The Role of Government in Business

The Role of Government in Business

Learning Objectives

1. Categories of Government Activities: List the seven categories of government activities that can affect business.

2. Historical Role: Trace the historical role of government in the Canadian economy and explain why Crown corporations were created.

3. Understanding Laws: Demonstrate why understanding laws and regulations at all levels of government is critical to business success.

4. Monetary Policy: Describe how the Bank of Canada influences monetary policy.

5. Fiscal Policy: Explain how fiscal policy affects the Canadian economy.

6. Government Expenditures: Describe how government expenditures benefit consumers and businesses alike.

7. Purchasing Policies: Illustrate how purchasing policies assist Canadian businesses.

Government Involvement with Business

Government activities that affect business can be divided into seven categories:

1. Crown Corporations

2. Laws and Regulations

3. The Bank of Canada

4. Taxation

5. Government Expenditures

6. Purchasing Policies

7. Services

Historical Role of Government in the Economy

• Canada operates a mixed economy, where the market and government both play significant roles.

• Governments allocate resources jointly with market forces.

• National Policy (1867): Introduced to encourage trade within Canada, specifically east-west rather than the natural north-south flow. Tariffs were utilized to protect this policy.

Crown Corporations

• Definition: Crown Corporations are companies owned by the federal, provincial, or territorial government.

• Historical Background:

  • They arose to provide services typically absent in the private sector; for example, Air Canada was founded in the 1930s to serve civil aviation needs.

  • Canadian National Railway (CNR) was created in 1919 to support a distressed industry.

  • They serve unique roles, such as the Bank of Canada managing monetary issues.

• Privatization and Deregulation:

  • Since the 1990s, the Canadian government has aimed to reduce its economic role by privatizing Crown Corporations, such as Teleglobe Canada, Air Canada, and CNR.

  • Deregulation is the process of removing restrictions that inhibit competition.

Crown Corporations Revenue Data (2022-2023)

Source: Data obtained from “Consolidated Financial Information for Crown Corporations (Second Quarter 2022-2023)”.

The Role of Government: Laws and Regulations

• Laws and regulations are established by elected politicians, meaning they can significantly alter the business environment.

• Sources of Laws:

  1. The Constitution

  2. Judicial Precedents

  3. Provincial and Federal Statutes

  4. Federal and Provincial Administrative Agencies

• The Supreme Court of Canada holds final authority on constitutional matters and critical civil and criminal law cases.

The Role of Government: Responsibilities

• The federal government manages issues impacting all citizens across Canada, which can include:

  • Trade regulations (both interprovincial and international)

  • Incorporation of federal companies

  • Direct and indirect taxation

  • Banking and monetary systems

  • Medicare and hospital insurance

  • Public debt and property

  • National defense

  • Immigration policies

  • Criminal law enforcement

  • Fisheries management

• Additional responsibilities include regulation of industries like aeronautics, shipping, railways, telecommunications, and atomic energy.

The Role of Government: Medicare

• Medicare is Canada's publicly funded health system, supported by federal grants aimed at ensuring provinces meet national healthcare standards despite varying financing and coverage.

• The Canada Health Transfer (CHT), the largest funding mechanism for federal health services, allocated $51.4 billion for the 2023-2024 period, with expectations of significant growth.

The Role of Government: Innovation, Science and Economic Development Canada (ISEDC)

• ISEDC oversees a wide range of laws influencing businesses and consumers. Key functionalities include:

  • The Office of Consumer Affairs, which aims to protect Canadian consumers and administers Acts like the Food and Drug Act.

  • The Competition Bureau, an independent agency pivotal for ensuring lawful competition through the Competition Act.

The Role of Government: Marketing Boards

• Marketing Boards manage the supply or pricing of select agricultural products.

• Established to combat unpredictable conditions (e.g., droughts, fires, COVID-19), these boards help ensure a steady and priced food supply for consumers.

• Examples of such boards include:

  • Canadian Dairy Commission

  • Canadian Egg Marketing Agency

  • Chicken Farmers of Canada

  • Canadian Turkey Marketing Agency

  • Canadian Broiler Hatching Egg Marketing Agency

Provincial and Territorial Government Responsibilities

• Provincial and territorial governments are mandated to manage various sectors, including:

  • Regulation of internal trade

  • Oversight of natural resources

  • Direct taxation for provincial needs

  • Incorporation of provincial businesses

  • Collecting licenses for revenue

  • Administration of justice systems

  • Provision of health and social services

  • Municipal governance

  • Property law administration

  • Labor law enforcement

  • Education systems

Free Trade Among Provinces and Territories

Impact of Interprovincial Trade Barriers

• Interprovincial trade barriers impact a $406 billion industry, adding $130 billion in annual costs.

• Barriers limit competition, efficiency, market access, and create market distortions.

• Types of Trade Barriers:

  • Natural: Geographic distance and borders

  • Prohibitive: Unintentional blocking by provincial laws

  • Technical: Industry-specific regulations (e.g., vehicle weight standards)

  • Regulatory/Admin: Involves bureaucracy like permits and licensing

Purpose of the Canada Free Trade Agreement (CFTA)

• CFTA, established by Canadian First Ministers, aims to diminish and eradicate trade barriers, increase efficiency, minimize business costs, and enhance worker mobility.

The Role of Government: Municipal Government

• Approximately 4,000 municipal governments in Canada deliver essential services including:

  • Water supply and sewage

  • Garbage disposal, roads, and sidewalks

  • Street lighting and building codes

  • Parks and libraries

  • Regulation of food establishments

  • Zoning laws dictating building heights and road setbacks

Bank of Canada

• The Bank of Canada (BoC), a federal Crown corporation, serves as the country’s central bank.

• It offers banking services for the federal government but does not cater to public banking needs.

Monetary Policy

• The BoC implements Monetary Policy, which involves managing the money supply and interest rates to foster price stability in personal spending.

• The money supply denotes the amount of money the BoC circulates to enable the purchase of goods/services.

• The BoC controls this supply using the overnight rate, the interest rate for major financial institutions lending or borrowing overnight funds. Changes in this rate affect the prime rate, the interest charged to the most reliable customers by banks.

Fiscal Policy

• Fiscal policy encompasses government strategies to maintain economic stability via taxes and government spending adjustments.

• The federal government relies on income tax and other taxes, while provincial governments depend on income and sales taxes, and municipal governments on property taxes.

• Taxes represent a significant cost for businesses; they are often transferred to consumers as higher prices.

Deficits and Surpluses

• A deficit occurs when governmental expenditure exceeds tax revenue over a specific time.

• High deficits restrict funds available for social programs, while budgeting surpluses yield reduced national debt, enabling enhanced competitiveness for businesses.

Taxation

• Taxes are vital for financing public services and behaving as behavior-influencing tools.

• Specific taxes serve as deterrents, such as “sin taxes” on cigarettes and alcohol.

• On average, Canadian families allocate 45.3% of their income to taxes, surpassing the combined costs of necessities such as food, housing, and clothing (35.6%), which adversely affects disposable income.

Expenditure Statistics

• The Average Canadian Family’s Total Expenditures as a Percentage of Cash Income, 1961-2022.
  Source: Data from the Canadian Consumer Tax Index 2023 Edition, Fraser Institute.

Government Expenditures

• Canada's vast size leads to disparities in resources, climate, and geography, resulting in varied economic development.

• Transfer payments are direct payments made by governments to others or individuals (i.e. employment insurance or social security).

• Equalization payments help to balance fiscal disparities by redistributing funds from wealthier to less affluent provinces and territories.

Government Expenditures: Purchasing Policies

• The government is a significant purchaser in Canada, often awarding contracts to foster support for Canadian businesses even if the costs are higher compared to non-Canadian bidders.

Chapter Summary

• Governments historically filled service gaps in business sectors, leading to the establishment of seven key activity categories affecting business: Crown Corporations, laws and regulations, the Bank of Canada, taxation, government expenditures, purchasing policies, and services.

• Legal understanding at all government levels is essential for business success.

• The Bank of Canada manages monetary policy for stability purposes, whereas fiscal policy outlines governmental tax and expenditure strategies.

• Government expenditures have been shown to benefit consumers and businesses through systemic supports like education, healthcare, infrastructure, and various services necessary for societal function.