From very casual observation, I get the sense that a lot of extra government spending in the last couple of years was to build stuff that would have been built anyway. They just built it a bit earlier. It was preponed government spending. Am I right?
Anyway, I'm going to assume I'm right, because it makes a really neat macroeconomic thought-experiment, as well as being possibly relevant to Canadian fiscal policy.
I'm going to make two more assumptions to keep the thought-experiment as clean as possible.
1. The real rate of interest on government bonds is zero for the interval between the preponed expenditure and when it would have been spent otherwise. Roughly plausible.
2. The stuff the government builds is mothballed at zero cost until the time it would have been built otherwise. They dig the hole, but don't do anything with it until they need it. They repair the bridge a couple of years earlier than it needed repairing. They build the bridge, but it doesn't go anywhere until they connect it up a couple of years later. Maybe a bit unrealistic, but it makes the thought-experiment cleaner.
What's so neat about this thought-experiment is that we can totally ignore the present value of the future tax liabilities. They are exactly the same whether or not the government expenditure is preponed. It doesn't matter whether Ricardian Equivalence is true or not. What's also neat is that we can totally ignore whether the government expenditure is useful and productive or not. It's going to be done anyway, and the only question is when -- now or later. And preponing the government expenditure is useless by assumption, because it's mothballed during the preponement years. So it can't be a substitute or complement to private consumption or investment during the preponement years.
OK, what are the macroeconomic consequences of preponing the government expenditure? Would aggregate demand be shifted forward in exactly the same way by preponing the same amount of government transfer payments?
If the economy has unemployed resources due to deficient demand, both this year and next, then there is no real benefit from preponing the government spending by one year. We get higher demand, output and employment this year, and lower demand, output and employment next year. Adding the two years together the multiplier is zero.
But if the economy has unemployed resources due to deficient demand this year, but not next year, there are benefits to preponing demand. We get an extra bridge (or whatever) almost for free. The resources that would have been used to build this bridge next year are now freed up to build something else instead. Like a second bridge. And the resources used to build the bridge this year weren't doing much anyway. If the government had spent the same amount on preponing transfer payments instead of preponing the bridge, everything else would be the same, except we wouldn't have whatever it is the freed-up resources would be building next year instead of the bridge. That's a multiplier of one. (The national income accountants can decide among themselves whether to add it to this year's or next year's GDP.)
Actually, it's maybe even better than that. If we prepone the bridge, government expenditure will be lower next year. That means private consumption will be higher next year. (Because government spending crowds out private spending under "full employment"). Assume people know this. The Euler equation for intertemporal optimisation tells us that an increase in expected future consumption will cause an increase in desired current consumption. So preponing the bridge also increases current consumption (and this effect is over and above any effect that preponing an equal amount of transfer payments would have).
Let's do a back of the envelope calculation. Assume future government spending crowds out future consumption spending dollar for dollar. (That's an upper bound, because private investment and net exports will be crowded out too). Assume the Euler equation tells us that desired current consumption increases dollar for dollar with expected future consumption. (That's an upper bound too, with imperfect foresight and borrowing constraints). But, given those assumptions, a $1 preponement of government spending would increase current consumption by $1, and future consumption by $1, giving a multiplier of 2. (We get the bridge either way, only it's this year instead of next year).
Of course, if monetary policy were quick enough and aggressive enough, this would all be academic. But then, I am an academic.
Not sure if any of this is original. Probably someone else has thought about this before. But I think it's right.