Leong-Melethil | 1
Expanding the Real Economy for a Global Competitive Edge
Melethil, Ammaar. Leong, Yiq Zhenn. Calgary, AB. 14 June 2022. 548 words.
A democratic approach to government which cycles every four years insinuates the incentive
for each party in power to secure re-election, neglecting the long-term implications of fiscal
policies that result in huge government debt. China grew rapidly because CCP adopted the
Five-Year Plan without any political interference. We are not suggesting to turn Canada into a
communist state, but to reckon with the likely repercussion of a growing government debt, as
cautioned by Ray Dalio1.
The Canadian government ran a historic deficit of C$381.6bn2 in 2021, which downgraded our
fitch rating3. Debt grew about 2.08% in March 2022, amounting to 1.14 trillion 4, which is 43.89%
of GDP 5 . Therefore, in our economic model of medium-run equilibrium, the government
should strengthen its financial position and expand the real economy.
Our evaluation of the progressive approach has enumerated a reduction in consumption,
investment, net exports, and savings while increasing the government budget deficit, contrary
to the premise we are proposing. High taxes and government spending also lead to a Barro
Misery Index (BMI) of about 2.5 percentage points higher than equilibrium. On the other hand,
conservatives would vow for low taxes and government spending. Though the numbers are
promising, an increased laissez-faire approach would be detrimental to subsidized sectors.
Moreover, the increase in the wealth gap due to reduced progressive tax rate pegged by the
philosophy of trickle-down economics would rupture social stability 6.
We are proposing to reduce the tax rate to 18% to provide lower-income earners with more
disposable income and expand the economy from bottom-up7. The progressiveness of the tax
bracket will be set at 1.01 to reduce the wealthiest’s spending on luxury items and channel the
money into investments. We advise reducing the government budget deficit to 0% of GDP,
allowing the government to manage its debt.
With this fiscal policy approach, our benchmark BMI will result in a 2.5% decrease, indicating
a stronger economy. Consumption will increase by 0.2% in the short-run and the growth of the
real economy is stimulated through higher investment, a gateway for Canada to become less
reliant on commodities. The potential trade-offs of this policy in the short-run are reduced GDP
by 1.7%, inflation running below the target rate by 0.43%, and an increased unemployment
rate to 10.86%. Yet, in response to the increased exchange rate, Canada will be positioned to
increase net exports.
1
Ray Dalio, Principles for Dealing with the Changing World Order (New York: Avid Reader Press, 2021).
“Canada Unveils Largest Economic Relief Package since WW2,” BBC News, December 1, 2020, sec. US & Canada,
https://www.bbc.com/news/world-us-canada-55139229.
3
Fitchratings.com, 2014, https://www.fitchratings.com/entity/canada-80442192#ratings.
4
“Central Government Debt (X 1,000,000),” Statcan.gc.ca, 2020, https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1010000201.
5
Statistics Canada Government Of Canada, “Gross Domestic Product by Income Account – Seasonally Adjusted at Annual Rates,”
www150.statcan.gc.ca, March 1, 2022, https://www150.statcan.gc.ca/n1/daily-quotidien/220301/t001a-eng.htm.
6
Ray Dalio, “Why and How Capitalism Needs to Be Reformed,” The Harvard Law School Forum on Corporate Governance, October 13,
2020, https://corpgov.law.harvard.edu/2020/10/13/why-and-how-capitalism-needs-to-be-reformed/.
7
Bob Simison, “How Sending Stimulus Checks to the Poor Can Boost the US Economy,” The University of Chicago Booth School of
Business, accessed June 13, 2022, https://www.chicagobooth.edu/review/how-sending-stimulus-checks-poor-can-boost-us-economy.
2
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Leong-Melethil | 2
The increase in exports, savings and investments will reduce the leverage foreign powers have
on us, thus strengthening Canadian national security in wake of the end of globalization 8.
In the response to deflation, the Bank of Canada will reduce the policy rate by 2% in the
medium-run to bring the economy back to equilibrium. In anticipation of the zero lower bound,
a 3% leeway is at Bank of Canada’s discretion in response to crises in the future.
All economic metrics in the medium-run still point towards a positive economic outcome.
While there are some drawbacks in the immediate term that are directly felt by the working
class, the economic shock of fiscal consolidation is still manageable. With good public
communication, consumer and business confidence will increase, helping to absorb the impact
on unemployment and inflation rate. Hence, fiscal consolidation cum monetary expansion will
make the Canadian economy stronger in the medium-run.
Larry Fink, “Larry Fink’s Letter to CEOs | BlackRock,” BlackRock, 2021, https://www.blackrock.com/corporate/investor-relations/larryfink-ceo-letter.
8
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Appendix
Ray Dalio’s Country Power Score for Canada
ECON 303 Spring 2022 Project Report
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Table 1.1 Comparative Statics for Progressive Approach
Equilibrium t1
t2
x
epsilon
e1
0.2
1 0.02
0
e2
0.22 1.01 0.03
0
e3
0.22 1.01 0.03 0.0225
Metrics
e1
Consumption
Tax Revenue
Investment
Government Expenditure
Income
Interest Rate
Net Exports
Exchange Rate
Inflation
Unemployment Rate
Barro Misery Index
Investment Relative to Income
Government Budget
Trade Deficit
Change in Consumption
Saving - Investment
ECON 303 Spring 2022 Project Report
e2
1110
400
450
440
2000
0.05
0
1.3
0.02
0.1
0.17
0.225
-40
0
0
0
e3
1069.57
484.41
442.08
545.62
2040.29
0.0675
-16.98
1.2777
0.025
0.09
0.2026
0.2167
-61.2087
-16.9771
-0.0364
-57.4094
1047.36
475.22
431.6
535.28
2001.98
0.0734
-12.27
1.2703
0.0202
0.0995
0.1941
0.2156
-60.0594
-12.2686
-0.0564
-74.9068
Leong-Melethil | 5
Table 1.2 Comparative Statics for Conservative Approach
Equilibrium t1
t2
x
epsilon
e1
0.2
1 0.02
0
e2
0.18 0.99 0.01
0
e3
0.18 0.99 0.01 -0.0225
Metrics
e1
Consumption
Tax Revenue
Investment
Government Expenditure
Income
Interest Rate
Net Exports
Exchange Rate
Inflation
Unemployment Rate
Barro Misery Index
Investment Relative to Income
Government Budget
Trade Deficit
Change in Consumption
Saving - Investment
ECON 303 Spring 2022 Project Report
e2
1110
400
450
440
2000
0.05
0
1.3
0.02
0.1
0.17
0.225
-40
0
0
0
e3
1144.57
327.8
457.2
347.44
1964.57
0.0344
15.35
1.3207
0.0155
0.1089
0.1411
0.2327
-19.6457
15.3498
0.0311
49.9235
1167.97
333.83
467.78
353.84
2001.09
0.028
11.49
1.3293
0.0201
0.0997
0.1484
0.2338
-20.0109
11.492
0.0522
69.4661
Leong-Melethil | 6
Table 1.3 Comparative Statics for Proposed Approach
Equilibrium t1
t2
x
epsilon
e1
0.2
1 0.02
0
e2
0.18 1.01
0
0
e3
0.18 1.01
0
-0.02
Metrics
e1
Consumption
Tax Revenue
Investment
Government Expenditure
Income
Interest Rate
Net Exports
Exchange Rate
Inflation
Unemployment Rate
Barro Misery Index
Investment Relative to Income
Government Budget
Trade Deficit
Change in Consumption
Saving - Investment
ECON 303 Spring 2022 Project Report
e2
1110
400
450
440
2000
0.05
0
1.3
0.02
0.1
0.17
0.225
-40
0
0
0
e3
1112.54
381.75
456.91
381.75
1965.95
0.035
14.74
1.3198
0.0157
0.1086
0.1422
0.2324
0
14.7437
0.0023
17.2825
1132.74
388.13
466.31
388.13
1998.46
0.0293
11.29
1.3274
0.0198
0.1004
0.1487
0.2333
0
11.2854
0.0205
34.0239
Leong-Melethil | 7
Graphs
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Experiments
------------------------------------------------------------------------------Following are the results of the simulation that ended on 06/10/2022,
16:51:20
*** Endogenous Variables ***
01 Consumption:
1110.00
02 Tax Revenue:
400.00
03 Investment:
450.00
04 Government Exp.:
440.00
05 Income:
2000.00
06 Interest Rate:
0.0500
07 Net Exports:
-0.00
08 Exchange Rate:
1.30
09 Inflation:
0.0200
10 Unemployment Rate: 0.1000
*** Parameters ***
01 t1:
02 t2:
02 x:
0.20
1.00
0.02
*** Benchmarks ***
01 Barro Misery Index:
0.1700
02 Investment Relative to Income: 0.2250
03 Government Budget:
-40.0000
04 Trade Deficit:
-0.0000
05 Change in Consumption:
0.0000
06 Saving - Investment:
-0.0000
------------------------------------------------------------------------------Following are the results of the simulation that ended on 06/10/2022,
16:51:29
*** Endogenous Variables ***
01 Consumption:
1069.57
02 Tax Revenue:
484.41
03 Investment:
442.08
04 Government Exp.:
545.62
05 Income:
2040.29
06 Interest Rate:
0.0675
07 Net Exports:
-16.98
08 Exchange Rate:
1.28
09 Inflation:
0.0250
10 Unemployment Rate: 0.0900
*** Parameters ***
01 t1:
02 t2:
02 x:
0.22
1.01
0.03
*** Benchmarks ***
01 Barro Misery Index:
0.2026
02 Investment Relative to Income: 0.2167
03 Government Budget:
-61.2087
04 Trade Deficit:
-16.9771
05 Change in Consumption:
-0.0364
06 Saving - Investment:
-57.4094
-------------------------------------------------------------------------------
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Following are the results of the simulation that ended on 06/10/2022,
16:52:07
*** Endogenous Variables ***
01 Consumption:
1044.91
02 Tax Revenue:
474.21
03 Investment:
430.45
04 Government Exp.:
534.14
05 Income:
1997.76
06 Interest Rate:
0.0740
07 Net Exports:
-11.75
08 Exchange Rate:
1.27
09 Inflation:
0.0197
10 Unemployment Rate: 0.1006
*** Parameters ***
01 t1:
02 t2:
02 x:
0.22
1.01
0.03
*** Benchmarks ***
01 Barro Misery Index:
0.1932
02 Investment Relative to Income: 0.2155
03 Government Budget:
-59.9327
04 Trade Deficit:
-11.7481
05 Change in Consumption:
-0.0586
06 Saving - Investment:
-76.8344
------------------------------------------------------------------------------Following are the results of the simulation that ended on 06/10/2022,
16:52:33
*** Endogenous Variables ***
01 Consumption:
1042.47
02 Tax Revenue:
473.20
03 Investment:
429.30
04 Government Exp.:
533.01
05 Income:
1993.54
06 Interest Rate:
0.0747
07 Net Exports:
-11.23
08 Exchange Rate:
1.27
09 Inflation:
0.0192
10 Unemployment Rate: 0.1016
*** Parameters ***
01 t1:
02 t2:
02 x:
0.22
1.01
0.03
*** Benchmarks ***
01 Barro Misery Index:
0.1922
02 Investment Relative to Income: 0.2153
03 Government Budget:
-59.8063
04 Trade Deficit:
-11.2281
05 Change in Consumption:
-0.0608
06 Saving - Investment:
-78.7587
------------------------------------------------------------------------------Following are the results of the simulation that ended on 06/10/2022,
16:52:40
*** Endogenous Variables ***
01 Consumption:
1047.36
02 Tax Revenue:
475.22
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03
04
05
06
07
08
09
10
Investment:
431.60
Government Exp.:
535.28
Income:
2001.98
Interest Rate:
0.0734
Net Exports:
-12.27
Exchange Rate:
1.27
Inflation:
0.0202
Unemployment Rate: 0.0995
*** Parameters ***
01 t1:
02 t2:
02 x:
0.22
1.01
0.03
*** Benchmarks ***
01 Barro Misery Index:
0.1941
02 Investment Relative to Income: 0.2156
03 Government Budget:
-60.0594
04 Trade Deficit:
-12.2686
05 Change in Consumption:
-0.0564
06 Saving - Investment:
-74.9068
------------------------------------------------------------------------------Following are the results of the simulation that ended on 06/10/2022,
16:53:35
*** Endogenous Variables ***
01 Consumption:
1144.57
02 Tax Revenue:
327.80
03 Investment:
457.20
04 Government Exp.:
347.44
05 Income:
1964.57
06 Interest Rate:
0.0344
07 Net Exports:
15.35
08 Exchange Rate:
1.32
09 Inflation:
0.0155
10 Unemployment Rate: 0.1089
*** Parameters ***
01 t1:
02 t2:
02 x:
0.18
0.99
0.01
*** Benchmarks ***
01 Barro Misery Index:
0.1411
02 Investment Relative to Income: 0.2327
03 Government Budget:
-19.6457
04 Trade Deficit:
15.3498
05 Change in Consumption:
0.0311
06 Saving - Investment:
49.9235
------------------------------------------------------------------------------Following are the results of the simulation that ended on 06/10/2022,
16:54:07
*** Endogenous Variables ***
01 Consumption:
1167.97
02 Tax Revenue:
333.83
03 Investment:
467.78
04 Government Exp.:
353.84
05 Income:
2001.09
06 Interest Rate:
0.0280
07 Net Exports:
11.49
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08 Exchange Rate:
1.33
09 Inflation:
0.0201
10 Unemployment Rate: 0.0997
*** Parameters ***
01 t1:
02 t2:
02 x:
0.18
0.99
0.01
*** Benchmarks ***
01 Barro Misery Index:
0.1484
02 Investment Relative to Income: 0.2338
03 Government Budget:
-20.0109
04 Trade Deficit:
11.4920
05 Change in Consumption:
0.0522
06 Saving - Investment:
69.4661
------------------------------------------------------------------------------Following are the results of the simulation that ended on 06/10/2022,
16:54:33
*** Endogenous Variables ***
01 Consumption:
1132.74
02 Tax Revenue:
388.13
03 Investment:
466.31
04 Government Exp.:
388.13
05 Income:
1998.46
06 Interest Rate:
0.0293
07 Net Exports:
11.29
08 Exchange Rate:
1.33
09 Inflation:
0.0198
10 Unemployment Rate: 0.1004
*** Parameters ***
01 t1:
02 t2:
02 x:
0.18
1.01
0.00
*** Benchmarks ***
01 Barro Misery Index:
02 Investment Relative to Income:
03 Government Budget:
04 Trade Deficit:
05 Change in Consumption:
06 Saving - Investment:
ECON 303 Spring 2022 Project Report
0.1487
0.2333
0.0000
11.2854
0.0205
34.0239