Please read the text pages from 15-28 pasted below and answer the following questions

Define:

1) expansionary fiscal policy

2) automatic stabilizers

3) progressive tax

4) contractionary fiscal policy

5) discretionary fiscal policy,

Fiscal Policy has many potential challenges, make detailed notes explaining the following challenges:

1) government budgets:

2) the 4 time lags:

3 election cycles:

4) regional variation:

5) impact on investment (crowding out) :

6) income equity :

7) burden on future generations:

stabilization policies Government intervention Fiscal Policy in the economy to try to stabilize it, using fiscal and Most mixed economies go through upheavals caused by the ups and downs of monetary policies. the business cycle. Should the government intervene in these economic booms fiscal policy and contractions, or should it let the market make its own adjustments? As you Government taxation. spending, and borrowing learned In Chapter 6, economist John Maynard Keynes believed that government policies used to try to intervention can help stabilize the economy. He proposed that the business cycle stabilize the economy could be managed, and advocated for some government involvement through expansionary fiscal fiscal and monetary stabilization policies policy A government policy to increase aggregate demand KEYNESIAN ECONOMICS through tax cuts, Increased spending or both By examining the relationships among the various forms of demand and income. Keynes was able to explain the Great Depression in a way that economists from the "classical school" could not. When the economic downturn started in 1929, businesses reduced investment and laid off employees, which decreased income and consumption. Trade was halted by high tariffs, as countries attempted to protect their economies by increasing domestic demand for their products. Governments decreased spending and raised taxes to balance their budgets. Together, these actions had the effect of shrinking the circular flow of income. During the Great Depression, economists from the classical school advocated for minimal government involvement in the economy. They believed that government involvement hindered the efficient allocation of resources and should occur only in areas of the economy in which the private sector could not or would not effectively deliver goods and services. Taxes should be collected only to cover the yearly level of government expenditure. The classical school predicted that prices, wages, and interest rates would eventually adjust. For example. prices would fall to low enough levels that people could afford to buy goods again, and wages would fall to low enough levels that businesses would begin to hire workers. This would eventually pull the economy out of the recession cycle. However, prices, wages, and interest rates did not adjust. They stabilized at very low levels for an extended period, while unemployment remained high for a prolonged period Keynes claimed that when traditional market mechanisms fall DID YOU KNOW? to work, government policy could influence the size of leakages and injections, While Keynes's theories have and aggregate demand could be managed been challenged by many. during times of extreme economic downturns, EXPANSIONARY FISCAL POLICY governments continue to turn to them, and the Fiscal policy is the use by a government of its powers of expenditure, taxation, and application of his ideas borrowing to stabilize the economy. When the economy is in a recession, aggregate continues to influence economic thought in the demand is too low. Unemployment is high, and there is little, or even negative, twenty-hiss concury. growth in output. The government could increase aggregate demand by using an The rapid application of expansionary fiscal policy. This type of fiscal policy involves decreasing taxes, Keynesian-style scabilization policies in the United States increasing government spending, or both to stimulate economic growth and lower and Canada during the unemployment rates. Figure 13.10 illustrates how this mechanism would work. recession of 2008-2009 is largely credited for limiting By cutting taxes (a leakage), the government would increase the disposable the severity and length of income of consumers, increasing the aggregate demand in the economy through -L-and injections model. Consumption is the "payments for goods and services in the central part of the circular flow model. Since consumer incomes are disposed of through some combination of consumption, taxes, savings, and import spending, if leakages go up, consumers generally reduce consumption spending: if leakages go down, consumers generally increase consumption spending The total amounts of leakages and injections are not likely to be the same For instance, governments might spend more or less than the amount they receive in tax revenues. Other countries' export earnings might be used to purchase Imports, but there is no guarantee that trade will be balanced or that people in other countries will purchase Canadian goods. The money we save might be borrowed for business investment inside Canada, but then again, it might not. The relationship between the three leakages and three injections determine whether overall demand is growing or shrinking. If the total of the leakages is greater than the total of the injections, aggregate demand will shrink. However, it will not shrink forever. As production falls, consumers will pay fewer taxes, save less, and buy fewer imported goods. When the total of the leakages falls to the level of the total injections, the economy generally stops shrinking At this point, the economy is in equilibrium. The equilibrium level may be below full employment (a recessionary gapl, at full employment, or above it (an inflationary gap). When the total of the injections is larger than the total of the leakages, the economy will grow as aggregate demand increases. However, as production and incomes rise, so do taxes, savings, and Imports. When the three leakages are, together, as large as the injections, growth will generally stop. Once again, this may be at, above, or below full-employment equilibrium. Some have likened this model to filling a bathtub. If the amount of water coming in (the injection) is greater than the amount going down the drain (the leakage), the bathtub fills up (GDP gets bigger). If the amount of water coming in is less than the amount that is leaking out, the bathtub empties (GDP shrinks). Finally, if the water coming in and the water leaking out are equal, the amount of water in the tub remains the same (equilibrium). Self-Reflect 1 List the four phases of the business cycle 2 Explain why an expansionary phase tends to "lord Itself." 3 Identify the characteristics of (a) a contractionary phase and Iblan expansionary phase of the business cycle when does a contraction become a recession? 5 List the there leakages and the three injections that exist in an economy and explain how they affect the circular flow of incomeThe goal of these fiscal stabilization policies is to smouth out tee ups and downs of the business cycle, as Figure 13.12 indicates FIGURE 13.12 The effect of fiscal policy on the business Contractionany Fiscal Policy Expansionary Fiscal Policy cycle A well-managed fiscal policy reduces the wide variations between the peaks and troughs of the Real GDP business cycle, making the economy relatively more stable while encouraging Though steady growth Eve news cycle without the moderating effects of fiscal policy Burrasocycle with the moderating effects of frical polks Time automatic stabilizers AUTOMATIC STABILIZERS Mechanisms built into the economy that help to What are the tools that a government has at its disposal to enact fiscal stabilize it by automatically increasing or decreasing policy? Some of the key tools are known as automatic stabllizers. These are aggregate demand, such as government-spending and taxation policies that are already in place and are Employment Insurance welfare programs, and acting on aggregate demand before a recession or inflationary trend fully takes progressive taxes, often hold. These stabilizers are mechanisms built into the economy that automatically contrasted with discretionary stimulate aggregate demand during economic downturns and slow aggregate fiscal policy. demand when the economy is too inflationary. They require absolutely no direct progressive tax A tax (such as Income tax) in action or legislation by policy-makers because they are already legislated. which the tax rate increases Employment Insurance (El) and social assistance programs are two examples as an Individual's income of automatic stabilizers. During periods of economic downturn, El payments increase as more people become unemployed. Since unemployment increases during contractionary periods, El payments help maintain people's incomes and, thus, the consumption (C) portion of GDP. If the contraction period is prolonged, the number of people on social assistance also increases. The purpose of social assistance programs is to ensure that people have a level of income that enables them to survive, but these payments also help Increase consumption so that downward pressure on aggregate demand is somewhat cushioned These automatic stabilizer payments either slow the leftward shift of the AD curve or begin to increase the rightward shift of the AD curve. Another example of an automatic stabilizer is the tax rate, which varies with the level of income. A progressive tax acts as a stabilizer in that the percentage of income taken in taxes rises as incomes rise and has the effect of increasing a leakage as incomes grow. At lower levels of income. the income tax rate may be 20 percent, but as a person's Income rises and they move to a "higher tax bracket." the rate may rise to 30 percent. This approach to taxation slows down the growth in consumption and, therefore, stops the AD curve from shifting too quickly to the right, which could lead to inflation.the consumption (Cl portion of the GAP equation The increase in aggregate contractionary fiscal demand from AD, to AD, would lead to both an increase in employment levels policy and an increase in GDP as the equilibrium moves closer to full-employment Government policies to decrease aggregate demand (FE) output. There would be little increase in the general level of prices if the through tax increases andfor equilibrium remained below full-employment equilibrium. decreased spending The same stimulation of the aggregate demand curve would occur if the government decided to enact an expansionary fiscal policy through an increase in the level of government spending: an injection in the circular flow of income. As one of the four components of GDP, an increase in government spending would directly shift the AD curve to the right through the government (G) portion of the GDP equation. A reduction in the level of taxes encourages consumers to follow through by spending their increase in income on domestic production, as opposed to saving it or spending on FIGURE 13.10 The effect of an expansionary fiscal policy on imports. If consumers choose not to increase consumption, aggregate demand aggregate demand will not increase, Because an Increase in government spending acts directly on aggregate demand. there is no risk that the policy will not have some effect. AS Finally, if the government wanted to maximize the effect of expansionary fiscal policy, it would both cut taxes and increase spending to stimulate aggregate demand. Price level AD CONTRACTIONARY FISCAL POLICY When the economy is suffering from inflation, aggregate demand is too high Employment is high, and there is high AD2 output growth In this context, the government may wish to decrease aggregate demand by using a contractionary Recession output FE fiscal policy. This type of policy involves increasing Real GDP (output) taxes, decreasing government spending, or both to reduce upward pressure on prices. Figure 1311 illustrates how this mechanism would work. FIGURE 13.11 The effect of a contractionary fiscal policy on By increasing taxes, the government would decrease the aggregate demand disposable income of consumers, decreasing the aggregate demand in the economy through the consumption (C) portion of the GDP equation. The decrease in aggregate AS demand from AD, to AD, would lead to a decrease in the inflation rate. However, the decrease would also have the trade off of lowering GDP and employment levels as equilibrium moved back toward full-employment (FE) Price level High output. inflation AD The government could also address this problem by altering its spending. A reduction in government spending would reduce aggregate demand. As in expansionary fiscal AD, policy, the use of both tax and government-spending tools would increase the overall effect. FE Inflation output Real GDP (output)Any built-in mechanism that increases or decreases government spending or discretionary fiscal taxation as the business cycle fluctuates is considered an automatic stabilizer. policy Deliberate government It is important to note that there are also discretionary elements to automatic action taken to stabilize stabilizers. At any time, the government may decide to change the level of E[ the economy In the form of payments or taxation levels. These actions are considered to be discretionary taxation or spending policies; often contrasted with fiscal measures. automatic stabilizers infrastructure DISCRETIONARY POLICY The foundation of goods and services (such as roads. When the government takes deliberate actions through legislation to alter power grids, transit systems. communications systems, spending or taxation policies to influence the level of spending and taxation, it is schools, and hospitals using discretionary fiscal policy. that allows an economy to operate efficiently. Changes in Spending If the government wants to stimulate the economy, it can increase general spending in all areas of its normal budgetary programs-health and welfare. culture, education, and so on. The difficulty in increasing the budgets in these areas is that it is tough to decrease them once the economy turns around Another way to increase spending is to undertake infrastructure programs. Infrastructure is the underlying foundation of goods and services that allows an economy and society to operate. These projects might include the building of roads, hospitals, schools, transit systems, and communications systems. The advantage to increased spending on infrastructure is that it can be temporary in nature by limiting it to specific projects; once the project is built, the spending ends. Moreover, spending on infrastructure adds to the stock of an economy's capital goods and, therefore. promotes the outward shift of the production possibilities curve in the future. Changes in Taxation To restrain or stimulate economic activity, the government can also use Self-Reflect discretionary fiscal policy to change the amount of tax that it collects. It has 1 How was Keynesian several options that it may consider in pursuing this policy- economics a radical departure from the The government could raise or lower personal income taxes, corporate income classical school of economics? taxes, or sales taxes, thus changing the amount of money leaking out of the 2 What is the difference circular flow of income during economic transactions. between discretionary Another possibility is to alter tax deductions or tax credits. Examples of tax fiscal policy and automatic stabilizers? deductions include Registered Retirement Savings Plan (RRSP) contributions, 3 Under what conditions child care expenses, and payments of union dues. Examples of tax credits would expansionary include EI premiums and education expenses. Tax deductions and credits are fiscal policy be used? Contractionary focal both effectively portions of income on which you are not required to pay taxes. policy? Changing what is considered a deduction or credit would alter the amount of 4 What three options are leakages in the circular flow of income. available to a government pursuing a discretionary The government may also provide special tax incentives for business Ascal policy? investment, such as larger capital cost allowances on new buildings and 5 what is infrastructure equipment; this would influence aggregate demand through the investment (1) and how Is spending on it portion of the GDP equation. beneficial in both the short and lone berma?274 Chapter 13 | Business Cycles and Fiscal Policy deficit budget The muktion that occurs The Challenges of Using Fiscal Policy when the government spends more than it collects in takes. While the application of fiscal policy as an economic tool has existed since the causing a shortfall for deficitl. Second World War, its use is still controversial. There are many challenges in which it must cover through borrowing using it that need to be considered surplus budget The situation that occurs GOVERNMENT BUDGETS when a government spends less than it collects in tears, Governments in Canada usually announce their changes in revenue and spending causing It to have money left plans in the spring by outlining the coming year's budget. Prior to the Second over to surplusi World War, the only purpose of government budgets was to finance government. balanced budget Today, government budgets are incredibly complicated documents drafted The situation that occurs when a government spends for both political and economic purposes. They contain economic forecasts, an equal amount to what n. macroeconomic goals, and social policy objectives. In establishing its budget, a has collected in tax revenue. government can end up with one of three scenarios: debt The total amount that a . A deficit budget which occurs when the government spends more than it government owes on money collects in tax revenue. It must borrow money to cover the shortfall. It has bonowed to fund deficit budgets in the past. * A surplus budget which occurs when the government collects more in tax revenue than it spends. Consequently, it has money left over. . A balanced budget which results when the government spends an amount equal to what it collects in tax revenue. A term related to deficit budgets is debt. The debt is the total amount that a government owes on money it has borrowed to fund budget deficits. For instance, if a government spends $150 billion in year 1 but takes in only $130 billion in revenues, It has a shortfall (or deficit) of $20 billion. To make up that shortfall, it must borrow $20 billion. In year 2, the government spends another $150 billion (including interest on the debt incurred in the previous year) and takes in $140 billion in revenues. Thus, in year 2, it has a deficit of $10 billion and an accumulated debt of $30 billion ($20 billion from year 1 plus $10 billion from year 21. This cover from the 2018 federal government budget demonstrates how government fiscal EQUALITY documents serve both GROWTH political and economic purposes. A Strong Middle ClassVIEWS ABOUT GOVERNMENT BUDGETS Over the past century, economists have been divided as to how fiscal policy should be used; when the government should have deficit, surplus, and balanced budgets; and why these decisions should be made. Part of the issue lies in the difficulty of predicting the actual output gap. Because recessions are incredibly hard to predict, little general agreement exists on when fiscal policy is needed, how much to apply, when it should be applied, and when it should be removed. Both expansionary and contractionary parts of business cycles are driven, in part, by irrational behaviour by consumers and investors, and it is very hard to predict this kind of behaviour. Annually Balanced Budget Until the Second World War, the primary aim of fiscal policy in Canada was to ensure that government expenditure each year did not exceed revenue-in other words, to balance the budget annually. During the Great Depression, the problem with a strict annually balanced budget policy-that it could exacerbate an existing problem in the economy-became obvious. If the government seeks to balance the budget during recessionary periods, it must either cut back spending or increase taxes. Both policies serve to intensify the effects of the recession by holding back aggregate demand. By cutting back spending, the government spending (G) portion of GDP is reduced. By increasing taxes, the government reduces incomes due to increased tax leakages, which would reduce the consumption (C) portion of GDP. Either way, the current economic problem is intensified-the recession is made worse. Conversely, during inflationary periods, tax revenues rise, and the government is forced to increase spending or lower the tax rate to balance the budget. Either way, more income is put back into the circular flow of income, causing upward pressure on aggregate demand and subsequently causing further inflation. Cyclically Balanced Budget Classical economists believed that the economy was self-correcting, but if the periods of downturn are prolonged and painful, is it worthwhile to wait, when the government could intervene and achieve economic infrastructure goals while at the same time alleviating the unemployment problem? According to Keynesian economists, governments should use their fiscal policy to achieve a high, stable level of national income with neither unemployment nor inflation. If an economic recession begins, the government should start to spend more than it receives in tax revenues. Such a policy is centred on altering fiscal decisions according to changes in the business cycle. During a recessionary phase, the government should run deficits by increasing government spending, decreasing taxes, or both. During an inflationary phase, the government should run surpluses by decreasing government spending, increasing taxes, or both. During weak economic times, the government should work to stimulate the economy; during expansionary and peak periods of economic activity, the government should work to slow the economy. Over the whole cycle, the deficits and surpluses should balance. The government's role, then, is to act as a stabilizer.Deficit and Surplus Budgets as Necessary The goal of having a cyclically balanced fiscal policy was criticized for not recognizing that the economy can sink into long periods of economic recession las was the case in the 1930s), while subsequent expansionary phases may be relatively short. As a result, the budget may not be able to be balanced over the business cycle. An extension of Keynesian theory held that fiscal budgets could be managed from the perspective of running deficits or surpluses when necessary. A deficit budget would be used only when the economy needed a boost. If a debt was accumulated as a result, so be it. The general health of the economy was more important than the balancing of budgets over the business cycle. Full-Employment Budget Yet another belief is that governments should achieve a non-inflationary, full- employment level of output. That Is, they should intervene with fiscal policy only when the economy falls below its full-employment targets. Inflation control because of economic expansion should be left to the Bank of Canada through tools of monetary policy (which you will discover over the next two chapters). Full employment in Canada is generally considered to be achieved when the unemployment rate is in the range of 6 to 7 percent A full-employment budget would entail using just the right amount of government spending and taxation. combined with the multiplier effect, to shift the AD curve so that it intersects the AS curve at full-employment equilibrium. Supply-Side Economics Keynesian views on fiscal policy are not universal, Other schools of thought argue that government budgets should not be used to manage aggregate demand. One such school is known as supply-side economics. Economists of this school believe that government policies should encourage the growth of aggregate supply. Increased private investment will lead to an Increase in aggregate supply, and incentives such as tax cuts should be used to encourage savings and investment for this purpose. They also believe that aggregate demand will take care of itself. as more people become employed through the increase in aggregate supply. Critics of supply-side economics call it "trickle-down economics." They believe that tax cuts generally focus on helping corporations and those who are wealthy, and that the benefits proposed by "supply siders" are supposed to eventually "trickle down" to everyone else. They are quick to point out that such tax cuts may be held on to by the wealthy and treated as a form of additional income. never trickling down to the rest of society. Part of the problem is that investment will only occur if businesses believe the economy will be robust enough to make Investment worthwhile, which is unlikely in a downturn. Increased savings also further reduces consumption, which means that investment is less likely. This scenario has been called the "paradox of thrift."While savings may be good for an individual in an economy, if everyone saves too much and consumes less, aggregate demand falls, unemployment increases, incomes fall, and everyone has less opportunity to saveSIZE OF THE GOVERNMENT DEBT cyclical deficit The part of a deficit that The size of the government debt can limit the use of fiscal policy as an is incurred when the government is trying to effective tool. The higher the government debt, the higher the amount of pull an economy out of a government spending that must be devoted to servicing the debt, (Recall that incetion. interest payments must be made on the funds borrowed as well) Moreover, structural deficit if an expansionary fiscal policy is required due to economic conditions, the The deficit that would exist government would have little room to increase spending and cut taxes without even if the economy were at full employment due to further additions to the debt. the structure of government spending and taxation Just how much government debt is too much? Many economists believe that policies and not current the size of the debt itself is not as important as its size relative to the GDP. In economic conditions Canada, between 1967 and 1997, the federal government posted a deficit budget in 30 of 31 years. Many of these years were periods of economic boom when. according to the "budget as necessary" FIGURE 13.13 theory, there should have been budget Canada's net federal debt-to-GDP ratio, 1967-2017 surpluses. The deficit budgets led to a significant accumulation of government 20- debt. Figure 13.13 illustrates the history of Canada's net federal debt-to-GDP ratio from 1967 to 2017. In 1995, this ratio peaked at 66.8 percent. Concern about how high that ratio had grown led Percent successive governments to run Il straight 40 years of surpluses, driving the ratio down to 28.1 percent. The economic downturn of 2008-2009 saw the government 20 - implement another deficit budget. Continued annual deficit budgets have occurred through 2017, driving the ratio 1967 1972 1977 1982 1987 1992 1957 2002 2007 2012 2017 up to 30.4 percent-still well below levels Year of the mid-1990s. Budget deficits have two components: a cyclical deficit and a structural deficit The cyclical deficit is that part of the deficit that is incurred in trying to pull an economy out of a recession. It would include spending on infrastructure projects and programs that invest in human capital, such as job retraining or the upgrading of skills. In a perfect world, the cyclical deficit would be just enough to DID YOU KNOW? put the economy at full-employment equilibrium. President Harry Truman of The structural deficit is the deficit that would exist even if the economy were the United States is famously at full employment due to the structure of government spending and taxation associated with a quote regarding his frustration policies and not current economic conditions. Many economists consider the with economic advislis presence of a structural deficit to be a sign of financial mismanagement, and an who were unable to agree unnecessary addition to government debt. on economic projections and recommended courses of action. He is purported to have said, "Give me a one-handed economist! All my coonsmists say. on the one hand, . . but on the other hand. .."recognition lag TIME LAGS The time it takesa government to recognizea The time lags that exist in utilizing fiscal policy can be problematic. Initially. problem in thi eonomy that there is the recognition lag or the time it takes for the government to recognize requires an appropriate fiscal policy to oeffect. there is a problem in the economy. Once a problem is identified, there is a decision lag decision lag. This is the time required for the government to determine the The time required for a most appropriate spending and taxation actions to implement the desired fiscal government to decide on an policy. Following this period, there is an implementation lag. Once the decision appropriate fiscal policy after recognizing that an economic has been made, various government departments have to figure out how to problem exists implement the new directives regarding government spending and taxation. implementation lag Finally, there is the impact lag Once the policy is in place, time is required The time required to before its full effects can be felt through the multiplier effect. The total time lag implement anappropriate fiscal policy after making the may amount to years. This delay leads to the potential for an "overcorrection." decision to cary it out If an expansionary fiscal policy is enacted, but the market self-corrects, the impact lag fiscal policy could actually create an undesired inflationary period. Conversely. The time required for a a contractionary fiscal policy could cause a recession. The time lags are why it is face policyto bring about Important for a government to have good automatic stabilizers in place, as they a change Inthe economy. help to minimize the challenges associated with these lags. Because they are already in place, automatic stabilizers only face an impact lag ELECTION CYCLES Since the Great Depression, the expansionary periods have been longer than the contractionary periods, so a large debt should not be an issue. But by the year 2017, Canada had a federal debt of $714 billion. What happened? One theory is that there is a conflict between election cycles In Canada and the business cycle. It is hard for governments to make budget cuts and raise taxes in general, but It is even harder when they are thinking about being re-elected. Generally, in the first two years of their mandate, governments make the toughest spending cuts-long before voters must cast a ballot. The nearer the time for an election, the harder it is to make spending cuts. In fact, a government that wants to be re-elected is more likely to increase spending and decrease taxes, running a budget deficit even when the economy does not need it. It is also difficult to convince the electorate that the government should collect more in taxes than it spends, which is necessary to run a surplus budget to pay down the debt. People seem to want government help when times turn tough, but object to being "overtaxed" when the expansion years arrive. REGIONAL VARIATIONS Regional variations may exist that interfere with the implementation of fiscal policy. If part of the country is doing well while another region is suffering from a slowdown, what policy should be used? An expansionary fiscal policy would likely cause inflation in the region doing well, yet a contractionary fiscal policy would make the recession wouse in the part of the country suffering a slowdown. Targeting fiscal policy to a specific region does not work very well. While initial government spending and taxation policies could be targeted at a specific region.it is likely that the impact of the fiscal policy would be spread well beyond the crowd ing out specific region once the multiplier effect is fully felt. The theory that government borrow ing drives up interest Additionally, conflict between the various levels of government regarding the rates and reduces the amount appropriate fiscal policy might limit its effectiveness. If the federal government of kanable funds, thereby making It more difficult for is reducing spending and increasing taxes In an effort to slow down economic businesses to borrow, growth, and a powerful provincial government is increasing spending and cutting taxes to gain political support, the two policies would be at odds, limiting the desired impact on economic conditions. IMPACT ON INVESTMENT Another potential concern about the use of fiscal policy is that a crowding out of private investment may occur when the government competes with the private sector to borrow funds to finance the debt. Some economists argue that expansionary fiscal policy drives up interest rates as the government competes in the market for loanable funds and, subsequently, reduces the amount of funds available for private investment. As a result, private investment in capital goods decreases and the rate of economic growth slows. In this case, the government is simply replacing government spending for investment spending with no net Impact on GDP. INCOME EQUITY Deficits redistribute income from all taxpayers to bondholders, In a sense, the deficit creates a debt that we owe in large part to ourselves. The government sella bonds and treasury bills to finance some of that debt. These financial instruments are known as marketable debt. Department of Finance Canada estimated in 2017 that approximately 70 percent of the federal marketable debt was In the hands of Canadians, while 30 percent was held by foreign investors. However, only some Canadian citizens are the government's creditors. The government pays interest on the debt, but does so with tax dollars. The people who hold bonds are receiving a portion of the tax dollars paid by all Canadians. Most government bondholders are corporations or those with above-average Self-Reflect incomes, Creating debt and financing it through bonds redistributes income from the poor to the rich in society-because most Income earners pay taxes, but the 1 Describe the three types of government budgets. interest payments go only to bondholders. 2 How is the "debt" different from the "deficit ? BURDEN ON FUTURE GENERATIONS 3 How does an annually balanced budget differ Finally, there is a concern that deficits impose a net burden on future generations from a cyclically balanced because citizens at some point in the future will have to pay that money back, budget or at least maintain the interest payments, in the form of taxes. This concern 4 Why is a structural largely depends on what the deficit is used to finance. If the money is spent on deficit comakdared a sign of financial economic infrastructure, such as roads or buildings, then future generations will mismanagement in the get the benefit of using those expenditures. However, if the deficit is generated application of fiscal by funding current expenditures, such as employee salaries or EI payments, then policy? future generations will derive no net benefit from the debt that is created. 5 How do automatic stabilizers help deal with the problem of time lags In fiscal policy