In this article, Bill Curry reports that the Canadian government posted a $1.3 billion deficit in December, expanding the total federal deficit for the fiscal year, which has one quarter left, to $14 billion. This lesson plan analyzes the significance of a federal deficit.

Appropriate Subject Area(s):

Economics

Key Questions to Explore:

• What is a federal deficit?
• What is the difference between a federal deficit and federal debt levels?
• What factors are driving the Canadian government’s federal deficit?
• What are the consequences of running the government on a deficit? Is a deficit necessarily a bad thing?
• What does the debt-to-GDP ratio signify?

New Terminology:

Debt-to-GDP ratio, fiscal year, federal deficit, federal debt

• Federal deficit: This is the difference between what the government takes in (in taxes, non-tax revenue and capital receipts) and what it spends in a given fiscal year.
• Federal debt: Canada’s federal debt is the total amount owed by the federal government of. It can also be thought of as accumulated deficits plus accumulated off-budget surpluses.
• Debt-to-GDP: The debt-to-GDP ratio is the ratio between a country’s government debt (a cumulative amount) and its gross domestic product (GDP, measured in years). A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt. A high debt-to-GDP signals a high credit risk, and may lead creditors to seek higher interest rates when lending.
• Fiscal year: This is the period used by governments for accounting and budget purposes, which varies between countries. In Canada, the fiscal year runs from April to March. The budget is usually presented in February or March. Note: April to June marks the first quarter, July to September the second quarter, October to December the third quarter and January to March the fourth quarter.

Materials Needed:

A copy of the article.

Introduction to lesson and task:

A federal deficit arises when government spending exceeds revenue in a given fiscal year. As at December 2016 – which marks the third quarter of fiscal year 2016 – the federal deficit for the 2016 fiscal year was 14 billion, significantly lower than the projected $29.4 billion deficit expected for the entire year.

In 2015, the government promised to keep federal deficits under $10 billion a year. However, Mr. Morneau abandoned this pledge, turning the government’s focus towards keeping the debt-to-GDP ratio in check. The Finance Department’s report shows that the deficit is mainly due to infrastructure spending and additional transfers to families with children and the elderly.

Generally, when a budget deficit arises due to an increase in government spending – as opposed to a drop in tax revenue – the effects in the short term tend to be positive, as this spending often boosts aggregate demand in the economy. However, in the long term, federal deficits could be problematic if the leads to inflation, or higher taxes which could have crippling effects on the economy.

Federal deficits are not necessarily a bad thing, as long as they cause debt levels to rise at a slower rate than GDP. However, some economists worry that the high deficits will leave the Canadian government flat-footed in the event of unexpected financial shocks. In such an event the government will have limited resources to prop up demand without relying heavily on debt. On the other hand, the government believes it is equally important to make tangible investments in the Canadian people and economy today.

Action (lesson plan and task):

• Ask your students to define federal deficits.
• Ask your students to differentiate between federal deficit and debt level.
• Ask your students to state the potential consequences of running a deficit.
• Ask your students to explain what debt-to-GDP ratios mean.
• Ask your students to explain why Mr. Morneau abandoned his plan to balance the budget by 2019.
• Ask your students to explain why a budget deficit is not necessarily a bad thing.
• Ask your students to state the pros and cons of running the government on a federal deficit.

Consolidation of Learning:

• Ask your students to explain how the Canadian government raises money to meet its obligations.

Success Criteria:

• After completing this lesson plan, students should be able to differentiate between federal deficit and federal debt levels. They should also have a better understanding of the impact and significance of federal debt and deficit levels.

Confirming Activity:

• Ask your students to explain why it is important for the government to increase spending.