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Management and Organizational Studies
Management and Organizational Studies 2275A/B
Henry Meredith

Chapter 29 Fiscal Policy Government Budgets • The annual statement of the outlays and revenues of the government of Canada, together with the laws and regulations that approve and support those outlays and revenues, make up the federal budget. • A provincial budget is an annual statement of the revenues and outlays of a provincial government, together with the laws and regulations that approve or support those revenues and outlays. • Fiscal policy is the use of the federal budget to achieve macroeconomic objectives such as full employment, sustained long -term economic growth, and price level stability. • Federal government revenues in the 2008-09 budget were projected at $242 billion. • These revenues come from four sources: o Personal income taxes o Corporate income taxes o Indirect taxes o Investment income • Federal government outlays in the 2008-09 budget were projected at $240 billion. • Outlays are classified in three categories: o Transfer payments o Expenditures on goods and services o Debt interest • The government’s budget balance is equal to its revenues minus its outlays. • If revenues exceed outlays, the government has abudget surplus. • If outlays exceed revenues, the government has abudget deficit. • If revenues equal outlays, the government has a balanced budget. • The government borrows to finance its debt. • Government debt is the total amount of government borrowing. • It is the sum of past deficits minus the sum of past surpluses. Supply-Side Effects of Fiscal Policy • A decrease in taxes can affect incentives and can increase aggregate supply. Some examples: o A cut in the income tax increases the supply of labour o A cut in capital taxes increases investment and saving • An income tax on labour decreases the equilibrium quantity of labour, and an income tax on capital decreases the equilibrium quantity of capital. • With less labour and less capital, potential GDP decreases. • The graph on the right shows the Laffer curve. • The Laffer curve shows the relationship between the tax rate and the amount of tax revenue collected. • For tax rates below T*, an increase in the tax rate increases tax revenue. • At tax rate T*, rate revenue is maximized. • At tax rates above T*, an increase in the tax rate decreases tax revenue. Stabilizing the Business Cycle • Fiscal policy actions can be automatic or discretionary. • Automatic fiscal policy is a change in fiscal policy that is triggered by a change in the state of the economy. • Discretionary fiscal policy is a policy action that is init iated by a n a ct o
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