1010 Class 6: Government and its Effect on the Private Sector

1. 1010 Class 6: Government and its Effect on the Private Sector

2. Part 1: How big has government become? Governments of all parties have managed to create a tax and social security system of such complex detail that they could not possibly understand it. The only explanation for their achievement is that it happened piecemeal, each change being made in pursuit of the latest fashion, social purpose or whim.” The Economist, October 1983

3. Two Approaches to Running the Economy • The other camp argues for tax cuts and a reduction of governments role in the running of citizens lives. • This they argue is the only way to achieve productivity. • One camp favors government intervention believing politicians and bureaucrats can orchestrate the economy from above.

4. The Mixed Economy of Canada • Governments enact a wide range of laws • They establish crown corporations • Deliver and array of services and financial aid packages • Purchase goods and services.

5. Budget Expenditures • In 1877, the total federal budget was 7.6 million. • In 2005-06 it was $196.4 billion with total revenues of $200.4 billion. • Canada is currently running a surplus, unique in the G8

6. A Study of the OECD • Reported total government revenues in Canada rose from 26% of GDP in the 1960’s to just under 39% in 1982. • Over the same period, expenditures by all levels of government rose from just under 29% of GDP to nearly 46% • This indicates that an ever increasing share of our national resources controlled by the public sector • Often there is a failure of revenue to keep pace with expenditure growth.

7. Government Control • Compared to the United States, Canadian governments control approximately 7 to 8 percent more of the G.D.P.

8. The First Approach to Government Growth • Was seen in public spending. • Most of the increased spending between 1965 to 1975 occurred In the form of transfer payment to individuals through higher unemployment insurance, family allowance and old age security payment.

9. The Second Approach to Government Growth • Explained in the tax expenditure process. • Defined as revenue losses resulting from special provisions in the Income Tax Act. • Designed to generate incentives for individuals and corporations to pursue certain courses of action

10. The Second Approach to Government Growth • When government spending is adjusted to take account of inflation on the price of goods and services purchased by governments, the spending increases are far less impressive. • Part of the revenue loss resulting from tax expenditure is absorbed by most provincial governments which collect their shares of personal and corporate taxes on the basis of the federal definition of taxable income.

11. Tax Expenditures as a method of pursuing public policy. • Does not undergo the same scrutiny either within Cabinet or in Parliament. • Favors more affluent members of society. • Contributes to regulatory activity.

12. Public Service Employment • Creation of new departments to administer new initiatives • Significant growth of crown corporations and regulatory boards • Increased specialization of the public service to deal with greater complexity of problems.

13. Section 2: What are the factors contributing to government growth? • Some economists explain in terms of total levels of government spending, not the allocation of spending among different sectors of government • Other economists explain in terms of the specific rules of various political institutions of the budgetary process • Political scientists emphasize the political behavior involved in the budgetary process.

14. Determinants of Government Spending • Changes in the attitudes of the public • Self Interest • Institutional Imperialism

15. Post World War Two Expansion in Government activity • A change in the public's conception of the appropriate role of the state. • From a restricted, negative conception. • To an activist, positive one. • What is the role of interest group behavior in this expansion?

16. Argues that departments and agencies seek to maximize the size of their budget and seek to increase the demand for their services. Also known as ‘empire building’ within the public service. Since the relative status of government officials is determined by what they control and how much money is in their budget, there is a predisposition to growth. Human Nature. The “Self Interest” theory of the budgetary process

17. Institutional Imperialism • The budget maximizing motivation leads organizations to expand their functions • This is growth for its own sake.

18. Disagreements with the Self-Interest Theory of Bureaucratic Behavior. • Not all government organization gain influence by spending freely. • With fixed expenditure ceilings, most government organizations can no longer expect the traditional annual increments in their spending. • Professionalism seeks to achieve improved standards in public programming for their clients and society. • The budgetary process is asymmetrical because spenders outnumber cutters.

19. The Role of Federalism in contributing to the Growth of Government • Produces competition between the Federal and Provincial governments for jurisdiction and political credit for new initiatives

20. Economic Conditions and the Impact on government • Affects the flow of taxation revenues • Affects non-discretionary spending on programs. • Governments face difficulties forecasting accurately their revenues and expenditures.

21. Section 3: How does business factor into the growth of government?

22. Growing industrialization Inflation Urbanization Ideological changes Technological changes Federal provincial fiscal arrangements The nature of the bureaucratic structure. Rising incomes Contributing Factors to the Growth of Government

23. Government Intervention in the Regions of Canada • Both federal and provincial governments are involved in decisions about the location of new or expanded economic activities by the private sector.

24. Federal Government Support of the Private Sector • Cash grants • Federal Provincial Agreements • Tax Incentives • Special grants to support firms facing economic difficulties.

25. Early Government Assistance Programs • The best means of adjusting fiscal policy lay in offering generous subsidies to provincial governments for public works projects to attack unemployment. • Later it introduced equalization payments to poorer provinces to even out the fiscal capacities of all provincial governments. • During World War Two, the Federal government acted as a high profile economic manager to intervene in private sector decisions.

26. The Legacy of CD Howe • Believed that government could not or should not force the pace of development faster than the private sector could support • Contented to see business being the engine and architect of development • Favored private enterprise and was happy to wield public power vigorously to help private enterprises achieve what seemed like national goals.

27. The Gordon Commission on Canada’s Economic Prospects • Advised that a federally sponsored commission to provide infrastructure facilities to encourage economic growth. • Recommended for measures to increase the rate of capital investment in the Atlantic region. • Results today? ACOA

28. The 1960 Budget Speech • Companies permitted to obtain double the normal rate of capital cost allowances on most of the assets they acquired to produce new products. • IF they located in designated regions with high unemployment and slow economic growth.

29. The Agriculture Rehabilitation and Development Act. • To improve the depressed rural economies. • This was a federal provincial effort to stimulate agricultural development and to increase income in rural areas • It was criticized because it lacked appropriate geographical framework

30. The Fund for Rural Economic Development • Assistance was provided to projects considered capable of creating long-term employment in the natural resource and tourism sectors. • Problem: Most of these projects were not viable without some public assistance • Example: In northeast New Brunswick provided special inducements to private enterprise.

31. The Atlantic Development Board • A special development fund to assist in the provision or improvement of the Atlantic's basic economic infrastructure.

32. The Area Development Agency 1963 • To stimulate growth in economically depressed regions. • High unemployment and slow growth regions were targeted. • Manufacturing and processing firms were invited to locate or expand operations in these regions.

33. The Department of Regional Industrial Expansion (DREE) • New programs would be discretionary. • Grants would be available for selected sectors only, but would be available over a much wider area by providing incentives in growth centers and in selected urban areas.

34. The Department of Regional Industrial Expansion • Designated areas included: • All the Atlantic provinces • Eastern and northern Quebec • Parts of Northern Ontario • Northernmost regions of the four Western provinces • Parts of Ontario • Alberta and British Columbia • Regions were designated in all ten provinces. • Accounted for approximately 30% of the Canadian labor force and the average per capita income within them was approximately 70% of the national average.

35. Montreal – Region C • The grant could not exceed 10% of approved capital cost, plus $2,000 for each direct job created. • Elsewhere in the designated regions of Quebec and Ontario, the maximum incentive grant was fixed at 25k of approved capital costs and $5,000 for each new job created. Stipulation for two years only. • Covered about 40% of the population.

36. Regional Incentive Program in the 1980’s • Covered fully 93% of Canada's land mass and over 50% of the population. • Between the 1960s and the 1980s, the Federal government spent well over $1 billion in cash grants to the private sector.

37. Development Index of the IRDP • Established the needs of individual regions. • Arranged then into four tiers. • Tier 1: Financial assistance up to 25% of the cost of the project. 50% of the population in the most developed areas. • Tier 4 financial assistance to 60% of the cost. Available to 5% of population with greatest need. • Greatly increased the role of government in the overall business cycle.

38. Modification to IDRE 1984 • Most successful in the Windsor - Quebec corridor in as far as job creation. • Created twice the number of jobs than tiers 3 and four combined. • Tier 1 allocated for projects $229 million compared with $23 million for Tier 4, $46 million for Tier 3 and $74 million for Tier 2.

39. Modification to IDRE 1984 • By 1985-86, 70% of the D.R.LE. funds for the Industrial and Regional Development Program went to Ontario and Quebec. • Atlantic and Western regions charged that Central Canada were given preferential treatment.

40. The Department of Regional Industrial Expansion • Goal to disband the DREE • To combine both industrial and regional perspectives. • To expand the industrial and regional development program everywhere in Canada. • Focus was to be on infrastructure, industrial diversification, new plants and product lines.

41. Separate Atlantic and Western Agencies 1988 • Disbanding of D.R.E.E. • Endowed Atlantic and Western Agencies each with their own $1 billion budgets. • Establishing of the Department of Industry, Science and Technology to make cash grants to private sector.

42. Other Regional Incentive Programs • Cash grants to various industry sectors • Federal-Provincial programs to assist firms in adjusting to new or emerging circumstances. • 1980 Budget Speech provided initiatives to promote industrial restructuring and manpower retraining and mobility in areas of particular need.

43. The Nielsen Task Force • Reported 218 distinct federal or federal-provincial programs costing in aggregate $16.4 billion In 1984-85 requiring more than 68,000 public servants. • Concluded programs to business were overly rich, overlapping and required rationalizing.

44. The Economics of Bankruptcy • Goal: To weed out unsuccessful firms. • Assets, if placed in the hands of energetic managers, lowers the cost of production. • Productivity and international competitiveness are increases with the result that sales and new employment is created.

45. Government Bail Outs • Government intervention to save a failing firm is counterproductive. • Once the government bails out a high profile corporation in Central Canada, other regions will insist on equal or better treatment for their weaker industrial base.

46. Section 4: Why Has Government Involvement Grown?

47. The Staple Thesis of Harold Innis • Asserted the origins and purposes of the federal government can be understood in terms of an economic territory dependent upon the export of certain staples. • To make it commercially feasible, production entailed heavy public expenditures on railways and canals. • The government filled an important vacuum by being the substitute for private enterprise in the building and developing Canada. • Thomas Hockin argues that the Canadian government was given an active role in national development and fostering and protecting of certain cultural and economic characteristics.

48. The Role of Government in the Early Development of Canada • Sir John A. MacDonald's national policy. • Exercise of residual legislative powers to establish a strong central government to unite, expand, develop and settle a newly established nation. • Regulate trade and commerce. • Establish trading patterns.

49. Economic Nationalism • Refers to a movement aimed at achieving greater control by Canadians of their economy. • Protectionism • Dislikes foreign ownership of business • Examples

50. Problems Created by Foreign owned Subsidiaries • The ability of head office to establish prices for both inputs and outputs or to transfer assets to their their subsidiaries. • These practices make it possible to manipulate balance sheets to reduce taxes to the Canadian government. • Multinationals.