Case Teaching Package

A case teaching package is available for this case. It includes strategies for case presentation, key concepts, solutions to the assignment questions in the case, and suggestions for the most effective ways to work this case into your course.

Length

This case is 21 pages in length and its case teaching package is 7 pages.

Abstract

The study of Canadian fiscal policy between 1993 and 1997 provides four insights into macroeconomics. First, the case provides evidence of the interaction between the government deficit and the current account deficit. Second, the issue of a credible reduction in a significant Budget deficit is addressed. In this case credibility is obtained in several ways. Minister of Finance Paul Martin chooses a short two-year horizon for fiscal forecasts to reduce uncertainty. The Minister made certain announced deficit targets would be more than met by underestimating future growth in output and revenue, by overestimating future interest rates and future debt service costs and by creating a contingency spending fund in the expenditure envelope to allow for unexpected expenses. Third, the case illustrates the successful reversal of fiscal policy from a path which was unstable where the debt-to-GDP ratio was increasing to a situation in which the debt-to-GDP ratio begins to stabilize. Fourth, the case provides an interesting example of a stimulative fiscal policy which was almost certainly ineffective; most of the stimulus occurred well after the economy had recovered from the recession.

Study Questions

1. Why is Canada's national debt a problem in 1993?
2. What evidence is there that Canada's foreign debt is a problem in 1993?
3. Is there evidence of a link between a federal government deficit and an increasing foreign debt?
4. Contrast the election platforms of the five parties with respect to fiscal policy.
5. Identify reasons for the success of Paul Martin's fiscal policy between 1993 and 1997.
6. Identify reasons for the failure of the Conservatives to control the deficit and debt.

current account deficit, budget deficit, debt-to-GDP ratio, sustainable fiscal policies, credible fiscal policy, stimulative fiscal policies.

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