Fiscal Policy Canada

According to Keynesian methodology, there are two powerful tools the government and The Bank of Canada can employ to direct the economy in a positive direction: fiscal and monetary policy. Both policies, when used correctly, can be employed to stimulate the economy during times of recession or slow down the economy during times of inflation. The effectiveness of government intervention in the economy in the long and short run through fiscal and monetary policy has been the subject of controversy among many economists. Fiscal policy is concerned with adjusting government spending levels and tax rates in order to influence the Canadian economy in such a way that it stimulates or slows down economic growth. Monetary policy is governed by the Central
According to the majority ruling Federal Liberal party, one of their election platform fiscal plans is to increase the marginal tax rate on Canada’s top one percent so that taxes can be cut for the middle class (The Liberal Fiscal Plan and Costing, 2015). There are both pros and cons to this approach. The pros are that with reduced taxes, the middle class sector will have more disposable income. However, the middle class individuals have a tendency to either save money or increase their debt load. With an increase in debt load, an individual is spending more money than they have. The banks are then loaning more money, increasing their chances of default. Canada’s top one percent typically do not have debt load, they have investments and savings, and all of their disposable income is injected back into the economy through the purchase of goods and services. An increase in spending increases the production of goods, and decreases unemployment, as more people have to be employed to meet the increase in demand. The drawback of taxing Canada’s one percent is that these individuals will be less inclined to inject money back into the economy, as the government is taxing more of their income. Increasing taxes on Canada’s one percent will be beneficial to the economy. The government will still receive revenue, which they can then spend on education, research and
Although the budget is currently in a slight surplus, the government should increase spending, in conjunction with the increase in taxes on Canada’s one percent. Attempting to balance the federal budget after getting out of a time of crisis will potentially push the economy back into a recessive state. With an increase in interest rates in an attempt to encourage savings from the middle class sector, there will be an increase in supply of loanable funds and a decrease in demand of loanable funds as not as many people will be able to afford the higher interest rates. This discourages firms and households from investing in infrastructure or capital equipment. However, with an increase in supply of loanable funds, the government can borrow the surplus of loanable funds in order to decrease their debt, without crowding out individuals who are interested in investing. Without investment, it is very difficult for the economy to experience growth, as they will be less productive without technological and machinery advancements. Therefore, to encourage investment, the government can offer investment tax incentives to firms and households who are looking to invest in infrastructure and/or capital equipment in order to increase efficiency, and thus