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

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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

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LO1

Fiscal Policy

Table 7.1

Federal Government Budget Year Ending March 2010

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LO1

REVENUES Personal income taxes 103.9Corporate and other income taxes 36.0E.I. premiums 16.8GST and excise and energy taxes 40.6Nontax revenues 21.6Total Revenues 218.6OUTLAYS Transfers to persons 68.6Spending grants to other levels of govt 57.0Public debt charges 29.4Direct program spending 119.2Total Outlays 274.2Projected Budget Plan Deficit 55.6Source: Data derived by authors from information found in Department of Finance; Annual Report to the Government 2009-2010. 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

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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

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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

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LO1

Fiscal Policy

Table 7.2

Net National Debt (current $ billion)

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LO1

Year Budget Surplus Budget Deficit Net National Debt

1940 — 0.1 3.3 1963 — 0.8 15.7 1973 — 1.9 24.0 1983 — 29.0 136.7 1993 — 39.0 449.0 1997 — 8.7 562.9 1998 3.0 — 559.9 1999 5.8 — 554.1 2000 14.3 — 539.9 2001 19.9 — 520.0 2002 8.0 — 511.9 2003 6.6 — 505.3 2004 9.1 — 496.2 2005 1.5 — 494.7 2006 13.2 — 481.5 2007 13.8 — 467.3 2008 9.6 — 457.62009 — −5.8 463.72010 — −55.6 519.1

Department of Finance: Fiscal Reference tables October 2010.

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LO1

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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)

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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.

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LO1

Real GDP 0 40 80 120 160

Net tax revenues 20 30 40 50 60

Budget balance — — — — —