We presented a plan, a bold plan, Canada's Economic Action Plan… That plan is working… The proof is in our performance, boasted federal Finance Minister Jim Flaherty in his budget speech earlier this month. While Minster Flaherty's comments are certainly great political rhetoric, the latest data from Statistics Canada tells a remarkably different story. Government stimulus had negligible effect on Canada's economic turnaround in the second half of 2009. Put simply, the stimulus didn't work.

First the positive news. The economic outlook today is certainly more positive than at this time last year. Stock markets are continuing to rally, housing starts are increasing, the unemployment rate is slowly edging downward, manufacturing sales are beating expectations, labour productivity growth is hitting recent historical highs and the Bank of Canada and major private sector banks are forecasting positive economic growth for 2010.

But the most encouraging sign is found in the latest data from Statistics Canada, which shows that the Canadian economy turned a corner midway through 2009. Specifically, GDP increased by 0.2% in the third quarter of 2009 and by 1.2% in the fourth quarter, after three consecutive quarters of decline: -0.9% in the fourth quarter of 2008, -1.8% in the first quarter of 2009 and -0.9% in the second quarter of 2009.

The Conservative government has pointed to the shift to growing GDP in the third and fourth quarters from declining GDP in the second quarter as evidence that their stimulus package is working. But how much of that improved growth rate can actually be attributed to government stimulus?

To gauge whether government stimulus had an impact on the economic turnaround in 2009, we examined Statistics Canada data on the contributions of government consumption (i.e., spending), of government investment (i.e., infrastructure) and of private sector activity to the improvement in economic growth at two critical junctures.

Between the second and third quarter of 2009, GDP growth improved by 1.1 percentage points from -0.9% to 0.2%. Of this 1.1 percentage point improvement in GDP growth, government consumption and government investment each contributed only 0.1 percentage points. Private sector investment contributed 0.8 percentage points and was the driving force behind the economic turnaround from the second to third quarter of 2009.

Interestingly, despite government attempts to stimulate renovations in the housing sector through the high-profile Home Renovation Tax Credit, investment in residential structures did not contribute to the change in GDP growth between the second to third quarters of 2009.

Similarly, while the federal government's Economic Action Plan included some temporary business tax relief for the purchase of new computer equipment, this move did not account for a significant part of the private sector investment that drove the economic turnaround between the second and third quarter of 2009.

On the other hand, one of the goals of the Economic Action Plan was to stimulate private sector consumption and increased private sector consumption did contribute to the turnaround in economic growth from the second to third quarter of 2009, albeit slightly.

To the federal government's credit, the $4.5-billion reduction in personal income taxes contained in its stimulus package likely had an impact on consumption, given the permanent nature of the tax relief. This supports academic research suggesting the government would have been better off introducing wide-spread tax relief to improve economic growth, rather than increased spending. However, of the entire federal stimulus package, less than 10% was for permanent tax relief.

Between the third and fourth quarter of 2009, GDP growth increased by 1.0 percentage points from 0.2% to 1.2% growth. At this juncture, government consumption and government investment contributed nothing to the 1.0 percentage point improvement in economic growth. Increased net exports were solely responsible for the improvement during this period.

Most indicative of the government's stimulus mistake, is that before the recession, during the recession, and well into economic recovery in 2009, the government's contribution to GDP growth has been markedly constant. In other words, whether the economy was shrinking, stagnant, or growing, the contributions of government spending and government infrastructure investment to economic growth had little effect on changes in GDP growth.

The government of course claims that Infrastructure measures in the Action Plan …have contributed to the economic recovery in Canada. But nothing could be further from the truth. As the figure shows, the contribution of government infrastructure investment to GDP growth was remarkably constant from the beginning of 2008 to the end of 2009.

This should really come as no surprise given that more than 40% of the federal government's stimulus package was earmarked for infrastructure initiatives, which take time to plan and implement. Looking forward, the fear is that spending on infrastructure will occur as the economy naturally begins to grow. This means government will be competing with the private sector for resources, resulting in increased costs and fewer private sector projects.

Despite the government's claims, the stimulus package didn't work and was a mistake that will burden Canadians with debt for years to come.