Ch. 4 The Role of Government in Business

Role of Government in Business

Learning Objectives

  • List the seven categories of government activities that can affect business:
    • Crown Corporations
    • Laws and Regulations
    • The Bank of Canada
    • Taxation
    • Government Expenditures
    • Purchasing Policies
    • Services
  • Trace the historical role of government in the Canadian economy and explain the creation of Crown corporations.
  • Demonstrate the importance of understanding laws and regulations at all levels of government for business success.
  • Describe the influence of the Bank of Canada on monetary policy.
  • Explain the impact of fiscal policy on the Canadian economy.
  • Describe how government expenditures benefit consumers and businesses.
  • Illustrate the role of purchasing policies in assisting Canadian businesses.

Government Involvement with Business

  • Government activities affecting business can be categorized into the following six groups:
    • Crown Corporations: Government-owned companies.
    • Laws and Regulations: Legal framework governing business operations.
    • The Bank of Canada: Central monetary authority.
    • Taxation: Government revenue through taxes.
    • Government Expenditures: Spending by government entities.
    • Purchasing Policies: Government procurement practices.
    • Services: Various governmental services impacting business operations.

Historical Role of Government in the Economy

  • Canada operates a modern mixed economy.
  • Levels of government significantly influence the economy, with resources allocated partly by the market and partly by government action.
  • National Policy (1867):
    • Implemented to direct trade flow within Canada, specifically east-to-west movement.
    • Utilized tariffs to counteract natural North-South trade flows.

Crown Corporations

  • Definition: Crown Corporations are companies owned by federal, provincial, and/or territorial governments.
  • Historical Significance:
    • Established to provide services absent from the private sector; e.g., the formation of Air Canada in the 1930s.
    • Created in response to industry crises, e.g., Canadian National Railway (CNR) established in 1919 for industry support.
    • Provided essential services that were not feasibly provided by the private sector, illustrated by the case of the Bank of Canada.
  • Privatization: Since the 1990s, efforts have been made to reduce government involvement in the economy, leading to the sale of entities like Teleglobe Canada, Air Canada, and CNR.
  • Deregulation: The process whereby the government removes laws hampering competition.

Crown Corporations Revenue Statistics (2022-2023)

  1. Laurentian Pilotage Authority: $50.197 billion
  2. Canadian Commercial Corporation: $15.837 billion
  3. Canada Pension Plan Investment Board: $12.931 billion
  4. Canadian Mortgage and Housing Corporation: $5.787 billion
  5. Canada Post Corporation: $5.017 billion
  6. Canada Race Relations Foundation: $3.197 billion
  • Source: Consolidated Financial Information for Crown Corporations (Second Quarter 2022-2023).

Role of Government: Laws and Regulations

  • Laws and regulations are created by elected politicians.
  • Political party dominance can significantly affect the business landscape.

Sources of Law

  1. The Constitution
  2. Judicial Precedents: Decisions made in previous court cases.
  3. Provincial and Federal Statutes: Laws made by legislative bodies.
  4. Administrative Agencies: Government bodies with specific regulatory responsibilities.
  • Supreme Court of Canada: Final authority on constitutional questions and significant civil/criminal law cases.

Responsibilities of Federal Government

  • Broader Issues Affecting Nation:
    • Trade regulations (interprovincial and international)
    • Incorporation of federal companies
    • Direct and indirect taxation
    • Banking and monetary system management
    • Hospital insurance and Medicare services
    • Management of public debt
    • National defence
    • Unemployment and immigration laws
    • Criminal law enforcement
    • Fisheries and natural resource management
  • Industries under Federal Oversight:
    • Aeronautics, shipping, railways, telecommunications, atomic energy.

Medicare

  • Canada’s publicly funded health system is supported through federal grants to provinces to ensure national standards despite regional differences.
  • Canada Health Transfer (CHT):
    • Provided $51.4 billion in 2023-2024, with projections for substantial growth.

Innovation, Science and Economic Development Canada (ISEDC)

  • Federal agency overseeing various business laws and regulations.

Key Functions of ISEDC

  • Office of Consumer Affairs: Protects consumers under laws like the Food and Drug Act, Textile Labelling Act.
  • Competition Bureau: Independent agency ensuring fair competition according to the Competition Act.

Marketing Boards

  • Definition: Agencies controlling the supply and pricing of specific agricultural products.
  • Agencies created to manage adverse economic conditions and maintain food supply stability include agencies for dairy, eggs, chicken, and turkey.

Provincial and Territorial Government Responsibilities

  • Key Areas of Responsibility:
    • Regulation of provincial trade and commerce.
    • Management of natural resources within provincial borders.
    • Direct taxation authority for provincial purposes.
    • Incorporation and licensing for revenue.
    • Administration of justice and health services.
    • Oversight of municipal affairs and property law.
    • Management of education systems.

Interprovincial Free Trade and Barriers

  • Financial Impact of Trade Barriers:
    • $406 billion industry faces $130 billion in annual costs due to interprovincial barriers.
  • Effects of Barriers:
    • Reduced competition and market efficiency, affecting overall economic dynamics.
  • Types of Trade Barriers:
    • Natural: Geographic constraints.
    • Prohibitive: Laws that inadvertently block trade.
    • Technical: Specific sector regulations.
    • Regulatory/Admin: Bureaucratic requirements and paperwork.

Canada Free Trade Agreement (CFTA)

  • Purpose: Agreement among Canadian First Ministers aiming to reduce trade barriers.
  • Goals: Enhance efficiency, reduce business costs, and facilitate greater worker mobility.

Municipal Government Responsibilities

  • Approximately 4,000 municipal governments deliver a range of services:
    • Water supply, sewage, roads, garbage disposal.
    • Regulations concerning food establishments and building codes.
    • Zoning regulations affecting building structure and placement.

Bank of Canada (BoC)

  • Definition: A federal Crown corporation serving as Canada’s central bank.
  • Functions: Provides banking services for the federal government; does not serve the public directly.
  • Monetary Policy Management:
    • Goal: Support Canadian spending levels consistent with price stability.
  • Money Supply Control:
    • Governed through the overnight rate, influencing the prime rate charged by banks.

    • Fiscal Policy

    • Definition: Refers to federal government strategies for economic stability via tax adjustments or spending changes.
    • Taxation Mechanics:
      • Federal government relies on varied revenue, including income taxes.
      • Provincial and territorial governments utilize taxes and tariffs for funding; municipal governments primarily depend on property taxes.

    Impact of Fiscal Policy on Businesses

    • Taxation affects businesses as a cost of doing business, influencing pricing and consumer costs.
    • Deficits and Surpluses:
      • Deficit: Occurs when spending exceeds tax revenue.
      • Surplus: Happens when revenue exceeds expenditures, allowing for national debt reductions.

    Taxation in Canada

    • Taxes are the primary funding sources for public services, also used to manipulate consumer behavior.
    • Impact on Families:
      • Average Canadian family allocates 45.3% of income to taxes, overshadowing essential needs which take up 35.6%.

    Government Expenditures

    • Canada's geographical and resource diversity leads to varying economic development.
    • Transfer Payments: Direct payments from one governmental layer to another or to individuals (e.g., employment insurance).
    • Equalization Payments: Program designed to mitigate financial discrepancies among provinces.

    Government Expenditures: Purchasing Policies

    • Governments are major purchasers in Canada, often prioritizing contracts for domestic businesses even at higher costs compared to international bids.

    Chapter Summary

    • Historical Government Role: Played a pivotal role in economic service provision not covered by businesses.
    • Seven Categories of Government Activity: Outlined above, crucial for business environments.
    • Laws and Regulations: Essential for operational success at all government levels.
    • Monetary Policy: Managed by the BoC to instill price stability.
    • Fiscal Policy: Central to tax collection and expenditure management.
    • Government Expenditures: Create benefits for consumers and businesses through various services.