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.

The Federal Budget

The federal budget outlines the government’s projected spending, revenue, surplus or deficit, and debt for the forthcoming fiscal year, running from April 1 to March 31, along with projections for at least one subsequent year. The government’s primary sources of revenue include various forms of taxation.

Budget Balance

The budget balance is the difference between total revenue and total spending. The government’s proposed annual budget can have three possible positions:

Budget Position Definition
Budget Surplus: Revenue > Spending The government spends less than it earns.
Budget Deficit: Revenue < Spending The government spends more than it earns.
Balanced Budget: Revenue = Spending The government spends equal to what it earns.

National Debt

The national debt consists of accumulated past deficits minus accumulated past surpluses in the federal budget. When there is a deficit, the government borrows from the capital markets to finance the national debt. The amounts representing the surplus or deficit each year, along with the current national debt, are crucial. These figures show the extent to which the government needs to borrow in the coming year and its effects on the capital markets.

Borrowing and Capital Markets

Governments finance deficits by issuing debt instruments such as bonds and Treasury bills in capital markets. Some maturing national debt must be refinanced, comprising refinanced debt and new debt borrowings.

Crowd Out Effect

The capital market has a finite amount of capital. When a government borrows significantly from it, less capital remains available for businesses to borrow. This phenomenon is known as crowding out, which can negatively impact the economy. If supply is less than demand, interest rates rise, and borrowing costs increase.

    gantt
	    title Crowding Out Effect
	    dateFormat  YYYY-MM-DD
	    section Government Borrowing
	    Issuing Debt           :done, 2023-01-01, 2023-03-31
	    section Business Borrowing
	    Limited Capital        :done, 2023-04-01, 2023-06-30
	    Rising Interest Rates  :crit, done, 2023-07-01, 2023-12-31

Key Takeaways

  • Federal Budget: Annual government plan about revenue and spending.
  • Budget Positions: Reveal whether there is a surplus, deficit, or balanced budget.
  • National Debt: The total amount of money the government owes from past deficits minus surpluses.
  • Crowding Out: When government borrowing limits the capital available for private businesses, potentially raising interest rates.

Glossary

  • Budget Surplus: A situation where the government’s revenue exceeds its expenditures.
  • Budget Deficit: A situation where the government’s expenditures exceed its revenue.
  • Balanced Budget: A situation where the government’s revenue equals its expenditures.
  • National Debt: The total outstanding debt owed by the federal government due to accumulated budget deficits and surpluses.
  • Treasury Bill (T-Bill): Short-term debt obligation backed by the government with maturities ranging up to one year.
  • Crowding Out: The effect where increased government borrowing reduces the amount of capital available for private sector borrowing.

Frequently Asked Questions (FAQs)

  1. What is the primary source of revenue for the federal government?

    • The primary source of revenue is various forms of taxation.
  2. How does a budget surplus differ from a budget deficit?

    • A budget surplus occurs when revenue exceeds spending, whereas a budget deficit occurs when spending exceeds revenue.
  3. What impact does government borrowing have on capital markets?

    • Government borrowing can limit the available capital for businesses, potentially increasing interest rates.
  4. What is ‘crowding out’ in the context of government borrowing?

    • ‘Crowding out’ refers to the reduction in available capital for businesses due to significant government borrowing, leading to higher interest rates.

By understanding the components and implications of the federal budget, individuals can better comprehend the broader economic dynamics at play.


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!

## When the government’s revenue equals its spending in a fiscal year, what does this scenario represent? - [ ] Budget surplus - [ ] Budget deficit - [x] Balanced budget - [ ] National debt > **Explanation:** A balanced budget occurs when the government's revenue equals its spending. ## What primarily constitutes the government's revenue? - [ ] Borrowing from capital markets - [ ] Issuing bonds and Treasury bills - [x] Different forms of taxation - [ ] Refinanced debt > **Explanation:** The government’s primary revenue source is from various forms of taxation. ## The national debt consists mainly of: - [x] Accumulated past deficits minus accumulated past surpluses - [ ] Current projections of deficits - [ ] Annual surplus calculations - [ ] Refinanced debt and new debt > **Explanation:** The national debt is the total of past deficits minus past surpluses. ## What does the government need to do when it runs a budget deficit? - [ ] Increase taxation - [ ] Cut spending - [x] Borrow from the capital markets - [ ] Decrease interest rates > **Explanation:** When the government runs a budget deficit, it needs to borrow from the capital markets to finance its debt. ## What is the economic consequence termed 'crowding out'? - [ ] Decreased taxes for businesses - [ ] Reduced public spending - [ ] More capital available for businesses - [x] Less capital available for businesses to borrow because the government borrows significantly > **Explanation:** Crowding out refers to the situation where significant borrowing by the government leaves less capital for businesses, leading to higher interest rates. ## How can the effect of 'crowding out' be observed in the market? - [ ] Increased supply of capital - [ ] Decreased government spending - [ ] Lower interest rates - [x] Higher interest rates > **Explanation:** 'Crowding out' usually results in higher interest rates due to limited capital available. ## When must the national debt be refinanced? - [x] When some of the national debt matures - [ ] When the budget is balanced - [ ] Whenever there is a surplus - [ ] Before accumulating additional new debt > **Explanation:** National debt must be refinanced when some of it matures. ## What instruments does the government use to finance its deficits? - [ ] Corporate bonds - [ ] Savings accounts - [x] Bonds and Treasury bills - [ ] Stock issuance > **Explanation:** The government issues debt instruments such as bonds and Treasury bills to finance its deficits. ## When does the government run a budget surplus? - [x] When revenue exceeds spending - [ ] When revenue is equal to spending - [ ] When spending exceeds revenue - [ ] When it issues new debt > **Explanation:** A budget surplus occurs when the government’s revenue exceeds its spending. ## What does the annual amount of surplus or deficit indicate? - [ ] Future tax rates - [x] The extent to which the government will be borrowing in the coming year and its impact on capital markets - [ ] Next year’s budget position - [ ] The total national debt > **Explanation:** The annual surplus or deficit indicates how much the government needs to borrow, affecting capital markets.

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