CHAPTER 7
Fiscal Policy
Learning Objectives:
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
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LO1
Fiscal Policy
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
Table 7.1
Federal Government Budget Year Ending March 2010
REVENUES
Personal income taxes
Corporate and other income taxes
E.I. premiums
GST and excise and energy taxes
Nontax revenues
Total Revenues
OUTLAYS
Transfers to persons
Spending grants to other levels of govt
Public debt charges
Direct program spending
Total Outlays
Projected Budget Plan Deficit
103.9
36.0
16.8
40.6
21.6
218.6
68.6
57.0
29.4
119.2
274.2
55.6
Source: 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.
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LO1
Fiscal Policy
Net Tax Revenue
• total tax revenue received by government less
transfer payments
NTR = tax revenue  transfer payments
Budget Balance
• the difference between net tax revenues and
government spending
Budget Balance = NTS - G
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LO1
Fiscal Policy
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
Table 7.2
Net National Debt (current $ billion)
Year
1940
1963
1973
1983
1993
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Budget Surplus
—
—
—
—
—
—
3.0
5.8
14.3
19.9
8.0
6.6
9.1
1.5
13.2
13.8
9.6
—
—
Budget Deficit
0.1
0.8
1.9
29.0
39.0
8.7
—
—
—
—
—
—
—
—
—
—
—
−5.8
−55.6
Net National Debt
3.3
15.7
24.0
136.7
449.0
562.9
559.9
554.1
539.9
520.0
511.9
505.3
496.2
494.7
481.5
467.3
457.6
463.7
519.1
Department of Finance: Fiscal Reference tables October 2010.
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LO1
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LO1
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LO1
Fiscal Policy
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
Self-Test 3
Suppose that government spending is an autonomous
$50 and net tax revenues are as follows:
Real GDP
0
40
80
120
160
Net tax revenues
20
30
40
50
60
Budget balance
—
—
—
—
—
Complete the table, and plot the corresponding
budget line.
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