Does Government Public Capital Expenditure Matter?: Evidence for Canada

Abstract

Does the provision of Canadian government capital expenditures and government deficits displace private economic activity? In the U.S., Erenburg (1993) found that private sector investment spending is enhanced by expected increases in public spending on infrastructure, while also showing that deficit spending has no significant effect on private investment. There is no empirical study to date that addresses the relationship between government capital investment and government debt on private capital investment in Canada. Thus, the objective of this study is to determine the effect of government investment expenditure and government deficit spending on private investment in Canada. The results of this study indicate that private sector investment is positively affected by public sector investment while no significant relationship was found between Canadian government deficit and private sector investment.