve Access to Financing and Strengthening Canada's Financial System: Providing up to $200 billion through the Extraordinary Financing Framework to improve access to financing for Canadian households and businesses.

In total, Canada's Economic Action Plan will provide almost $40 billion in support to the economy over the next two years. Including funds leveraged from other orders of government, support provided in the Action Plan amounts to 1.9 per cent of the economy in 2009 alone.

This chapter reviews recent economic developments and situates the Economic Action Plan in the context of international efforts.

Recent Economic Developments

The economic context continues to be one of significant uncertainty with the balance of risks to the global outlook tilted to the downside. All Group of Seven (G7) countries have now released national accounts data for the fourth quarter of 2008, with real gross domestic product (GDP) contracting sharply in all countries (Table 1.2). In the United States, real GDP fell by 6.2 per cent (quarterly at annual rate). In the Euro Zone, real GDP fell by 5.7 per cent, a third consecutive quarterly drop, reflecting declines in most member countries, including Germany, Italy and France. In Japan, real GDP plunged nearly 13 per cent.

Growth also remains relatively weak in developing countries. In line with broad-based global weakness, the International Monetary Fund revised down its 2009 global growth forecast from 2.2 per cent to 0.5 per cent in the January 2009 World Economic Outlook Update. Global economic developments since that Update suggest that global economic activity will fall this year.

Recent economic developments in Canada have been more favourable than in other advanced economies. Canada was the only G7 country to have posted positive growth in both the second and third quarters of 2008, and economic conditions deteriorated less in Canada than in the other G7 countries in the fourth quarter.

In part, this recent performance reflects the positive impact of past policy actions, including the $65 billion in permanent tax cuts over this and the next five fiscal years announced in the October 2007 Economic Statement. These tax cuts were implemented just a few months after the start of the global financial crisis in August 2007 and two months in advance of the U.S. entering recession in early 2008.

Further, Canada has a number of structural strengths that should allow this country to manage through the current period of economic weakness:

• Canada's financial system is the strongest in the world, with Canada's banking sector less leveraged than in other countries.
• The financial position of Canadian households and businesses remains stronger than in most other industrialized countries. In part, this is because lending practices and housing markets in Canada were not subject to the excesses that occurred in many other countries. This means that the deleveraging of household and corporate balance sheets will be less than in other countries.
• The fiscal position of governments in Canada remains structurally solid.

Canada's Economic Action Plan anticipated that in the current period of heightened risk and uncertainty, there was a significant probability that economic conditions could turn out to be weaker than projected by private sector economists at the time of the Budget. Accordingly, the economic assumptions adopted in the Economic Action Plan included a significant fiscal risk adjustment. Recent economic developments are broadly in line with Budget projections.

Despite these strengths, Canada is clearly being affected by the cyclical downturn in the global economy, with both employment and output now falling. Canada's Economic Action Plan is designed to limit the extent of the recession now underway and to bolster the recovery. The Government will continue to monitor the situation closely and will report to Canadians on the economic and fiscal position of the country in future reports.

Fulfilling International Commitments

The response to the global economic crisis will only succeed if governments work cooperatively and in a coordinated manner.

The actions included in the Economic Action Plan meet Canada's commitments at the November 2008 G20 leaders' summit to provide timely stimulus to domestic demand, while maintaining long-run fiscal sustainability. Canada's Economic Action Plan is an important contribution to the global response to the current economic downturn.

The total stimulus for the Canadian economy provided by the Economic Action Plan amounts to 1.9 per cent of GDP for 2009 and 1.4 per cent of GDP for 2010. This compares favourably to budgetary actions announced in other countries, including the United States.

The estimate for Canada consists of the measures announced in the Economic Action Plan, including the expected contribution of provincial governments. The estimate does not include the impact of the permanent tax reductions announced in the 2007 Economic Statement and taking effect in 2008 and 2009.

In contrast, the estimate for the U.S. stimulus package includes tax reductions that offset the expiration of temporary tax cuts in 2008. These tax reductions account for 40 per cent of the U.S. stimulus package. Taking this into account, in economic terms the stimulus provided by the Economic Action Plan is comparable to the U.S. stimulus package even though our economy is not as severely affected as the U.S. in this global downturn. Moreover, the U.S. stimulus package also contains significant stabilization funding for state and local governments to help forestall spending reductions. In contrast, the Economic Action Plan in Canada builds upon growing transfers to provinces.

As well as contributing to global efforts to provide economic stimulus, Canada will continue to play a leading role in ongoing international efforts both to deal with the current turmoil and to limit the impact of future economic downturns on financial markets. Canada is co-chairing one of the four working groups set up following the November 2008 G20 leaders' summit, on enhancing sound regulation and strengthening transparency in the financial sector. This group is on target to propose a set of concrete actions to G20 leaders at their next meeting in April.

Structure of the Report

This report focuses on the steps being taken to ensure timely, responsible implementation of the Economic Action Plan.

Chapter 2 reviews the Government's accountability framework to ensure that the Plan is implemented quickly and effectively. Chapter 3 sets out the actions required by Parliament as well as domestic and international partners to ensure that the actions in the Plan provide maximum impact. Chapter 4 reviews the significant progress to date in implementing the Plan. Chapter 5 concludes with a review of next steps.

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