Introduction
The Canadian Department of Finance should consider Income and price policy issues as crucial in the next two years while offering advice. These two issues are fundamental in facilitating and streamlining wealth distribution in any country. During this period prices are expected to increase at a higher rate as compared to the income rate due to inflation and unrest in the oil-producing countries.
Prices and incomes policy issues
In Canada, price codes define the permitted price increases with references to an increase in allowable costs and profit margins. Price and income policy issues affect the level of investment that will be made in the country thus they need to be monitored well. This means that if the prices are reduced, the result will be reduced growth of output affecting the level of employment in Canada. The department is required to advise on deflationary fiscal and monetary policies that combat inflation. Incomes policy will work in a way of reducing the rate of inflation without inviting undesirable side effects such as unemployment. It is also seen as a method of easing the conflict between the objectives of full employment and stable prices. The policy might be appropriate since there is inflation resulting from cost-push factors, particularly from high prices of oil currently.
If inflation is caused by generalized excess demand, however, an income policy is likely to result in disguised increases in earnings, as employers who wish to hire extra labor will attempt to find loopholes or other ways encircling the policy. Even so, there is a logical argument for the introduction of an income policy in a situation of excess demand as a means of reducing inflationary expectations. Inflation develops initially if the money supply is expanded faster than the economy’s long-run growth of productive capacity. But once inflation is underway, it develops a momentum of its own because people expect further inflation and incorporate these expectations in their price-fixing and wage demands. The duration and amount of unemployment above the natural rate is required to reduce the rate of inflation but it depends on the length of the time that it takes for inflation to be reduced. Thus, if an incomes policy succeeds in reducing inflationary expectations, it will enable a government to reduce inflation with less employment than would otherwise be necessary. This is now the duty of the department to advise on that.
In an effort to keep the economy on-trend the government may attempt to introduce discretionary changes in policy but because of policy lags and uncertainty, the government has difficulty in timing discretionary changes appropriately. This problem is especially severe on the spending side of the budget. Temporary changes in taxes and transfers can be introduced relatively quickly, but because consumption depends on permanent income these changes may have little value in stabilizing the economy.
Some economists believe that these deficits have little effect on the economy’s savings. They argue that taxpayers understand that their taxes, or their children’s taxes, will be higher in the future in order to pay interest on the enlarged federal debt, so taxpayers will save now to have extra resources in the future to pay for the high taxes. Other economists, though, find this argument unconvincing; they believe that the government budget deficit lowers the national saving rate.
In the past, the federal government has sometimes used incomes policies to keep the aggregate supply from shifting up. Wage-price controls create market distortions and inefficiencies and are difficult to enforce, and ultimately prove ineffective. These policies which would provide tax incentives for appropriate wage and price behavior are discussed but never implemented because of doubts about their cost and effectiveness.
These two policy issues will also deal with economic inequalities between the levels of income and quality of life for the poor people and the rich. The underprivileged people have less access to capital for investments that can increase their wealth or human capital. Therefore, they are less likely to access the same amenities that the rich people do access. They have lower self-sufficiency and productivity to the rich because they have more money to invest in high-quality education and job training. In some cases, segregation along the lines of class and race leaves some people disadvantaged due to their class or race as opposed to their competence. The poor people mostly live in neighborhoods that are not hygienic and lack social utilities. Some people are underprivileged because they lack important services and amenities. The poor suffer isolation from the social norms and are denied the status and respect of respectable members of society. Poverty denies some people the social mobility that would enable them to be promoted to positions that are socially recognized.
The distribution of wealth is important to improve the welfare of the poor in society. This is important in ensuring that equity is achieved in society and the welfare of all people is improved. The dynamics of the labor markets and the education system also contribute to the issue of inequality. Some of the factors that determine the ability of an individual to succeed and become wealthy are specific to the individual. There is little that individuals or governments can do to change these factors though they greatly affect the distribution of wealth and income inequality.
Fiscal policy tools and applications affecting the two issues
There are a number of fiscal policy tools which is employed to stimulated economic activity of a country. These tools help the government to manipulate economic trends and foster growth. One of the fiscal tools is government spending. The government adjusts its spending and uses taxes to achieve economic growth and full employment. This tool is a deficit method which stimulates trading that leads to economic development. This will be achieved through a budgetary process where the government will decide what to do in terms of allocating funds. When there is surplus the government ensures price stabilization thereby stimulating economic growth.
The other tools that are used include borrowing for the public. According to neoclassical economists, when there is a budget deficit, funds can be borrowed from the public, from abroad, or by printing of new currency. The government can finance its deficit by borrowing from the public through issuing treasury bills and bonds thus creating demand for credit. This is known as ‘crowd-out’. When the government enters the credit market, the others in need of credit are forced out of the market due to high-interest rates. This is against the goals of a budget deficit, which is to stimulate demand and supply and to trigger economic growth. Neo-classicalists feel that manipulating fiscal policy can decrease net exports, therefore increasing the availability of national output in the local market and stabilizing income.
To reduce inflation tendencies the government can borrow from foreign sources and this will ensure interest is lowered and income maintained. This would force companies in the country to compete with their own government in raising credit in foreign markets, thus forcing them to offer higher interest for the credit that they get from abroad. This way the foreign capital flows into the economy, which causes demand and subsequent appreciation of its currency. When there is currency appreciation, exports decrease, and imports increase because exports from the country are costlier due to currency appreciation and cheap imports.
Other problems that can be caused by the economic stimulus are the time it takes to determine the outcome of the implementation of a fiscal policy on the economy, and the effect of inflation caused by increased demand. Fiscal stimulus may not cause inflation when idle resources are utilized but it would certainly cause inflation when resources that are being utilized are merely re-deployed because the stimulus is creating demand for the resource underutilization when the supply is static.
Conclusion
Price and income policy issues are important in Canada as they chart the way forward for economic growth. Because these policies form the background upon which people engage in meaningful economic activities to improve their life. It is therefore important for government agencies to establish mechanisms through which inflation is checked to stir up economic growth.