5.2 Fiscal Policy

Comprehensive guide to understanding fiscal policy, its components, and its impact on economic performance in the context of Canadian federal and provincial governments.

Fiscal Policy

1. Describe the Components of Fiscal Policy and Their Impact on Economic Performance

Fiscal policy comprises the strategies and decisions made by a government regarding its spending and taxation powers. These decisions significantly influence economic activity, employment levels, and long-term economic growth. The foundational balance within fiscal policy involves a consideration of taxes and government spending. Notably, perspectives on the effectiveness of fiscal policy vary greatly among economists and policymakers.

Key Components of Fiscal Policy

Government Spending

Government spending involves all expenses undertaken by the federal and provincial governments to provide public services and welfare offerings. this includes:

  • Healthcare: Funding hospitals and healthcare initiatives.
  • Education: Funding public schools and post-secondary institutions.
  • National Defense: Maintaining military forces and national security operations.
  • Infrastructure: Roads, bridges, public transport, and other foundational structures.
  • Social Services: Support systems, welfare, and employment benefits.


Taxes are crucial revenue-generating mechanisms for the government. Types of taxes include:

  • Income Tax: Charged on individual and corporate earnings.
  • Property Tax: Levied on property ownership based on assessed value.
  • Sales Tax: Applied to the sale of goods and services.
  • Corporate Tax: Tax levied on corporate profits.
  • Excise Tax: Duties on specific goods, such as tobacco and alcohol.

Impact on Economic Performance

Fiscal policy’s impacts can be both immoderate and long-lasting, including:

  • Economic Growth: Careful fiscal policy can stimulate growth by increasing aggregate demand through government spending and reductions in taxation.
  • Employment: Enhancing spending in public projects and services can lead to job creation.
  • Inflation: While additional government expenses may stimulate economic growth, they could also accelerate inflation if the supply does not meet increased demand.
  • Public Debt: Persistent fiscal deficits over time can lead to growing national debt, with significant long-term economic consequences.

Federal and Provincial Responsibilities

Federal Government Programs and Services

At the federal level, several responsibilities dictate the allocation of spending:

  • National Defence
  • Employment Insurance and pension income for seniors and disabled persons
  • Veterans’ Affairs, Foreign Affairs, and Indigenous and Northern Affairs

Provincial Government Programs and Services

Provincial governments manage another range of services critical to the regions:

  • Health Care
  • Education
  • Securities Regulation
  • Various Social Services

Shared Responsibilities

Certain sectors require both federal and provincial oversight and funding. Large segments of federal spending support transfer payments to provinces to assist with responsibilities like healthcare and education.


Q: What is fiscal policy?

A: Fiscal policy involves the use of government revenue (taxation) and expenditure (spending) to influence the economy.

Q: How does fiscal policy affect inflation?

A: Additional government spending can increase demand, potentially leading to higher prices if supply does not meet this increased demand, thus inflating the economy.

Q: What are some examples of transfer payments?

A: Federal payments to provincial governments for healthcare, education, and social services funding are typical transfer payments.

Key Takeaways

  • Fiscal policy is crucial for governmental influence over economic activity, employment, and long-term economic growth through taxation and government spending.
  • Both the federal and provincial governments have distinct responsibilities but also share duties in critical areas, funded through a combination of taxes and intergovernmental transfer payments.
  • Varying taxation methods and carefully planned government expenditures can be potent tools for stimulating the economy but can potentially lead to inflation or high public debt if not managed wisely.


  • Fiscal Policy: Government strategy involving the use of taxation and spending to influence economic conditions.
  • Transfer Payments: Identifiable flows of money between different levels of government to finance responsibilities shared amongst them.
  • Inflation: The rate at which the general level of prices for goods and services rises, eroding purchasing power.
  • Public Debt: Accumulation of government deficits over time.

Diagram: Fiscal Policy Structure

Here’s a simple diagram that outlines the basic structure and flow of fiscal policy:

    graph TD
	A[Government Revenue]
	C1[Income Tax]
	C2[Sales Tax]
	C3[Corporate Tax]
	C4[Excise Tax]
	D[Government Spending]
	E3[National Defense]
	E5[Social Services]
	A --> B
	B --> C1
	B --> C2
	B --> C3
	B --> C4
	A --> D
	D --> E1
	D --> E2
	D --> E3
	D --> E4
	D --> E5

This diagram provides a high-level view of how government balances revenue through varied forms of taxes and allocates it towards various public spending efforts helping sustain overall economic health.

CSC® Exams Practice Questions

📚✨ CSC Exam Questions ✨📚

Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck!

## What is the primary purpose of fiscal policy? - [ ] Regulate monetary supply - [x] Inform government decisions regarding spending and taxation - [ ] Control interest rates - [ ] Manage exchange rates > **Explanation:** The primary purpose of fiscal policy is to inform government decisions around the use of its spending and taxation powers to influence economic activity, employment levels, and long-term growth. ## Who is responsible for national defence in Canada? - [ ] Local governments - [x] Federal government - [ ] Provincial governments - [ ] International organizations > **Explanation:** The federal government in Canada is responsible for national defence, along with services such as employment insurance and foreign affairs. ## What is a major component of federal government spending? - [ ] Direct subsidies to businesses - [x] Transfer payments to provincial governments - [ ] Local infrastructure projects - [ ] International aid > **Explanation:** A significant component of federal government spending consists of transfer payments to provincial governments to help fund shared responsibilities like healthcare and education. ## Which of the following is a responsibility primarily under provincial jurisdiction? - [ ] National defence - [ ] Employment insurance - [x] Securities regulation - [ ] Foreign affairs > **Explanation:** Securities regulation is primarily a provincial responsibility in Canada, although there are shared responsibilities in other areas. ## What element of government policy directly influences employment levels and economic activity? - [ ] Foreign policy - [x] Fiscal policy - [ ] Environmental policy - [ ] Trade policy > **Explanation:** Fiscal policy directly influences economic activity and employment levels through its management of government spending and taxation. ## Who oversees healthcare services in Canada? - [ ] Federal government - [x] Provincial governments - [ ] Local governments - [ ] International health organizations > **Explanation:** Healthcare services in Canada are primarily the responsibility of provincial governments. ## What areas do both federal and provincial governments share responsibility for? - [x] Health care, education, various social services - [ ] National defence, foreign affairs, veterans’ affairs - [ ] Employment insurance, indigenous affairs, treasury operations - [ ] Environmental regulation, municipal services, local policing > **Explanation:** Both levels of government share responsibility for healthcare, education, and various social services due to their broad impact on society. ## What influences the effectiveness of fiscal policy according to different views? - [ ] Trade policy - [ ] Federal regulations - [x] Balancing of taxes and spending - [ ] Judicial review > **Explanation:** The effectiveness of fiscal policy is often debated and is heavily influenced by how well taxes and spending are balanced. ## Which service is NOT a shared responsibility between federal and provincial governments? - [ ] Health care - [ ] Education - [x] Employment insurance - [ ] Various social services > **Explanation:** Employment insurance is primarily handled by the federal government and is not a shared responsibility with provincial governments. ## How does fiscal policy typically impact long-term economic growth? - [ ] By setting interest rates - [ ] By managing currency exchange - [ ] By overseeing international trade - [x] Through government spending and taxation decisions > **Explanation:** Fiscal policy impacts long-term economic growth by influencing economic activity through its decisions on government spending and taxation.

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In this section

  • 5.2.1 Federal Budget
    A comprehensive overview of the federal budget in Canada including government's revenue sources, budget positions, and the impact on national debt and capital markets.
  • 5.2.2 How Fiscal Policy Affects Economy
    Explore how fiscal policy influences the Canadian economy with insights into government spending, taxation, and key economic theories.
Sunday, July 21, 2024