1010 Class 6: Government and its Effect

on the Private Sector

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
Two Approaches to Running the
Economy
► One camp favors ► The other camp
government argues for tax cuts
intervention and a reduction of
believing politicians governments role in
and bureaucrats can the running of
orchestrate the citizens lives.
economy from ► This they argue is
above. the only way to
achieve
productivity.
 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.
 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
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.
 Government Control
ƒ Compared to the
United States,
Canadian
governments control
approximately 7 to 8
percent more of the
G.D.P.
 The First Approach to
Government Growth
ƒ Was seen in public
spending.
ƒ 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.
The Second Approach to
Government Growth
ƒ Explained in the tax expenditure
process.
ƒ Defined as revenue losses
resulting from special provisions in
the Income Tax Act.
ƒ Designed to generate incentives
for individuals and corporations to
pursue certain courses of action
 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.
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.
 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.
 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 roles of
various political institutions of
the budgetary process
► Political scientists emphasize
the political behavior involved
in the budgetary process.
 Determinants of Government
Spending

► Changes in the
attitudes of the public
► Self Interest
► Institutional
Imperialism
 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?
 The “Self Interest” theory of the
budgetary process
► Argues that departments ► Since the relative status
and agencies seek to of government officials is
maximize the size of determined by what they
their budget and seek to control and how much
increase the demand for money is in their budget,
their services. there is a predisposition
► Also known as ‘empire to growth.
building’ within the ► Human Nature.
public service.
 Institutional Imperialism
► The budget
maximizing motivation
leads organizations to
expand their functions
► This is growth for its
own sake.
 Disagreements with the Self-Interest Theory
of Bureaucratic Behavior.
1. Not all government organization gain influence
by spending freely.
2. With fixed expenditure ceilings, most
government organizations can no longer expect
the traditional annual increments in their
spending.
3. Professionalism seeks to achieve improved
standards in public programming for their clients
and society.
4. The budgetary process is asymmetrical because
spenders outnumber cutters.
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
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.
Section 3: How does business
factor into the growth of
government?
 Contributing Factors to the Growth
of Government
1. Growing 6. Federal provincial
industrialization fiscal arrangements
2. Inflation 7. The nature of the
3. Urbanization bureaucratic
4. Ideological changes structure.
5. Technological 8. Rising incomes
changes
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.
 Federal Government Support of the
Private Sector
► Cash grants
► Federal Provincial
Agreements
► Tax Incentives
► Special grants to
support firms facing
economic difficulties.
 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.
 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.
 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
 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.
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
 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.
 The Atlantic Development Board
►A special
development fund
to assist in the
provision or
improvement of the
Atlantic's basic
economic
infrastructure.
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.
 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.
 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.
 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.
 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.
 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.
 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.
 Modification to IDRE 1984
► By 1985-86, 70% of the
DREE 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.
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.
 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.
 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.
 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.
 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.
 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.
Section 4: Why Has Government
Involvement Grown?
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.
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.
 Economic Nationalism
► Refers to a movement
aimed at achieving
greater control by
Canadians of their
economy.
► Protectionism
► Dislikes foreign
ownership of business
► Examples
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.
 The Issue of Extraterritoriality
► Refers to the tendency
of a foreign
government to assert
legal jurisdiction over
the branch plants of its
branches operating in
other countries.
Watkins Task Force of Foreign Ownership and
the Structure of Canadian Industry
► Recommended the creation of a special agency to
coordinate government policies and programs
dealing with multinational corporations.
► Goal was to gather more information on their
activities.
Wahn Report Respecting Canada-US
Relations
► Restated Watkins's
recommendation.
► Suggested that Canadians
attempt to secure 51%
ownership of foreign firms.
► Recommended stringent
laws to countervail
American extraterritorial
jurisdiction.
 Herb Grey’s Foreign Investment in
Canada Report
1. A foreign firm would be
questioned if it was
contemplating the purchase
or erection of a plant in
Canada about the need for
this particular plant.
2. A foreign firm would be
questioned about the nature
of the technology to be
employed in comparison with
technology available in
Canada.
 Herb Grey’s Foreign Investment in
Canada Report
3. A foreign firm would be
questioned about
employment
opportunities.
4. A foreign firm would be
questioned about its
plans for research and
development, its product
innovation in Canada
and its plans for
purchasing materials,
components and services
in Canada.
 Enter a New Era
► There has been for the most part a rejection
of Keynesian principles.
► A general acceptance of monetarism and
Milton Freidman.
► A reversal to the thoughts of Adam Smith.
► It is possible the era of big government
intervention in the economy is drawing to a
close.