CH. 11: GOVERNMENT EXPENDITURES & REVENUESCIE3MM. Nicholson

Reasons for Government Involvement in the Economy Public goods – good or service that

everyone benefits from regardless if they have paid for it or not (e.g. national defence)

Externalities – good or bad side effects of production (e.g. golf course vs. pollution)

Reasons for Government Involvement in the Economy Harmful and Beneficial Goods –

cigarettes vs. education Distribution – help make it a fairer world

by taking from the rich and giving to the poor

Economic Stability – stable prices and full employment

Growth in Government Spending Government spending has increased greatly

since the Great Depression of the 1930s Canadians have come to expect gov’ts to

take care of them to prevent another economic depression from ever occurring again

Canadians are a mostly urban people who are highly specialized & therefore not self-sufficient like their farming ancestors

Government Expenditures Municipal – local roads, sewers, police,

garbage disposal, libraries, schools Provincial – Fed Gov’t transfers money to

pay for goods & services such as health & education

frequent deficits have led to large provincial debt & interest payments (1/7th of exp.)

Government Expenditures Federal – massive growth from the late

70s to the mid 90s1. transfers to persons – Old Age Security, UI2. transfers to other levels of governments –

make things even3. subsidies – Natives, farmers, international

aid4. payments to crown corporations (e.g. CBC)

Government Expenditures5. defence – Cold War over so declining6. government operations – judicial,

government departments7. other – veterans allowances8. public debt charges – by the mid 90s

the largest government expenditure

Government Revenues Taxes are the key source of government

revenue and come in many different forms

direct – e.g. HST consumers can see indirect – e.g. excise tax is hidden in the

price of gas progressive – higher % for higher income proportional – same % regressive – lower income pays %

Government Revenues Municipal – property taxes contribute

90% Provincial – direct taxes (33%), indirect

taxes (25%), federal transfers (20%) Federal – income tax, corporate income

tax, UI, GST, excise (luxury/sin) tax, duties, government investment

Controlling Federal & Provincial Debts & Deficits Growth of the Federal Public Debt – 1966

($27.4 billion) 1995 ($546 billion) Present Debt / Debt Clock

Effects of the Federal Public Debt1. redistribution of income2. debt held by foreigners3. cost of collecting tax4. danger of the debt feeding on itself

Controlling Federal & Provincial Debts & Deficits Effects of the Federal Public Debt

(cont’d)5. crowding out investment6. burden of future taxpayers7. restrictions on government

spending and taxing policy

Controlling Federal & Provincial Debts & Deficits Curbing the Federal Debt and Deficit1. cut federal government expenditures –

politically unpopular2. increase revenues – more taxes (e.g.

GST)3. rely on economic growth and rising

incomes Provincial Debts and Deficits – peaked in

1993

Government & the Circular Flow Gov’t intervenes in the market system

because households & businesses sometimes have extremes in their relationship causing instability (e.g. unemployment, inflation)

Government & the Circular Flow

Government Regulation of Business Prevent reduction in competition Regulate prices and production – Rogers

Cable, electricity, eggs, milk Health, safety and the environment –

building codes, restaurants Crown Corporations - CBC