Question

What is the proposed Budget deficit for Canada 2018? Why is the deficit currently so large and should the government be more focused on a balanced budget?

i)    As a Keynesian economist, defend the use of this deficit spending to help the economy. Use the AD/AS model in your answer.

ii)    As a Classical economist explain using the “crowding out” theory why you are opposed to this deficit spending. Use graphical support in your answer.

Answer 1

OTTAWA -- The federal government is putting an emphasis on gender equality in the 2018 budget, but proposes only modest new spending as Canada’s economy continues to perform well. The 2018 budget focuses on increasing the number of women in the workforce, and also emphasizes investments in technology and research.

In releasing his third fiscal plan, Morneau sought to reassure Canadians the new commitments would be carried out in a responsible way, while arguing his earlier investments had already produced encouraging economic results.

Total new spending over the next year comes in at $5.4 billion, of $338.5 billion in overall planned spending.

The federal government is projecting an $18.1 billion deficit in 2018-19, dropping to $17.5 billion in 2019-20

"The economy is doing well — remarkably well,'' Morneau said in prepared remarks of his budget speech.

During the last federal election the Liberals pledged to not run deficits over $10 billion and said they’d return to balance by 2019, a promise their own numbers now indicate will not be kept.

Canada’s federal debt as a percentage of GDP is projected to fall from 30.4 per cent in 2017-18 to 30.1 per cent in 2018-19.

Compared to the fall, the government says it has $19.8 billion in additional cash to play with over the next six years — an average of $3.3 billion a year in extra fiscal elbow room.

That money was generated by a number of sources, including the stronger economy, revenues from tax changes for private corporations, lower-than-expected departmental spending and nearly $5 billion in re-profiled infrastructure commitments over the next two years alone.

The GDP growth rate is projected to slow from 3.0 per cent in 2017, to 2.2 per cent in 2018, bottoming out at 1.6 per cent in 2019.

Budget 2018 includes a $3 billion adjustment for risk in 2018-19 and following years.

Others argue Morneau should be spending far more if he truly wants to increase growth. For example, some said the budget's lack of a comprehensive child-care plan means Ottawa hasn't gone far enough to ensure the economy reaps the benefits of higher female participation in the workforce.

The government is projecting deficits roughly in line with its October projections. The new outlook now shows an $18.1-billion shortfall for 2018-19 that's expected to gradually shrink to $12.3 billion in 2022-23, including annual $3-billion cushions to offset risks.

The Keynesian perspective focuses on aggregate demand. The general idea being that firms produce output only if they expect it to sell.

Thus, while the availability of the factors of production determines a nation’s potential gross domestic product, or GDP, the amount of goods and services actually being sold—known as real GDP—depends on how much demand exists across the economy. You can see this concept represented graphically in the diagram below

all their limitations, the simple models of the old Keynesian school using the Aggregate Demand-Aggregate Supply (AD-AS) framework provide a better starting point for serious analysis than more recent models in the New Keynesian (NK) or Real Business Cycle (RBC) traditions which have come to dominate modern macroeconomics.

Just as Canada is vast geographically, so too is the reach of our members who work in all sectors of the economy, many serving a chief executive officers, chief financial officers and in other senior leadership roles.  CPA Canada engages in public policy discourse and economic research to contribute to Canada's economic and social development.1 To foster a more productive, competitive and prosperous Canada, we recommend that the federal government take action in these key areas: 1. Responsible fiscal management 2. Tax reform 3. Human capital development 4. Innovative business environment 5. National adaptation plan

The Great Depression came as a shock to what was then the conventional wisdom of economics. To see why, we must go back to the classical tradition of macroeconomics that dominated the economics profession when the Depression began.

Classical economics is the body of macroeconomic thought associated primarily with 19th-century British economist David Ricardo. His Principles of Political Economy and Taxation, published in 1817, established a tradition that dominated macroeconomic thought for over a century. Ricardo focused on the long run and on the forces that determine and produce growth in an economy’s potential output. He emphasized the ability of flexible wages and prices to keep the economy at or near its natural level of employment.