Inflation edit
.png)
Since 2012, Canada’s inflation rate has remained low and stable, remaining between around 1% and 2%.[1] Most recently, in April 2018, the inflation rate was measured at 2.2%. The Bank of Canada has set the target inflation rate at 2%, to encourage economic activity through consumption and business investment[2], so Canada is succeeding in maintaining their ideal level of inflation. The government uses monetary policy to control the inflation rate - the central bank, the Bank of Canada, changes its short-term interest rates in response to changes to the inflation rate above or below the target inflation rate. For example, if the inflation rate is below the target, the central bank would reduce interest rates to encourage borrowing and spending, increasing aggregate demand and causing inflation. If the inflation rate was above the target, they would increase interest rates to have the opposite effect, decreasing aggregate demand and causing deflation.
The graph to the right demonstrates the effects that changing interest rates would have on an economy. Reducing interest rates would encourage consumers to borrow and spend more money, increasing aggregate demand from AD1 to AD2. This change increases inflation as the price level increases from P1 to P2. Increasing interest rates instead would discourage borrowing, decreasing aggregate demand from AD1 to AD3 and decreasing inflation as the price level decreases from P1 to P3.
Economic growth edit
After reaching its short term peak in GDP in 2013, the Canadian economy entered a recession, experiencing negative economic growth over three years until 2016[3]. However, the GDP growth rate has gradually improved and the economy reached its short term low, or trough phase, in 2016 - projections indicate that the GDP began to grow after 2016[4][5]. This pattern of rebounding growth and recession follows the natural business cycle, and Canada is succeeding in maintaining a trend of stable upward growth. From 2016 to 2018, GDP growth rates have remained mostly positive, measured at a steady 0.4% per quarter for the last two quarters of 2017[6]. The Canadian government is working to stimulate economic growth with its Hamburg Growth Strategy[7]. This plan includes the Innovation and Skills plan for training labourers, which will improve output efficiency and aggregate supply, as well as a $1.3 billion investment into public infrastructure and transportation, which would increase aggregate demand via the purchase of a merit good for society, both causing economic growth.
Unemployment rate edit
The unemployment rate in Canada has been steadily declining over the past decade, reaching the lowest level in over 40 years at 5.7% in December of 2017[8], with the unemployment rate at 5.8% by the most recent measures in April 2018[9]. This rate quite low and close to ideal - some unemployment will be present even in healthy economies due to natural causes of unemployment such as frictional or structural unemployment. As the Canadian economy grows and inflation occurs, either naturally or due to government policies like monetary policy by the Bank of Canada, unemployment will naturally decrease, since greater output levels necessitate more employment. Certain other government policies also contribute to a reduction in unemployment rates: an Ontario policy requires that “all businesses with more than 20 employees to hire at least one additional person with a disability[10].” This policy aims to reduce the especially high unemployment rate for people with disabilities, who are unemployed at a rate of 16% - more than twice the national rate[11].
Equity in income distribution edit
Canada’s income inequality has been rising over the past two decades. According to most recent measures, Canada’s GINI coefficient - a measure of the wealth distribution in a country, with 1 being the most unequal and 0 being the most equal - reached its highest level in 2013 at, 0.34. Compared to peer countries such as Sweden and France, which tend to have GINI coefficients between 0.2 and 0.3, this means that Canada has moderate income inequality. Some income inequality is necessary to serve as an incentive for people to pursue more difficult, higher paying jobs, but this high level of inequality indicates a problem of inequity, where the income distribution is unfairly skewed towards higher income earners. Canada has policies in place aiming to reduce income inequality such as a progressive tax structure, where tax rates rise with income, whose revenue is then redistributed to benefit lower income earners.
Solution to improve equity in income distribution edit
Of the four major macroeconomic goals, Canada needs most to address its problem of inequity in income distribution. Canada’s GINI coefficient is high compared to those of comparable countries at 0.34, and the wealth is very concentrated in the top quintiles of the Canadian population. In 2016, the top 20% of the population owned over 67% of the wealth, and the top 1% alone owned 11.2% of the country’s total income in 2015[12]. To improve equity in income distribution, Canada currently has a progressive tax structure in place, where the lowest earners are taxed 15% and the highest are taxed 33%[13]. This structure was recently modified to better benefit middle class earners with the move from the previous Harper plan to the Trudeau plan for taxes, lowering the tax rate for the middle class from 22% to 20.5% and increasing taxes for the top 1% of taxpayers[14]. The government’s revenue from this tax plan is then redistributed for the benefit of lower income individuals through programs such as the direct provision of merit goods like healthcare[15] and through investments into public services like transportation.
This plan works to reduce income inequality and promote equity and simultaneously works towards the other macroeconomic goals. A progressive tax structure generates much more government revenue than other tax structures, supplying the government with more money to spend on public services and redistribution. Directly providing merit goods and providing access to public services for low income earners significantly improves their quality of life and ensures they have access to many necessities such as food, education, and healthcare. Along with the humanitarian benefits, this also allows them to be better and more productive members of the labour force, increasing the country’s productive capacity as well as its aggregate supply. In addition, large portions of the money earned by high income earners goes unspent - as income increases past a certain point, their consumption reaches a limit while their income continues to grow, so they opt to put the extra money into savings or investments. Taxing this income and spending it through redistribution policies increases aggregate demand and better stimulates the economy. These increases in aggregate supply and demand would lead to economic growth, and may lead to reduced inflation in the economy.
However, implementing a progressive tax structure can lead to some disadvantages for society and the economy. First, the process of collecting and redistributing the tax money requires labour to carry out, meaning the government will have to pay some administrative costs to these labourers. This creates some opportunity cost as the money from those administrative costs cannot be spent on other services for society. Second, some level of income inequality is necessary in an economy to serve as an incentive for people to pursue higher skill jobs that offer higher pay. If the tax rates for high income earners are too high, people that could have worked the more difficult jobs may decide that the amount of extra income they get to keep from working those jobs would be too small to justify the increase in difficulty. This reduction in the quality of labour would lower the nation’s productive capacity and lead to negative economic growth and increased unemployment. This would actually reduce tax revenue as fewer people would have high paying jobs that would pay high taxes. Therefore, the specific tax rates imposed on each bracket should be carefully monitored and adjusted to maximize the benefit while avoiding this reduction in efficiency. This concept is reflected in the theory of the Laffer Curve, which models that past certain tax rates, tax revenue will begin to decrease rather than increasing.