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From the dawn of independence, Canada built itself a reputation
of a powerful and democratic nation that has a profound influence on the nations
across the world.  A key aspect that maps
Canada’s position in the world is its economy. Canada is able to maintain a
high economic ranking and quality of life because of the vast policies
implemented to keep the economy steadily growing and prospering.  In order for the government to effectively
regulate the economy and avoid hyper-inflation or an economic depression,
specialized policies such as the monetary and fiscal are legislated.  Such policies are designed to stabilize the
economy and decrease the effects of the inevitable business cycle.  They aim to deter the direction of the
economy’s movement.  However, the
question of which policy to use is a highly controversial and debated topic
among economists.  The Fiscal Policy is
mainly a stabilization policy that utilizes government taxes and spending
initiatives to control the economy whereas the Monetary Policy uses interest
rates and money supply as its tools. While some economists think that fiscal
policy causes more harm than good, recent economic reports and events have
proven that this policy is favourable by showing a continual increase in
economic growth. The recent fiscal actions by the government such as spending
initiatives display positive results along with an economy that is forecasted
to further improve. This spending initiative is backed by tax policies that are
leaving citizens with more money allowing for increase in consumer purchase.
Although the increase in economic growth seems promising, it is important for
governments to have complete control on the increasing debts caused by the
nature of this policy. If contractionary measures are not taken at the right
time, debt can substantially increase and cripple the economy. The use of
fiscal policy in Canada is effective because of its ability to increase
economic output by increasing GDP, lowering the unemployment rate and creating economic
stability through government spending and changes in tax policies.


            The most prominent tool
of fiscal policy is government spending. Government spending can help stimulate
a sluggish economy or slow down an economy that is
growing at a rate that is getting out of control. This is achieved by affecting
aggregate demand which is the total number of final goods and services in the
economy. When an economy is in a recession or in a trough in the business
cycle, expansionary fiscal policy is put into place, increasing government
spending which helps to close the recessionary gap. The aggregate demand
increases because of the increase in investments in communities, resulting in a
higher GDP output. (Refer to fig 1.) Likewise, contractionary fiscal policies are
designed when the economy is expanding too rapidly and the economy needs to
slow down to prevent hyper-inflation. Government spending is reduced lowering
aggregate demand and GDP. (Refer to fig 2). The government of Canada is
currently using fiscal policy over the past few years to help improve the economy.
The liberal government has implemented increased spending in infrastructure to
build roads and highways to create jobs. Other areas such as healthcare, childcare,
and social services are being invested in as well. Specifically, Ontario Finance
Minister Charles Sousa projects program expenditures to rise by more than $12
billion, which is a substantial boost from the $7.7 billion rise over the past
three years. In just one-year, total revenues increased from $140.7 billion in
2016 to $150.1 billion dollars by the end of 2017. (Refer to Fig 3) The
increase in GDP by 6.6% is directly related to program expenditures, showing that
fiscal policy is effective increasing GDP. The increase in GDP is not just
present in Ontario, but other provinces as well. Canada’s nominal GDP is continually
rising after 2015’s mini recession caused by fall in oil prices (Refer to Fig
4). The increase in GDP is not the only factor that has improved the economy,
but unemployment has decreased as well. Major spending in programs has allowed
for creation of new jobs. Since December 2015, total employment in Canada has
risen by an average of over 20,000 jobs per month. This is the greatest increase
since 2012. In total, unemployment rate has decreased from 7.1 per cent to 6.6
per cent. The Canadian economy has created more than 200,000 new jobs in the
past few months. Additionally, most of the recent job openings have been
full-time positions, a trend that was common across many provinces. This is a
positive sign that the Government’s investments are starting to benefit the
economy. Therefore, the increased spending in different sectors of businesses
and industries has increased GDP and decreased unemployment rate showing that
fiscal policy is working.

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second tool fiscal policy has at its disposal is its tax policies. Like
government spending, tax policies can either stimulate the economy or hinder it
when it is growing too fast. Tax policies affect the aggregate demand by increasing
or decreasing consumer consumption. Refer to figure 1 and 2) Consumers represents
Canada’s residents and their effect of spending habits on the market. In an
expansionary tax policy, tax rates are reduced in hopes that consumer behavior
will be changed because of lower taxes charged on their goods. People are
generally expected to buy more as they have extra revenue, spending it more on
businesses and the market These progressive actions will lead to businesses
selling more allowing them to thrive which will help grow the economy. Also,
many people might choose to invest their money and companies will choose to
invest domestically rather than abroad. The reverse is possible if a government
wishes to slow economic growth. This is done by increasing taxes on citizens as
well as corporations. For citizens the income tax may rise and for corporations
it would be the increase of corporate taxes. When consumers are left with less
money they will likely save it and reduce market spending, essential for
economic growth. Businesses would invest less in resources and might cut jobs
increasing unemployment and produce less causing a decrease in GDP. These
factors would help slow the economy. The government of Canada has recently put
certain tax policies over the years to help stimulate the economy from the
economic slump Canada experienced in 2015. One policy implemented by the
liberal government is the decrease in the middle-income tax bracket from 22.5%
to 20%. Canadians with taxable annual income around $45,000 and $90,000 experience
their income tax rate fall. This tax cut is worth up to $700 a year per person.
The effects of this tax cut have allowed Canadians to spend their money more
freely on the market. Household spending continued to grow at a solid pace in
2016 and 2017, especially in the retail sector of the economy. Consumer
spending in Canada increased to $1,071,880 million in the third quarter of 2017
from $1,061382 million in the second quarter of 2017. (Refer to fig 6) Therefore,
this tax cut will continue to support economic growth across the
country by giving businesses an opportunity to grow and showing tax policy
is an effective method of boosting the economy.


though the fiscal policy is designed to help the economy in the long-term, if
the government is not careful to stop spending when it has reached the peak of
the business cycle, the debt can spiral out of control forcing negative effects
on the economy. The nature of expansionary fiscal policy involves an increase
in government budget, which is appreciated by citizens as it means an increase
in job opportunities and higher revenues. The government must borrow more money
in order to enact on this policy, causing yearly deficits to rise and allowing
the country debt to rise. This phenomenon is acceptable when the economy is
down as expansionary policies acts as a catalyst to boost the economy. The
motive is to boost the economy enough so that when it is exceeding its
potential output, contractionary policies can be put in place in order to
increase government revenue so that the deficits can be replaced with surpluses.
If contractionary policies are not put in place then deficits will continue to
rise and the debt can increase beyond control. However, contractionary policies
are disliked by citizens as it reduces their spending power, without realizing
it is beneficial to the economy long-term. Governments also dislike this policy
as it puts a negative stigma to their political party and can affect their
chance of being elected again. In Canada, the annual budget has been
continually increasing as expansionary policies has been put into place. The
federal debt increased by $15.9 billion going into 2017 caused by a decrease in
tax revenues as well as increased spending on programs. (Refer to fig 6) The
spending has caused the GDP to debt ratio to rise from 30.9 % to 31.2% over
past 2 fiscal years. As economy has picked up in 2017 and 2016 with increased
GDP, expansionary policies are continued to be put in place such as the
decrease in corporate taxes from 4.5% to 3.5% in November 2017. Additionally,
recent minimum wage increases to $14 is backed up by the Ontario government
investing another $300 million in businesses to help them cope with the wage
increase. The government is expected to increase their budget in the 2018-2019
fiscal year. This could pose a problem in the long term as any unexpected decline
in the economy could require expansionary policies and if the deficits from
previous years are not paid off then the economy could go into serious debt.
Instead of spending, the government should begin to increase corporate taxes as
consumers are spending more on retail. The spending initiative should not
increase but rather remain the same to promote GDP growth but decrease
deficits. The combination of these two should be adequate enough to decrease
deficits and create surplus.

conclusion, the
use of fiscal policy in Canada is effective because of its ability to increase
economic output by increasing GDP, lowering the unemployment rate and creating
economic stability through government spending and changes in tax policies. It
is clear spending initiatives implemented by the government allow for the
creation of more jobs, a higher GDP output and a lower unemployment rate. Additionally,
a decrease in income tax for middle class individuals is proving to be an
effective method of regulating revenues earned by business. Canadians are
starting to spend more in retail because of their increased purchasing power.
The combination of these two tools has affected the economy positively by
allowing for an increase in GDP and a lower unemployment rate. Although fiscal
policy can be beneficial to the economy, it is important for governments to
know when to reduce expansionary policies and implement contractionary
policies. This, however is frowned upon by citizens which leads to the
government hesitant to act on what is economically beneficial in fear of losing
votes. Recent increases in deficits and debt should be decreased by increasing
corporate taxes and reducing government spending. All in all, Canada has become
an economically strong country with one of the highest living standards in the
world and is on its way to becoming stronger. With correct use of macro
policies Canada can build an economy that will be sustainable for many years to

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