Chapter 11 Chapter 11 Government Expenditures Government Expenditures

and Revenueand Revenue

Economics 11 Economics 11

June 2013June 2013

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Governments influence the economy in Governments influence the economy in four major ways: four major ways:

By spending By spending By taxing By taxing By regulating By regulating And by directing Crown CorporationsAnd by directing Crown Corporations

By spending By spending

When government increases its spending When government increases its spending on schools and hospitals, then more on schools and hospitals, then more schools and hospitals are builtschools and hospitals are built

By taxing By taxing

Through taxation, government raises the Through taxation, government raises the money it needs to function money it needs to function

Governments may also use taxes to Governments may also use taxes to discourage the consumption of certain discourage the consumption of certain goods or services goods or services

as a result, the prices of these as a result, the prices of these goods and services will increase and less goods and services will increase and less will be consumed. will be consumed.

By regulating By regulating

Government regulations influence the Government regulations influence the economy through laws. economy through laws.

For example, the law that requires all For example, the law that requires all young Canadians to go to school means young Canadians to go to school means that schools must be built, teachers must that schools must be built, teachers must be paid and teaching resources provided. be paid and teaching resources provided.

By directing Crown corporationsBy directing Crown corporations

For example the CBC (Canadian For example the CBC (Canadian Broadcasting Corporation) has a policy of Broadcasting Corporation) has a policy of favouring Canadian contentfavouring Canadian content

This results in more Canadian performers This results in more Canadian performers and technicians finding workand technicians finding work

Reasons for Government Reasons for Government Involvement in the EconomyInvolvement in the Economy

1. Public Goods1. Public Goods

2. Externalities 2. Externalities

3. Harmful and Beneficial Goods3. Harmful and Beneficial Goods

4. Distribution 4. Distribution

5. Economic Stability5. Economic Stability

1. Public Goods1. Public Goods A public good is a good where the benefits go to A public good is a good where the benefits go to

the public and not to the individual who the public and not to the individual who purchases it. purchases it.

Public goods are provided by the government.Public goods are provided by the government.

An example of a public good is National An example of a public good is National Defence. Defence.

Government can make sure that the general Government can make sure that the general public pays for the production of these goods. public pays for the production of these goods.

2. Externalities2. Externalities

An externality is a good or bad side effect An externality is a good or bad side effect of production or consumption. of production or consumption.

For example, an externality is produced For example, an externality is produced when a factory pollutes the air or water, when a factory pollutes the air or water, this is obviously a negative externality. this is obviously a negative externality.

2. Externalities2. Externalities

Another example is if owners of a golf club Another example is if owners of a golf club decide not to sell their land to developers. decide not to sell their land to developers.

A positive externality of this decision is A positive externality of this decision is that people around the club will breathe that people around the club will breathe cleaner air and enjoy a more beautiful cleaner air and enjoy a more beautiful view than if the land were developed. view than if the land were developed.

3. Harmful and beneficial goods3. Harmful and beneficial goods

Harmful goods include such products as Harmful goods include such products as addictive drugs – cocaine, heroine, addictive drugs – cocaine, heroine, cigarettescigarettes

Government reaction to such products Government reaction to such products may include outright prohibition (cocaine) may include outright prohibition (cocaine) or warnings about the dangers of using it or warnings about the dangers of using it (cigarettes)(cigarettes)

3. Harmful and beneficial goods3. Harmful and beneficial goods

A beneficial good is education, A beneficial good is education, governments provide free education in governments provide free education in elementary and secondary schools and elementary and secondary schools and cover some of the cost of post-secondary cover some of the cost of post-secondary education. education.

4. Distribution 4. Distribution

The market distribution of goods and The market distribution of goods and services does not always agree with our services does not always agree with our view of economic justice. view of economic justice.

Therefore government is involved in the Therefore government is involved in the distribution of goods and services to the distribution of goods and services to the economically disadvantaged. economically disadvantaged.

5. Economic Stability5. Economic Stability

Government works to promote stable Government works to promote stable prices and full employment. prices and full employment.

Growth in Government Spending Growth in Government Spending

FederalFederal government: government: Defence, international trade and foreign Defence, international trade and foreign

affairs that affect the nation as a wholeaffairs that affect the nation as a whole

Provincial/municipalProvincial/municipal government: government: Police, fire protection, schools, roads, Police, fire protection, schools, roads,

education (affairs that affect the individual education (affairs that affect the individual citizen more directly) citizen more directly)

Municipal Government Municipal Government ExpendituresExpenditures

Building and Building and maintenance of local maintenance of local roads, sewers, roads, sewers, sidewalks, sidewalks, streetlights, and the streetlights, and the services of the local services of the local police, garbage police, garbage collection, and fire collection, and fire departmentsdepartments

Provincial Government Provincial Government ExpendituresExpenditures

Interest payments on Interest payments on the provincial debtthe provincial debt

Salaries for Salaries for government government employeesemployees

educationeducation

Federal Government ExpendituresFederal Government Expenditures

National defenceNational defence International trade and International trade and

commercecommerce Foreign relationsForeign relations Construction of railwaysConstruction of railways Federal court systemFederal court system Highway constructionHighway construction Income security programsIncome security programs Retirement and disability Retirement and disability

programsprograms

Government Revenues - taxesGovernment Revenues - taxes

taxestaxes – obligatory payments made by – obligatory payments made by individuals and corporations to individuals and corporations to governmentgovernment

direct taxdirect tax – one that is levied on a person – one that is levied on a person that cannot pass the tax along to someone that cannot pass the tax along to someone elseelse

• Provincial Sales Tax (PST) is an example of a Provincial Sales Tax (PST) is an example of a direct taxdirect tax

Government Revenues - taxesGovernment Revenues - taxes

indirect taxindirect tax – a tax that can be passed on – a tax that can be passed on to other peopleto other people

For exampleFor example: anyone who imports Japanese cars into : anyone who imports Japanese cars into Canada for sale to Canadians has to pay the federal Canada for sale to Canadians has to pay the federal import tax. import tax.

The import tax is an indirect tax that can simply be added to The import tax is an indirect tax that can simply be added to the final cost of the car so that the consumer, not the the final cost of the car so that the consumer, not the importer, ultimately pays the tax. importer, ultimately pays the tax.

Government Revenues - taxesGovernment Revenues - taxes

• In Canada, personal income taxes are In Canada, personal income taxes are progressive. progressive.

• With a With a progressive taxprogressive tax, as income increases , as income increases the tax rate also increasesthe tax rate also increases

• With a With a proportional taxproportional tax, the tax rate remains , the tax rate remains unchanged as income increasesunchanged as income increases

• With a With a regressive taxregressive tax, the tax rate diminishes as , the tax rate diminishes as income increases. income increases.

Municipal Government RevenuesMunicipal Government Revenues

Local property taxes provide approximately 90% Local property taxes provide approximately 90% of the tax revenue of municipalitiesof the tax revenue of municipalities

• These taxes are based on the assessed value of the These taxes are based on the assessed value of the property property

Grants from provincial governments provide Grants from provincial governments provide local governments with their other major source local governments with their other major source of revenueof revenue

A relatively small amount of revenue comes from A relatively small amount of revenue comes from fines, parking meters, parking tickets, and fines, parking meters, parking tickets, and building permits. building permits.

Provincial Government RevenuesProvincial Government Revenues

The bulk of provincial government The bulk of provincial government revenues comes from revenues comes from direct taxes from direct taxes from personspersons ( (about 1/3about 1/3), ), indirect taxesindirect taxes (about ¼),(about ¼), and and federal government federal government transferstransfers ( (about 1/5about 1/5) )

Federal Government RevenuesFederal Government Revenues The federal government has a much wider The federal government has a much wider

range of taxes than the provincial range of taxes than the provincial governmentgovernment

The federal government has five major The federal government has five major sources of revenues: sources of revenues:

• 1. Federal income tax1. Federal income tax• 2. Corporate income tax2. Corporate income tax• 3. EI contributions3. EI contributions• 4. GST4. GST• 5. Excise taxes5. Excise taxes

Federal Government RevenuesFederal Government Revenues

1.1. Federal income taxFederal income tax

The most important source of federal The most important source of federal government revenuesgovernment revenues

Federal Government RevenuesFederal Government Revenues

1.1. Federal income taxFederal income tax

The amount of income tax paid by an The amount of income tax paid by an individual is a complicated process but here is individual is a complicated process but here is the simplified version: the simplified version:

First, total income from all sources (wages, interest, , total income from all sources (wages, interest, rent, dividends, profits) from all places inside and rent, dividends, profits) from all places inside and outside of Canada is calculated. outside of Canada is calculated.

Federal Government RevenuesFederal Government Revenues

1.1. Federal income taxFederal income tax

SecondSecond, , allowable deductionsallowable deductions are are subtracted from total income to get taxable subtracted from total income to get taxable income. income.

• Examples of allowable deductions would be Examples of allowable deductions would be charitable donations, expenses connected with charitable donations, expenses connected with employment like union dues or professional employment like union dues or professional association fees.association fees.

Federal Government RevenuesFederal Government Revenues

1.1. Federal income taxFederal income tax

ThirdThird, taxes payable are calculated from a , taxes payable are calculated from a schedule or table that shows the different schedule or table that shows the different tax rates based on the different income tax rates based on the different income rangesranges

Federal Government RevenuesFederal Government Revenues

2. Corporate income tax2. Corporate income tax

The tax is paid on the profits of the The tax is paid on the profits of the corporationcorporation

Federal Government RevenuesFederal Government Revenues

3. Employment Insurance Contributions3. Employment Insurance Contributions

Contributions are made by employees and Contributions are made by employees and employers employers

Exceptions include the self – employed, Exceptions include the self – employed, some part-time workers, and workers over some part-time workers, and workers over the age of 65the age of 65

Federal Government RevenuesFederal Government Revenues

4. Goods and Services Tax (GST)4. Goods and Services Tax (GST)

In 1991, the GST replaced the FST In 1991, the GST replaced the FST (Federal Sales Tax) (Federal Sales Tax)

The tax base of the FST was much The tax base of the FST was much narrower than that of the GST – services narrower than that of the GST – services for example were excludedfor example were excluded

Federal Government RevenuesFederal Government Revenues

5. Excise taxes and duties5. Excise taxes and duties

Imposed on the sale of many luxury or Imposed on the sale of many luxury or non-essential items, such as tobacco, non-essential items, such as tobacco, liquor, and playing cards. liquor, and playing cards.

Customs duties are collected on goods Customs duties are collected on goods that are brought into the countrythat are brought into the country

Controlling the debtControlling the debt

There are several ways the federal There are several ways the federal government can try to control the deficit: government can try to control the deficit:

• Cut federal government expendituresCut federal government expenditures

• Increase revenuesIncrease revenues

• Rely on economic growth and rising incomesRely on economic growth and rising incomes

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