Lecture Eight: Fiscal Policy
March 13, 2012
Background to Fiscal Policy
In 2007, the federal government spent 15 cents of each dollar Canadians earned, and
collected 16 cents of each dollar earned in taxes.
Therefore, the government had planned a surplus of 1 cent on every dollar earned
-How does this planned surplus affect the economy?
For many years, the federal government had a large deficit and ran up debt
-What are the effects of an ongoing government deficit and accumulating debt?
The federal budget is the annual statement of the federal government’s outlays and tax
The federal budget has two purposes:
1. To finance the activities of the federal government
2. To achieve macroeconomic objectives
Fiscal policy is the use of the federal budget to achieve macroeconomic objectives
such as full employment, sustained economic growth, and price level stability.
The federal government and Parliament make fiscal policy
-After a long and drawn out process of consultations, the Minister of Finance presents a
budget plan to Parliament
-Parliament then debates the plan and enacts the laws that are necessary to implement
Highlights of the 2008 Budget
-The projected fiscal 2008 federal budget has revenues of $242 billion
-Outlays of $240 billion
-A projected deficit of $2 billion
Revenues come from personal income taxes, corporate income taxes, indirect taxes,
and investment income.
-Personal income taxes are the largest revenue source
Outlays are transfer payments, expenditure on goods and services, and debt interest
-Transfer payments are the largest item of outlays
The federal government’s budget balance equals revenue minus outlays.
If revenue exceeds outlays, the government has a budget surplus
If outlays exceed revenues, the government has a budget deficit
If revenue equals outlays, the government has a balances budget.
The Budget in History
As outlays grew and revenues fell, the government deficit increased and peaked at 6.6%
of GDP in 1985.
During the 1990s, spending cuts eliminated the budget deficit.
-In 1997, a budget surplus emerged
Deficit and Debt
Government debt is the total amount that the government is borrowing
-It is the sum of past deficits minus past surpluses