Canada's Fiscal Policy & Recession

Canada's Fiscal Policy & Recession

Introduction

In defining fiscal policy, it is first useful to discuss the broader idea of government economic policy. Commonly we think of governments as delivering key political 'goods' in society, such as law and order, national defence, and social programs. Another component of government activity falls within the economic realm. Governments, for example, issue currency, enforce rules concerning the production and sale of goods and services, and even operate businesses themselves (for example, crown corporations). Governments, moreover, attempt to influence the behaviour of the overall economy, which is commonly referred to as economic or macro-economic policy. In this context, governments will introduce specific policies and actions to promote stable economic growth over the long term, and to protect the country from sudden recessions and depressions.

Key issues in modern government economic policy include controlling inflation (the rate at which the price of goods and services increase), maintaining high levels of employment for citizens, promoting growth in personal and household income, and ensuring growth in the general economic activity of the nation (that is, the overall production and sale of goods and services).

Fiscal policy represents a particular area of economic policy. More specifically, it involves the use of government finances to influence the overall behaviour of the national economy. Of particular importance to fiscal policy is a government's budget, or annual levels of spending, taxation, and borrowing. In this context, the budget functions not just as a process by which the government collects revenues to pay for goods and services for its citizens, but as a mechanism for promoting economic stability over the short- and long-terms.

Fiscal policy can be contrasted with another area of economic policy, commonly referred to as monetary policy. As the name suggests, monetary policy focuses on the management of money; in particular, its supply and cost. The supply of money refers to the total amount or stock of money in circulation in the economy, which the government can influence by engaging in such activities as printing new currency notes or stockpiling pre-existing money. The cost of money, by contrast, centres on the interest rate or the amount charged by public and private banks and financial institutions when they lend money. In this context, a government attempts to influence the cost of borrowing by pushing interest rates upwards or downwards.

Instruments of Fiscal Policy

Financial Crisis and the Global Recession

In the latter part of 2008, the global economy entered into a severe recession, caused in large part by a financial crisis and loss of confidence (International Monetary Fund, 2009). The economic downturn was precipitated by the collapse of the housing bubble in the United States, and the resultant crisis among financial institutions in many major world economies. Additional components of the economic downturn included significant declines in world financial markets, weaker commodity prices, and a collapse in global trade(www.td.com).

While the global recession was most acutely felt in the United States, it was also severe in Europe and the advanced economies of ...