CH. 11: GOVERNMENT EXPENDITURES & REVENUES CIE3M M. Nicholson

Reasons for Government Involvement in the Economy  Public goods – good or service that everyone benefits from regardless if they have paid for it or not (e.g. national defence)  Externalities – good or bad side effects of production (e.g. golf course vs. pollution)

Reasons for Government Involvement in the Economy  Harmful and Beneficial Goods – cigarettes vs. education  Distribution – help make it a fairer world by taking from the rich and giving to the poor  Economic Stability – stable prices and full employment

Growth in Government Spending  Government spending has increased greatly since the Great Depression of the 1930s  Canadians have come to expect gov’ts to take care of them to prevent another economic depression from ever occurring again  Canadians are a mostly urban people who are highly specialized & therefore not self-sufficient like their farming ancestors

Government Expenditures  Municipal – local roads, sewers, police, garbage disposal, libraries, schools  Provincial – Fed Gov’t transfers money to pay for goods & services such as health & education  frequent deficits have led to large debt and interest payments (1/7 th of exp.)

Government Expenditures  Federal – massive growth from the late 70s to the mid 90s 1. transfers to persons – Old Age Security, UI 2. transfers to other levels of governments – make things even 3. subsidies – Natives, farmers, international aid 4. payments to crown corporations (e.g. CBC)

Government Expenditures 5. defence – Cold War over so declining 6.government operations – judicial, government departments 7.other – veterans allowances 8.public debt charges – by the mid 90s the largest government expenditure

Government Revenues  Taxes are the key source of government revenue and come in many different forms  direct – e.g. HST consumers can see  indirect – e.g. excise tax is hidden in the price of gas  progressive – higher % for higher income  proportional – same %  regressive – lower income pays %

Government Revenues  Municipal – property taxes contribute 90%  Provincial – direct taxes (33%), indirect taxes (25%), federal transfers (20%)  Federal – income tax, corporate income tax, UI, GST, excise (luxury/sin) tax, duties, government investment

Controlling Federal & Provincial Debts & Deficits  Growth of the Federal Public Debt – 1966 ($27.4 billion)  1995 ($546 billion)  Present DebtPresent Debt  Effects of the Federal Public Debt 1. redistribution of income 2. debt held by foreigners 3. cost of collecting tax 4. danger of the debt feeding on itself

Controlling Federal & Provincial Debts & Deficits  Effects of the Federal Public Debt (cont’d) 5.crowding out investment 6.burden of future taxpayers 7.restrictions on government spending and taxing policy

Controlling Federal & Provincial Debts & Deficits  Curbing the Federal Debt and Deficit 1. cut federal government expenditures – politically unpopular 2. increase revenues – more taxes (e.g. GST) 3. rely on economic growth and rising incomes  Provincial Debts and Deficits – peaked in 1993

Government & the Circular Flow  Gov’t intervenes in the market system because households & businesses sometimes have extremes in their relationship causing instability (e.g. unemployment, inflation)

Government & the Circular Flow

Government Regulation of Business  Prevent reduction in competition  Regulate prices and production – Rogers Cable, electricity, eggs, milk  Health, safety and the environment – building codes, restaurants  Crown Corporations - CBC