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MGSC05H3 Study Guide - Final Guide: Tax Expenditure, Mortgage Insurance, Sea Monster

Management (MGS)
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3) Describing Leviathan: A Governing-Instruments Approach
Leviathan: a sea monster embodying evil
Applied to the sovereign state in 1651
Today, used to criticize government and political processes
(dangers of expanding public sector)
business’ prefer more conservative, right wing governments
promise expenditure cuts, privatization of crown corporations,
openness to suggestions by individual executives and trade
only lasts in the short run (like the honeymoon phase of a marriage)
businesses are unable to contribute broader decisions regarding
growth and effectiveness of government and economic nationalism
government influence in the private sector is grossly understated through
conventional means of measuring economic activity
total government spending, G, is significant portion of GNP (more than in
the US, but less than in Western Europe)
ratio of G to GNP continues to increase dramatically
exhaustive expenditures: expenditures that use up goods and services
that would otherwise be available for private sector activities
transfers: unreciprocated payments to individuals, firms, or other levels of
government that alter the distribution of money income but are not
included in GNP
transfer to individuals
interest on the public debt
subsidies and capital assistance
transfers to other levels of government (cancels out when
measuring GNP)
expenditures by level of government
result in significant changes in fiscal role of different levels of
method A: calculated by subtracting them from the paying
government and adding them to the expenditures of the receiving
method B: including transfers at the level of government making
dramatic increase in provincial share of total government
tax expenditures: potential revenues the government chooses not to
i.e. any form of incentive or relief granted via the tax system
“giving by not taking”
Cost of tax measures to the federal government
income tax expenditures
Governemnt is “paying a subsidy” when it grants tax concession or
Many tax expenditures reduce provincial taxes payable for personal
income tax
Tax expenditures increase as a percentage of income in each
income group
Economic regulation: the imposition of rules by a government, back by
the use of penalties, that are intended specifically to modify the economic
behaviour of individuals and firms in the private sector
Typical areas: prices/supply/rate of return/disclosure of
information/methods of production/attributes of a product of
services/conditions of service
Economic/direct regulation vs. new/social regulation
Direct regulation is industry specific – affects price, output,
rate of return, entry/exit
Social regulation covers broad range of industries – affects
environmental regulations, consumer protection legislation,
“fairness” regulations, health&safety regulations, cultural
Scope and coverage of regulation is consistently greater in Canada vs. the
US in almost every industry
Subject to same type of controls in Canada and the US
Expenditures associated with regulation is “tip of the iceberg”
(economic impact can be many times greater)
Considerable larger regulatory effort in Canada (great number of
Growth of regulation indicated by: pages of regulations/number of
programs/important legislative initiatives/public expenditures
Federal and provincial regulation growing at similar rate
Concern with growth of regulation directed at social/environmental
legislation (however, often more justifiable if properly drawn up b/c
more beneficial to society than economic regulation)
Businesses feel government regulation that requires firm to take
social costs into account, impose undesirable burden in decision
However, external costs of private actions need to be accounted for
“road to bad policy is often paved with good intentions”
Internalizing external costs can lead to inefficiency (need to weigh
benefits with costs when making decisions to avoid inefficiencies)
Some argue economic regulation is directly and explicitly intended
to be economically inefficient to reduce national welfare in favour of
designated select group of beneficiaries
So little is known about crown corporations’ activities
Like an enormous iceberg floating lazily in the foggy north Atlantic;
silent, majestic, awesome (?)
Federal crown corporations employ more Canadians than federal
Provincial crown corporations’ assets substantially larger than total assets
of federal and provincial governments
Government ranks 2nd to the chartered banks among Canada’s financial
Financial assistance concentrated in four sectors:
Provinces are more active in agriculture/natural resources/housing
Account for large portion of long terms loans in agriculture
Major lender and only supplier of credit insurance through Export
Development Corporation
6th largest supplier of residential mortgages and mortgage
4th largest institution in financing business
Not easy to measure the size of subsidies inherent in federal and
provincial loans
Use financial costs difference between lending rate and
government’s borrowing rate?
Add governments’ cost of administering loan programs?
Measure cash cost, or social opportunity cost?
“bailing out” private enterprises through loans and guarantees
Rise in government holdings of equity in private sector firms
Crown corporations can be created from scratch or created by
“nationalizing” existing firms
Obtain legal or real control using stock exchange
Various reasons: business investment/regional development/imperfect
capital markets/control of a key sector/national development/bailout
“the equity route” is not always the best instrument for government
Creates opportunity to either benefit or hurt the private
Effects are immediately apparent b/c stock market will capitalize on
changes in expectations induced by governments’ actions
Cost of adverse changes in government policy are concentrated