Fiscal policy is defined as the government’s own approach to spending and taxation. Remember : ◦ Taxation levels determine the government’s revenue ◦ Government spending (G) includes spending on programs, services, government salaries, and transfers to provinces.
When you subtract the government spending from their tax revenue, you determine the government’s deficit or surplus. Deficit: When spending (G) is greater than tax revenue. Surplus: When spending (G) is less than tax revenue. Balanced Budget: when spending (G) equals tax revenue.
What is the history in Canada? We have had budget deficits in two periods: ◦ 1940’s to 1997 ◦ 2009-present We have had budget surpluses in the years ◦
Government Deficit: refers to the yearly amount that spending exceeds tax revenue. Government Debt: the sum of all government deficits less its surpluses. In 2014, our deficit was $16.6 billion, and our direct debt was $1.2 trillion (2013) ( Source: Fraser Institute, April 2014 ) ◦ ca/Content/research-news/research/publications/canadian- government-debt-2014.pdf ca/Content/research-news/research/publications/canadian- government-debt-2014.pdf
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What should government do to achieve our macroeconomic goals (full employment, stable prices, low inflation)? Two Schools of Thought: 1.Interventionist Policy (Countercyclical Fiscal Policy) 2.Balanced-Budget Fiscal Policy
The idea that governments should help the economy achieve full employment with minimal inflation.
In periods of recession: ◦ governments should increase spending, thus helping people find jobs and fuel the economy. ◦ governments could lower taxes to increase people’s disposable income (thus increasing aggregate demand)
In periods of high growth (booms) The government should decrease spending. The government should increase taxes. Both of these policies will have the effect of reducing aggregate demand in the economy, and thus, lowering price levels.
It is subject to serious time lags (by the time we realize we are in a recession, we might have already been there for some time) It can cause serious budget deficits.
The belief that a government budget should be balanced in each budget period, regardless of our position in the business cycle.
Automatic Stabilizers: tax laws and government spending programs that automatically adjust to reduce spending in times of boom and increase spending in times of recession. Example: Our progressive tax system (when the economy is in a recession, GDP ↓, tax revenue ↓, amount paid out in welfare and EI ↑)
Economists that believe in balanced-budget fiscal policy believe that: Modern economies have enough automatic stabilizers built-in to avoid large swings in the economy (deep recessions, or periods of huge economic boom). Countercyclical policy does more harm than good (leads to large deficits).
It is interesting to look at our national debt levels as a percentage of our GDP. Interactive World Map Interactive World Map