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Economics 101

The role of government in the economy
Related sections>> Alternative Budgets and Advocacy and What governments can do?

The government plays a critical role in the functioning of the economy. However, many people don't really understand what exactly the government does and how this impacts the economy. This section is meant to answer some of those questions and thus to empower us to talk to our elected officials and let them know our ideas, or perhaps to run for elected office ourselves.

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Canadian flagWho sets the rules for the roles of government?
When Canada was formed in 1867 through the British North America Act (BNA), and later the repatriation of the Canadian Constitution from Britain (1982), the powers of provincial and federal levels of government in the Federation of Canada were set. The Supreme Court was given power to uphold these rules. Rules for municipal governments were later set by each provincial government. Many of the rules at all levels were later modified, when the need arose and the political will existed.

People have different ideas about the role of the government. Some people believe government should be small, interfering as little as possible into citizens' lives. People who advocate for smaller government tend to believe taxes should be the lowest they can be and that citizens should not depend too heavily on government services. They believe that limited social services provide incentive for citizens to work harder, earn more, and take care of themselves rather than be dependant on the government. Those who prefer bigger government on the other hand, believe the role of government is to create fairness and equity within the country. These people see that even those who work hard don't always have what they need to survive and they want a system that provides for and protects all the country's people.

Federal government
In Canada the federal government is the level of government where most of the economic decision-making takes place. The federal government controls Canada's budget and sets the rules for and collects most of the personal and corporate income taxes. Because the federal government collects taxes, many of the government services Canadians enjoy are funded directly by the federal government. These services include old age security (OAS) payments, employment insurance payments, student loans, agricultural subsidies, the Royal Canadian Mounted Police (RCMP), and funding to crown corporations like the Canadian Broadcasting Corporation (CBC), Via Rail, and Canada Post. It also manages the Canada Pension Plan (CPP) which is funded by employer and employee contributions. The federal government provides money to the provinces to deliver other services such as health, education, and social services.

The federal government has a significant impact on how public services are delivered, even if they are delivered by the provinces. When the federal government cuts taxes or changes the way it transfers money to the provinces, Canadians experience direct consequences. While the federal government sets the principles and standards under which some provincial services operate (e.g., Medicare under the Canada Health Act), it may not necessarily provide sufficient funds to enable all the provinces to comply. In 1995 the federal government eliminated the Canada Assistance Plan (CAP) replacing it with the Canadian Health and Social Transfer (CHST). Under CAP, provinces received separate funding for health, post-secondary education, and social assistance. Provinces had to abide by national standards in the delivery of health and social assistance. The CHST, in contrast, is a block of funding that the provinces can use as they see fit. In response, many provinces cut social assistance rates drastically, leaving vulnerable people in desperate circumstances. (For more visit Women, Poverty, and Social Assistance.)

The federal government is also involved in the flow of money in Canada and controls the national bank. The Bank of Canada, which is owned by the federal government (making it unique among western countries), sets interest rates for the entire country; interest rates of all other financial institutions are based on these. The Canadian government also controls the money supply and is in charge of printing new coins and bills. It is responsible for dealing with currency exchange rates set by international financial institutions, and for dealing with balances of payments with other countries resulting from the two-way flow of investment and trade. And it is responsible for setting the rules within which corporations operate.

The federal government also controls defense, foreign affairs, and international trade. Lately, federal politicians have been represented at trade meetings around the globe advocating for free trade agreements. Free trade agreements generally give less power to governments and more to corporations so it is interesting that the government is so complicit in signing these trade agreements. They also tend to benefit richer countries more since the headquarters of most of the world's largest and most powerful corporations are generally found in these countries.

Managing immigration and citizenship is another role of the federal government. Rules that dictate whether or not recent immigrants and refugees to Canada can work or study have a major impact on the economic reality of persons new in Canada.

The government of Canada works to create equal opportunities for all peoples. In Canada, this is done through equalization. Wealthy provinces pay fees to the federal government which are distributed to poorer provinces. This is why we speak of the have and have not provinces. Not surprisingly richer provinces do not tend to appreciate this system. Poorer provinces suffer more when the federal government reduces its contribution to the provinces. On the international scene, governments perform a somewhat similar function through Overseas Development Assistance (ODA); however, amounts that are sent are never sufficient to start closing the gap between have and have not countries.

Finally, because the federal government is so large, federal government departments hire large numbers of Canadians. Providing relatively stable, high-paying, and usually unionized jobs is a significant contribution to the Canadian economy made by our federal government.

Manitoba Legislative BuildingProvincial government
Canada's provincial and territorial governments play a significant role in delivering services to Canadians. Through funding from the federal government and through the taxes they collect themselves, provincial and territorial governments administer and deliver services such as health care, education, social assistance, child care (albeit limited), road maintenance, and some student loans. Provincial governments also fund provincial crown corporations. In Manitoba these include Manitoba Hydro and Manitoba Public Insurance (MPI).

Until recently, almost all provinces except Quebec collected provincial taxes according to the rules set by the federal government. Deductions, credits, and exemptions the federal government authorized limited the revenues available for the provinces to tax. Because some provinces now collect taxes themselves, provincial governments can also cut taxes - a trend which provincial governments across the country have been adopting over the past decade. When provincial governments cut taxes, the federal government does not want to be left picking up the slack. For example, as the Alberta government discusses funding private medical clinics, the federal government threatens to cut its health payments to the province. Provincial governments' inclination to cut taxes along with the federal government's elimination of CAP has created a precarious situation for the most vulnerable Canadians.

In Canada provincial governments control minimum wage and provincial labour laws and in this way have a significant impact on the working lives of their citizens. However, they rarely act in isolation as they want to promote investment and population growth in their own province rather than see it flow out to other more lenient provinces.

Provincial courts make laws relating to the family, such as maintenance laws which dictate how much money is to be distributed within families that have separated. These laws have a major impact on the quality of life for many divorced families, especially women and their children.

Provinces are also responsible for land-use planning and the establishment of an environmental framework of incentives and penalties within which sustainable development can be promoted, or regrettably, hampered.

Although provincial governments do not usually have a major say in international trade, they do control trade between provinces. And provincial government representatives are sometimes represented on international trade missions, encouraging international trade with their particular province.

Like the federal government, the provincial government is a good source of quality employment.

Ordinary Canadians are usually able to have greater input in the decision-making at the level of the provincial government than the federal simply because it is a lot smaller. In less populated provinces like Manitoba, there are sometimes better opportunities for citizen input in such things as budgets as well as for ordinary citizens to run for elected office. Each year the Manitoba government holds budgetary consultations across the province asking citizens what they would like to see in the provincial budget. To offer your opinion on how our government's money should be spent visit Manitoba Finance Budget Consultation.

Local government
In Canada, governments of cities, towns, and rural municipalities/counties, have the least amount of say in economic decision-making. Municipal governments receive most of their funding from the provinces. With these funds they deliver services such as water, sanitation and sewers, road maintenance, fire and ambulance services, garbage collection, and they operate municipal hospitals.

Municipal governments have a small amount of control over taxes. They collect gas taxes, property taxes, business taxes, and some other small taxes. For example, the City of Winnipeg collects an amusement tax.

In some countries, municipal governments encourage much citizen input in budget decisions. The city of Porto Alegre in Brazil is known around the world for its participative budget, a practice that has had a profound impact on how resources are distributed in a disadvantaged area of the country, and has radicalized citizen involvement in that process.

What is my role?
One of the ways citizens can hold their governments accountable is by offering input on how the budget is divided up. All of us can play a part in this process, no matter who we are. Each year in Canada the Canadian Centre for Policy Alternatives (CCPA) publishes an Alternative Federal Budget. In Manitoba CCPA and CHO!CES also work on an alternative provincial budget. To learn more about these initiatives and about gender-sensitive budgets around the world visit Alternative Budgets.

Another more direct role open to each citizen is through membership and activity in the political party of their choice where members work together to develop party policy and select and campaign for candidates for election who they think best able to carry out party policy. Many also take the opportunity to run for office themselves. To become active in a political party, contact the party of your choice and ask them how you can become involved. To hear of one woman who became involved see Muriel's story.

Some people find preparing for work in the civil service offers another route to helping shape political policy. Most bureaucracies in Canada have well-educated people who are selected and advanced according to merit and not political persuasion.

Federal Provincial Local
  • prepares Canada's federal budget
  • collects most taxes
  • pays Old Age Security (OAS)
  • administers Canada Pension Plan (CPP) and Employment Insurance (EI)
  • administers and funds most of the student loan program
  • funds Crown corporations such as CBC, Via Rail, and Canada Post
  • provides agricultural subsidies
  • controls Bank of Canada (sets interest rates)
  • prints money
  • sets rules for corporations
  • controls defense, foreign affairs, and international trade (negotiates free trade agreements)
  • controls immigration and citizenship
  • administers inter-provincial equalization payments
  • controls Overseas Development Assistance (ODA)
  • provides good jobs for many Canadians
  • delivers public services such as health care, education, social assistance, and child care (limited)
  • maintains provincial roads
  • collects some taxes
  • sets minimum wage
  • decides provincial labour laws
  • decides rules of family law (including divorce, separation, and maintenance laws)
  • administers land-use planning
  • sets environmental laws
  • controls inter-provincial trade
  • provides good jobs for many residents
  • delivers services such as water, sanitation, and sewage
  • maintains municipal roads
  • provides fire and ambulance services
  • operates municipal hospitals
  • collects garbage and maintains municipal dumps
  • collects gas taxes, business taxes, and property taxes
  • provides some jobs for residents

Special thanks to Muriel Smith for extensive input into this article. Thanks also to Murray Smith and Ross Dobson.

  • Economics Glossary

    "Women have cleaned up things since time began; and if women ever get into politics there will be a cleaning-out of pigeon holes and forgotten corners, on which the dust of years has fallen, and the sound of the political carpet-beater will be heard in all the land."

    Nellie McClung, 1915

    "Yet we know - not scientifically, not empirically, but in our guts and our hearts, in our women's knowledge - that when more than half of the elected representatives are women, the institutional structure of government will change: the impact of women's culture in those numbers will see the hierarchy transformed."

    - Marilyn Waring

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