The Major Challenges Of The Canadian Federal Government: The National Debt And, Trade / Economic Growth

TABLE OF CONTENT

TITLE PAGE

PROJECT INTRODUCTION 1 - 1

SECTION I: DEBT AND DEFICIT 2 - 3

Low Revenue / Taxes 3 - 4

Low revenue / Budget constraints 4 - 5

Government Expenditure 5 - 6

National debt and the public 6 - 7

Financing the debt 7 - 8

SECTION II: Trade / Economic Growth 9 - 9

Trade as a challenge 9 - 10

Canadian trade polices 10 - 12

Value of Canadian dollar / Exchange Rate 13 - 14

SECTION III: COMMENTARY 15 - 15

BIBLIOGRAPHY 16 - 16

PROJECT INTRODUCTION

From a macroeconomic perspective the government of Canada faces many economic challenges. These are evident as part of our economic history, our current economic situation and certainly our economic future. The following discussion will focus on what seems to be the two most important of these challenges: The National Debt, and Trade/Economic growth. These two topics will be presented as follows: defining what they are, explaining where they come from, and expressing how they affect the daily life of Canadians. For the national debt we’ll be talking about the low revenue / taxes, low revenue / budget constraints, government expenditure, financing the debt and, our national debt and the public. With reference to the trade / economics growth, we’ll mention how the international trade is related to our economics growth, showing trade as a challenge and giving examples of the Canadian trade polices. On the other hand the Canadian dollar and the exchange rate affecting our consumers, manufacturers and, international trade.

SECTION I: Debt and Deficit

The Canadian debt is the accumulation of deficits; the excess of expenditures over receipts is the government deficit. Some countries are extremely large debtors but Canada is not one of them. A useful measure of government indebtedness is the quantity of government debt outstanding divided by the GDP or the debt-GDP ratio. Since the mid-1970s, greater budget deficit caused the debt-GDP ratio to rise. By the mid-1990s, the combined federal-provincial debt-GDP ratio was at a postwar high. It peaked in 1996, and then began to decline.

The Canadian government has accumulated a large debt in the second half of the 20th century due to two main factors: low revenue, and constantly increasing government expenditure. More recent figures take into account the total budget of all levels of government, and paint a bleak picture of the ability of the current federal and provincial governments to pay it off.

Low Revenue / Taxes

The main revenue sources of the Canadian government are taxes. By taxes we mean induced taxes (those that vary as income varies) and, autonomous taxes (those that are independent of income). Over the years demands by the provencies for higher transfer payments from Ottawa to cover healthcare and education costs have strained the federal coffers. Many problems have forced the federal government to accept lower income revenue from major sectors of the economy such as the beef industry. As well, such related expenditures as national relief funds have increased due to such things as the SARS outbreak in Ontario, the fight against terror, and the current bird flew situation.

In certain industries there has been a decrease in available employment and this has translated into less overall income tax paid by the public. For example, the new bankrupt fisheries industry in New Finland has not only left a lot of people out of work, but has hampered their ability to give revenue to their governments, and in particular to Ottawa since it is the federal government that invested the most into maintaining that industry. One other idea that arises here is that even if those workers in such industries were retrained and switched careers, it is very possible that their new personal incomes would be lower than before and their purchasing power would decrease, pulling the desired consumption down. This means that if we put federal income tax aside for a moment, the government’s revenue from excise taxes (e.g. Luxury tax) and sales taxes (e.g. GST) would also drop.

The aforementioned leads us to conclude that at the end of the day not only does the federal government have lower revenues from their main sources but that one must look at the fact that this leads to budget constraints even if expenditures were to stay constant.

Low revenue / Budget constraints

Budget constraints are when governments do not have enough money to spend on their plans for the population. Spending on certain public projects, through transfer payments to the provinces, for such expenses as better access to healthcare, solid education, and infrastructure development has been a priority of the Liberals throughout their stay in power in Ottawa. These are some of the biggest items of expenditure for the government due to their immediate necessity. For the sake of argument provincial matters including a shortage of hospital beds for example, and increases in tuition for students, are two social constraints that the federal government keeps advising the provinces to alleviate with their transfer payments.

As years have gone by, taxes and tax reform have been either stabilized or put on the back burner. Because of public pressure and foreign investment programs created to attract outside economic development dollars. In other words, the increase in spending on various social and economic programs has outweighed the increase in revenues. Hence, budget constraint. That being said, government expenditures (including expenditure smoothing) are related issues that have kept the Canadian government in debt in recent times as well.

Government Expenditure

Considering the large expenses on the aforementioned and other programs the Canadian government , or any government