The government generally spends more than it gets in revenue When expenditures > revenue: budget deficit

If, however, expenditures = revenue, government is running a balanced budget

If a government’s revenues > expenditures: budget surplus

Depending on the size of the budget surplus or budget deficit, we can tell which type of discretionary fiscal policy is in place

11.3 Impact of Fiscal Policy

NOTE! Deficits is not the same as debt – a country’s debt is the sum of all its

deficits

Since federal surpluses and deficits have not balanced each other out in the long run, this greatly impacts Canada’s public debt

Impact on Public Debt

Annually Balanced Budgets Critics of Fiscal Policy state that it should be balanced

annually If government needs to spend this year, it should

increase taxes Opponents state that society doesn’t act like a single

household – to balance its budget in 1 year The business cycle spans several

years One year, there may be a recession,

which is followed by inflation the next year

Fiscal Policy Guidelines

Cyclically Balanced Budgets This type of budget has more supporters Government revenues and expenditures don’t need to

be balanced every year, but should balance over 1 business cycle

Deficits from periods of contraction should roughly equal the surpluses from period of expansion

Fiscal Policy Guidelines Cont’d

Functional Finance View that policy-makers should just correct

fluctuations caused by the business cycle Government should just base a year’s fiscal policy on

the present yearly needs of the economy

Essentially, those who fully support the notion of fiscal policy support Functional Finance

Those who don’t fully support fiscal policy back up either Annually Balanced Budgets or Cyclically Balanced Budgets

Fiscal Policy Guidelines Cont’d

1970s – 1980s: Functional Finance controlled fiscal policy (Canada)

After, attempts made to move toward Cyclically Balanced Budget Resulted primarily from multiple past budget deficits

Recent Fiscal Policy

The budget balances for the federal, provincial and territorial governments combined are shown as percentages of Canada’s nominal GDP

Recessions in early 1990s caused an increase in combined budget deficits

During the long economic expansion of the 1990s, these deficits gradually declined and turned to a combined surplus, only to return to a deficit in the aftermath of the 2008-2009 recession

It is difficult to return to the region of surpluses because Canadian Health Care costs, public pensions and benefits to the elderly keep increasing as more baby boomers retire

So far, fiscal policy has kept Canada’s debt in sustainable If it becomes unsustainable, it will be very damaging https://www.youtube.com/watch?v=rkqxQ3qZg90