Monetary policy in Canada

Monetary policy in Canada

The Department of Finance Canada handles federal Financial Corporation’s (Banks, Treasury and Lending firms, insurance agencies and Credit Unions) and pension schemes.  

● The regulations governing the organizations are designed to stay safe and adapt to the requirements of consumers.

● Analysis of the Canadian and international financial sectors. 

● Helps ensure a practical framework for Canada in the battle against money laundering and terrorist financing. 

● It administers, together with the Bank of Canada, the debt and international reservations of the Government of Canada and generates policy advice on regional capital markets activities. 

The role of government

Appropriate financial management generally consists of a code of principles and values that guides public officials in their work. Such policies include respect for democracy, respect for people, honesty, government and competence in the Canadian context.

Four fundamental financial management principles are identified by the Government of Canada: money worth, accountability, transparency, and risk management. 

- Value of money requires responsible and equitable management of public finances, safeguarding properties and using resources to achieve departmental and policy goals effectively, efficiently and economically. 

- Accountability requires clear financial management responsibilities that provide government and citizens with the assurance of the effective use and results of public finances.

- Transparency means that the public and the government are informed of the use and management of public funds, with relevant, reliable and timely financial and related, non-financial information and reports. 

- Proper risk management requires effective and efficient inner manage systems. Controls must commensurate with the dangers that they are seeking to mitigate innovation and results.

To ensure consistency and effective public sector financial management, the Government of Canada has published several policy instruments on financial management.

Impact of Surpluses and Deficits

The conventional approach to fiscal policy stressed the direct impact on aggregate demand on public revenue and expenditure. Although the government budget balance is acknowledged as a rough attribute of the effect of government on the expected inflation, some changes in tax and spending have a more significant impact on the economy than others. At first, government surpluses were thought to be linked to high production and employment deficits. A more nuanced view emerged, as the economic reality rejected such simplistic ideas that related changes in government income balances and expenditures led to changes in aggregate demand. 

The subsequent change on the budget balance (rise on the surplus or decline of deficits) appears to slash overall demand, bringing downward pressure upon growth, wages, work and ultimately costs. Both of these items are equivalent if government receipts rise to overspend. In the opposite, the subsequent fiscal deficit deterioration (an increase of the shortage or reduction in surplus) raises economic demand, improves production, wages, employment, and ultimately costs, while government expenditure decreases over revenues. 

Areas of disagreement

- Some economists believe that fiscal policy does not affect aggregate demand. One party hopes to be funded by public spending through some worsening in the fiscal deficit and that this saving, in effect, is a potential levy, which prudent customers can take into consideration, by reducing their rates, in the same manner as existing taxes. It completely compensates for any impact on aggregate demand of expansionary fiscal policy.

- Another party notes that growing government debt by an evolving monetary policy would clash with private lenders to collect capital, boost interest rates and exchange rates and render business spending and exports more costly. It again offsets some of the policy’s original expansionary effect. Monetarist economists have so far argued in favour of dissipating all of the expansionary effects of fiscal policy.  

- In turn, the sustained deficit over extended periods would result in higher interest levels being increased by an increase of public debt and growing interest on debt over time and in a decrease in aggregate demand and jeopardize in policy efficiency to stabilize revenues and spending adjustments.

- Canadians' macroeconomic models somewhat confirm the views of those who argue that private expenses have been reduced by public expenditure. The fiscal multitudes created from simulations of such models are initially greater than the increase in Gross Domestic Product and then decreased to zero in several years. It indicates that higher government expenditure only temporarily increases production, but does not permanently increase output. It also provides additional proof that fiscal policy consequences can not be interpreted in isolation from monetary policy (money supply and demand) and changes in public debt.

How Fiscal measures are reported

Taxation reform is mainly the federal government’s obligation, but there is a function for provinces. The federal Minister of Finance presents the government's plans of spending, anticipated revenues and the amounts that must be borrowed if a deficit is expected (total financial requirements including 'non-budget' transactions, such as pension accounts and loans, investments and advances) in the annual budget. 

While expenditure and income are reported on the policy reports needed to submit to the parliament, they can be often viewed on a regional accounting framework. Specific taxes and expenses are classified due to their economic effect, as in the administrative budget by agency or by general intent.

Conclusion 

Before 1930, many economists felt that economic activity swings were mostly automatic, but with the aid of monetary policy, perhaps, to prevent excessive price movements. Governments were supposed to balance their Budgets annually, much like responsible households. Often, when economic performance was still weak, this contributed to tax increases or cost reductions, exacerbating the market cycle. But the government sector was fortunately relatively small, so changes in fiscal policy usually had minor economic impacts.

The Government of Canada reported a record $14 million of its largest fiscal surplus in 2008. The next year, however, expenditures will return to government accounts. The budget for 2009 expected a $55 billion shortfall due to higher public spending and the global recession in 2008-2009 (driven by the credit crisis of the financial markets in 2008). This Canadian deficit trend was accompanied in several years by gradually decreasing deficits and againMonetary policy in Canada, a balanced 2015-16 government budget target.


References:

https://www.thecanadianencyclopedia.ca/en/article/fiscal-policy

https://www.economy.com/canada/monetary-policy-rate

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Aug 10, 2020

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