Question

On July 8, 2020, Canada’s federal government released their “fiscal snapshot”, detailing the expected $343 Billion deficit, with $212 Billion linked directly to government spending programs to counter the worst economic hardships brought on by lockdowns in response to COVID. In a time of historically low interest rates, in response to the COVID pandemic and crisis, the government launched programs to make up for lost labour income, and to stimulate the faltering economy. Critics like the Canadian Chamber of Commerce noted that the deficit and the debt-to-GDP ratio of 49.1 per cent “will undermine Canada’s fiscal capacity for decades.”

Answer the following questions:

1. Explain USING MACROECONOMIC CONCEPTS what the Canadian government is trying to achieve with this fiscal policy.

2. Explain USING MACROECONOMIC CONCEPTS why critics are concerned about this approach.

answers should be long enough as its 20 marks each

Answer 1

Answer - In the light of the ongoing global pandemic , the fiscal policies of the government are expansionary in nature. The increase spending of the government by taking the loans will increase the AD of the economy. The government spending aims to create the various opportunities for the small businesses and the people who have lost their jobs in the pandemic by providing them with the adequate allowances and loans in order to continue the consumption. Small businesses have been provided cheaper loans in order to carry out the production. All these are the measures in the direction of keeping the cycle of the economy going. The increase spending will lead to rise in the consumption and investment leading to rise in AD and thus taking the economy out of the ongoing recessionary conditions.

Todays increased borrowing and such a huge debt to GDP ratio of 49 % will hurt the future generations. This is because in order to overcome this deficit , the interest rates and the level of taxes will be raise in order to increase the revenue of the government to be able to pay off the borrowings. Thus the real disposable income of the future generations is likely to fall .