 The government generally spends more than it gets in revenue  When expenditures > revenue: budget deficit  If, however, expenditures = revenue, government is running a balanced budget  If a government’s revenues > expenditures: budget surplus  Depending on the size of the budget surplus or budget deficit, we can tell which type of discretionary fiscal policy is in place 11.3 Impact of Fiscal Policy NOTE! Deficits is not the same as debt – a country’s debt is the sum of all its deficits

 Since federal surpluses and deficits have not balanced each other out in the long run, this greatly impacts Canada’s public debt Impact on Public Debt

 Annually Balanced Budgets  Critics of Fiscal Policy state that it should be balanced annually  If government needs to spend this year, it should increase taxes  Opponents state that society doesn’t act like a single household – to balance its budget in 1 year  The business cycle spans several years  One year, there may be a recession, which is followed by inflation the next year Fiscal Policy Guidelines

 Cyclically Balanced Budgets  This type of budget has more supporters  Government revenues and expenditures don’t need to be balanced every year, but should balance over 1 business cycle  Deficits from periods of contraction should roughly equal the surpluses from period of expansion Fiscal Policy Guidelines Cont’d

 Functional Finance  View that policy-makers should just correct fluctuations caused by the business cycle  Government should just base a year’s fiscal policy on the present yearly needs of the economy  Essentially, those who fully support the notion of fiscal policy support Functional Finance  Those who don’t fully support fiscal policy back up either Annually Balanced Budgets or Cyclically Balanced Budgets Fiscal Policy Guidelines Cont’d

 1970s – 1980s: Functional Finance controlled fiscal policy (Canada)  After, attempts made to move toward Cyclically Balanced Budget  Resulted primarily from multiple past budget deficits Recent Fiscal Policy

 The budget balances for the federal, provincial and territorial governments combined are shown as percentages of Canada’s nominal GDP  Recessions in early 1990s caused an increase in combined budget deficits

 During the long economic expansion of the 1990s, these deficits gradually declined and turned to a combined surplus, only to return to a deficit in the aftermath of the recession

 It is difficult to return to the region of surpluses because Canadian Health Care costs, public pensions and benefits to the elderly keep increasing as more baby boomers retire  So far, fiscal policy has kept Canada’s debt in sustainable  If it becomes unsustainable, it will be very damaging 