Learning Objectives: Fiscal Policy LO1: See why the federal government’s budget depends on the rate of taxation, the size of the GDP, and its own spending LO2: Explain the pros and cons of a budget policy aimed at achieving full-employment equilibrium LO3: Explain the pros and cons of a budget policy aimed at achieving a balanced budget in each fiscal year CHAPTER 7 7-1© 2012 McGraw-Hill Ryerson Limited

Fiscal Policy Government’s approach toward its own spending and taxation Minister of finance brings down annual budget in Parliament each spring Contains estimates of government’s revenues and expenditures 7-2© 2012 McGraw-Hill Ryerson Limited LO1 Fiscal Policy

Table 7.1 Federal Government Budget Year Ending March © 2012 McGraw-Hill Ryerson Limited LO1 REVENUES Personal income taxes103.9 Corporate and other income taxes36.0 E.I. premiums16.8 GST and excise and energy taxes40.6 Nontax revenues21.6 Total Revenues OUTLAYS Transfers to persons68.6 Spending grants to other levels of govt57.0 Public debt charges29.4 Direct program spending119.2 Total Outlays274.2 Projected Budget Plan Deficit55.6 Source: Data derived by authors from information found in Department of Finance; Annual Report to the Government Reproduced with the permission of the Minister of Public Works and Government Services, 2010.

Net Tax Revenue total tax revenue received by government less transfer payments Budget Balance the difference between net tax revenues and government spending 7-4© 2012 McGraw-Hill Ryerson Limited LO1 Fiscal Policy NTR = tax revenue  transfer payments Budget Balance = NTS - G

Budget Surplus net tax revenue in excess of government spending on goods and services Budget Deficit government spending on goods and services in excess of net tax revenues 7-5© 2012 McGraw-Hill Ryerson Limited LO1 Fiscal Policy

National Debt the sum of the federal government’s budget deficits less its surpluses Balanced Budget the equality of net tax revenues and government spending on goods and services 7-6© 2012 McGraw-Hill Ryerson Limited LO1 Fiscal Policy

Table 7.2 Net National Debt (current $ billion) 6-7© 2012 McGraw-Hill Ryerson Limited LO1 YearBudget SurplusBudget DeficitNet National Debt 1940— — — — — — — — — — — — — — — — — —− —− Department of Finance: Fiscal Reference tables October 2010.

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© 2012 McGraw-Hill Ryerson Limited7- 9 LO1

The government budget is affected by: the level of the GDP A change in the amount of government spending A change in the amount of government revenue (taxation) 7-10© 2012 McGraw-Hill Ryerson Limited LO1 Fiscal Policy

Self-Test 3 Suppose that government spending is an autonomous $50 and net tax revenues are as follows: Complete the table, and plot the corresponding budget line. © 2012 McGraw-Hill Ryerson Limited 7-11 LO1 Real GDP Net tax revenues Budget balance—————