Download The Sources of the Recession in Canada: 1989

The Sources of the Recession in
Canada: 1989-1992
Thomas Wilson
Peter Dungan
Steve Murphy*
University of Toronto
Introduction
restructuring related to the increased competition in the world economy.
The Canadian economy entered a recession
in the second quarter of 1990, following a period of slowing real growth over the previous
year. The recession technically lasted four
quarters,1 about average length for postWorld War II recessions in Canada. However,
the recovery, which began with a one-quarter
growth spurt in the second quarter of 1991,
has been anaemic. Real growth over the first
seven quarters of recovery averaged 1.3 per
cent (annual rate), well below the historical
norms for previous early recovery periods,
and well below the growth of potential output. Key aggregate indicators for the 1989-92
period are presented in Table 1.
The purpose of this article is to assess the
contributions of macro-economic policies and
macro-economic developments abroad in explaining the cyclical behaviour of the Canadian economy over the 1989-92 period. The
approach taken is similar to that of the analysis of the 1981-82 recession and 1982-84 recovery previously carried out by Wilson
(1985) who found that most of that cycle
could be explained by such developments.
Opponents of the Canada-U.S. Free Trade
Agreement (FTA), which took effect at the beginning of 1989, have argued that the FTA was
a major factor undermining Canada’s economic performance in recent years. Others
have emphasized the negative effects of the
central bank’s tough anti-inflationary monetary policy.2 And many commentators in the
financial press have focused on the need for
The remainder of our article is organized as
follows. The second section discusses the
methodology of the analysis. The third section describes how each macro-economic
‘event’ is modelled. The fourth section presents the results, and the final section draws
some conclusions.
Methodology
The method of analysis we use to appraise
the impact of domestic policies and external
developments involves counter-factual historical simulations with a macro-econometric
Table 1 Selected Economic Indicators, 1989-1992
GDP Real
(% change)
Unemployment
Rate (%)
CPI Inflation
Rate (%)
Real Disposable
Income (% change)
1989
2.4
7.5
5.0
4.4
1990
-0.2
8.1
4.8
0.2
1991
-1.7
10.3
5.6
-2.7
1992
0.7
11.3
1.5
0.8
3
Canadian Business Economics
Winter 1994
model of the Canadian economy. The model
used—the FOCUS model—is a medium-scale
macro-model which has been used for projections and policy analysis since 1977.3 Basically, the procedure used is to construct an
historical base case for the model which fits
actual data exactly.4 Policy or external developments are then analyzed by changing exogenous variables and/or parameters in the
model and solving the model to derive the
counter-factual result for the particular policy
change or development.
For example, in the analysis of the impact of
the U.S. recession, all exogenous variables
from the U.S. economy were adjusted to represent a ‘soft-landing’ for the U.S. economy,
and another solution of the FOCUS model was
calculated. The differences between this solution and the historical base case represent the
estimated effects of the U.S. recession.
It is important, in doing this type of analysis
with a macro-model that the monetary policy
regime be specified appropriately. This is particularly important for the FOCUS model, because it is highly sensitive to monetary policy
changes.
With the exception of the simulation which
examines the consequences of a monetary
policy ‘overshoot’, all simulations were run
with monetary policy targeting the base case
inflation rate (adjusted for indirect taxes). We
felt that this was appropriate given the Bank
of Canada’s commitment to reducing inflation
and given the announcement of formal inflation targets early in 1991 (Crow, 1988; Bank of
Canada, 1991a). The exchange rate is, of
course, allowed to float in all simulations.
In the following section, we briefly describe
the modelling of each simulation analysis.
Description of
Modelling of Each
‘Event’
External developments:
A U.S. ‘Soft Landing’
The U.S. economy entered a recession in the
third quarter of 1990 which lasted for three
quarters. The U.S. recovery was also sluggish
in its early stages, though more robust growth
was achieved in the last three quarters of
1992.
Since the U.S. recession began two quarters
later than the Canadian recession, it is unlikely to have been a ‘trigger’ for the latter.
However, given the strength of trade and investment linkages between the two economics, weak U.S. economic performance could
have contributed to the depth of the recession
and the sluggish recovery in Canada. In order
to examine the impact of the U.S. recession,
we constructed an alternative model solution
which incorporated a ‘soft landing’ for the
U.S. economy.
We assume that the U.S. experienced 2.5 per
cent growth in real GNP and industrial production in 1989, 2.1 per cent growth in 1990
and 1991, and 2.5 per cent growth in 1992.
The demand for motor vehicles is assumed to
grow by 2 per cent in 1989, 1990 and 1991 and
Table 2 Impacts on U.S. Prices and Interest Rates of U.S. Soft Landing Assumptions
Percentage change in
1990
1991
1992
GNP Deflator
0.06
0.38
0.88
Consumer Price Index
0.02
0.20
0.50
Wholesale Price Index
0.15
0.66
0.70
Wage Rate
0.02
0.20
0.50
Consumer Durables Price
0.02
0.20
0.50
Short Term Interest Rate*
0.11
0.69
0.70
Long Term Interest Rate*
-0.04
0.12
0.15
Winter 1994
Canadian Business Economics
4
by 2.5 per cent in 1992.5 The impact of these
U.S. soft landing scenario assumptions on
U.S. prices and interest rates was based on
Project LINK macroeconometric model results for the U.S. economy6 (Table 2). These in
turn were fed into the FOCUS model along
with the assumed changes in U.S. GNP, industrial production and motor vehicle demand.
The impact of these developments on the Canadian economy is analyzed by adjusting the
various U.S. exogenous variables in FOCUS
and solving the model to generate the U.S.
‘soft landing’ scenario. As noted above,
monetary policy is assumed to neutralize the
price level effects of any changes in the external variables.
Monetary Policy Overshoot
In February 1991, the Bank of Canada and
the Department of Finance announced formal
price inflation targets, making explicit the
quantitative objectives of the Bank’s anti-inflation policy. These targets7 are presented in
Table 3 below:
In the event, the ‘core’ inflation rate observed over the 12 month period ending December 1992 was 1.7 per cent, well below the
Bank of Canada’s 3 per cent target.
In order to explore the role of monetary policy in the recession, we have modelled the impact of the Bank of Canada having adjusted
monetary policy so as to hit exactly the 3 per
cent inflation target.8 In this simulation the
money supply was adjusted upward gradually over the interval in order to achieve the
3 per cent inflation target by the end of 1992.9
Federal Tax Increases
The federal government instituted several
tax increases over the 1989-91 period. Most of
these increases involved sales, excise, and
payroll taxes. At the beginning of 1991, a major reform of the federal sales tax system was
implemented, which is treated in a separate
simulation described below.
To explore the role of the other tax measures,
two model simulations were constructed. In
the first, all federal tax rates were simply held
constant at their 1989Q1 levels.10 This simulation would approximate the effects of a ‘neutral’ contra-cyclical fiscal policy, since cyclically adjusted program spending did not
5
Table 3 Inflation Targets
Period
Year Over Year
‘Core’ Inflation Target
End 1992
3.0
Mid 1994
2.5
End 1995
2.0
increase relative to potential output over the
four year period.11 However, the consequences of this policy would involve larger
deficits and a higher debt/GDP ratio at the
end of the period.
Since containment of the growth of the debt
was an explicit objective of federal fiscal policy,12 we also constructed an alternative scenario in which stable tax rates are accompanied by gradual expenditure restraints, such
that the debt/GDP ratio at the end of the period is the same as in the base case.
When indirect (sales, excise, and payroll) tax
rates are held constant, direct upward pressures on prices and unit costs are lower. In
both of these simulations, monetary policy
therefore targets the base case Consumer
Price Index (CPI) less the direct (‘first round’)
price effects attributable to the indirect tax increases.
Transitional Effects of Sales
Tax Reform
On January 1, 1991 a new broad-based value
added tax—the Goods and Services Tax
(GST)—replaced the Federal Manufacturers’
Sales Tax. Although the sales tax reform was
designed to be approximately revenue neutral, it did increase the sales tax burden on
consumer goods and services. As a result the
CPI would increase by 1 per cent as a direct
consequence of the new sales tax system (Department of Finance, 1989). In previous work
(Dungan and Wilson, 1989), we have explored the possible transitional effects of the
implementation of the GST under alternative
monetary policy responses.
In the current analysis, we constructed a
counter-factual simulation without the GST.
In this simulation, monetary policy targets the
CPI after adjustment to remove the impact effect of sales tax reform, i.e. since prices would
have been 1.25 per cent lower as a direct re-
Canadian Business Economics
Winter 1994
sult of reversing the sales tax changes, the
money supply is reduced sufficiently to be
consistent with this lower price level.
Chart 1 Sources of the Recession
GDP Path—Canada
Aggregate Supply: Potential
Output Assumptions
For simplicity we assume that actual output
in 1989Q1 equalled potential output.13 Over
the 1989-92 interval we assume that potential
output growth was 3 per cent per year,14 plus
an adjustment for the impact of the CanadaU.S. Free Trade Agreement (FTA) on total factor productivity (TFP). The FTA adjustments
to TFP are those used by Dungan and Wilson
(1991), which were based on the work of Harris (1991). These FTA adjustments are relatively small over the four years; the cumulative effect is an addition of 0.4 per cent to
potential output in 1992.
The reader should note that the estimated
level of potential GDP does not affect the
simulation results. Rather it is used as a reference point to measure the extent to which deviations of actual from potential output are accounted for by the four factors which we
analyze.
economic performance of its leading trading
partner, the U.S. recession alone cannot explain the severity of the 1990-91 recession in
Canada, nor the slow growth achieved in
1992.
Monetary Policy Overshoot
Results
We shall first present the results for each of
the simulations described above, and then
consider their joint effects. The results for the
individual simulations are presented in Tables
4 through 8 at the end of the article. Their joint
effects are presented in Charts 1, 2, and 3.
U.S. Soft Landing
Had the U.S. economy achieved the much
hoped for ‘soft landing’ at the end of the boom
of the late 1980s, the real growth performance
of the Canadian economy would have been
better, as shown in Table 4. However, the soft
landing of the U.S. economy would not have
had much impact in Canada until 1991. Hence
it is unlikely that the Canadian economy
could have avoided a recession during 1990
under this scenario. Viewing the results over
the four year period, the U.S. soft landing
would have been sufficient to keep the Canadian economy in a ‘holding pattern’ with real
GDP roughly stable over the period.
Although the U.S. recession obviously was
therefore an important factor worsening the
Winter 1994
The severity of the Bank of Canada’s anti-inflation policy may be gauged by money supply statistics—M1 declined for the first three
quarters of 1990—and in short-term interest
rates—which moved to levels 5-6 percentage
points above corresponding U.S. rates early in
1990.
As earlier noted, monetary policy was sufficiently restrictive to cause an overshoot of the
Bank’s inflation reduction targets: the ‘core’
inflation rate achieved at the end of 1992 was
1.3 per cent below the target. In the alternative simulation, money supply growth is
gradually augmented over the interval so as to
achieve the target inflation rate of 3.0 per cent
for the end of 1992.
The results, presented in Table 5, indicate
that ‘excessive’ monetary restraint significantly reduced real growth in 1990 and 1991,
and slowed growth somewhat in 1992.
Clearly, monetary restraint was an important
factor contributing to the recession and slow
growth realized over the period.
The model results also imply that restrictive
monetary policy gradually reduced inflation,
Canadian Business Economics
6
Chart 2 Sources of the Recession
It is noteworthy that the two alternative
simulations do not differ by a large amount.
Of course, eliminating the tax increases has a
stronger positive effect on real output than the
combination of stable taxes and expenditure
restraints, but the differences between them
are much smaller than what would be expected from conventional analysis. What accounts for this?
GDP Path—Canada
Recall that all simulations (except the monetary policy overshoot) are run with monetary
policy targeting the inflation rate (adjusted for
indirect taxes). Since indirect tax increases
generate secondary wage and price pressures
in the FOCUS model, a more restrictive monetary response must accompany this type of
fiscal restraint than under the alternative of
expenditure restraints.
Sales Tax Reform
Chart 3 Sources of the Recession
The fourth factor we examine is the transitional impact of Sales Tax Reform. As shown
in Table 8, the launching of the GST at the beginning of 1991 had a negative effect on real
output in 1991 and 1992. Once again this
negative effect is attributable to the need for
monetary restraint to offset the secondary
wage and price pressures generated by the
new tax system.15
Unemployment Rate Path—Canada
As we allow for no anticipatory effects of the
new regime, the negative effects on real
growth are concentrated in 1991, with a small
additional negative effect in 1992. Our previous analysis (Dungan and Wilson, 1989;
Dungan, Mintz and Wilson, 1990) would indicate that the transitional impact should attenuate as the economy adjusted to the new
system.16
although its impact on prices was masked by
the effects of demand pressure in 1989 and by
indirect tax increases, particularly in 1991.
Tax Increases
The results of the two alternative simulations which examine the effects of federal tax
increases are presented in Tables 6 and 7. The
results indicate that these tax increases were
about as important as monetary policy in contributing to reduced output over the period.
7
Although the GST was perhaps the most visible feature of federal tax policies over the period, its net effect was considerably smaller
than the combined impact of the other federal
tax measures, reducing real GDP by 0.8-0.9
per cent over 1991-92.
Joint Effects of the Four
Developments
Combined effects of the four factors are presented in Charts 1 and 2. The most striking
feature of the results is highlighted in these
charts: the four factors we have examined ex-
Canadian Business Economics
Winter 1994
plain most of the shortfall between actual and
potential output over the period.17
As is clear from the charts, domestic monetary and tax policies were the main factors accounting for the recession of 1990. By 1991,
these two factors were reinforced by the impact of the U.S. recession and the transitional
effects of implementing the GST.
The slow growth puzzle of 1992 is also explained by these factors. Although the negative impact of the U.S. recession attenuated as
the U.S. economy recovered, the restraining
effects of the other three factors increased, so
that real growth was held to a moderate pace
in the first year of recovery.
Implications for
Unemployment
Chart 3 summarizes the effects of the four
events on the unemployment rate. As is clear,
in the absence of the U.S. recession, the
monetary policy overshoot, and the various
tax increases, the rise in the unemployment
rate would have been quite moderate. The
analyses indicate a peak unemployment rate
just below 8.0 per cent, consistent with a ‘soft
landing’ for the Canadian economy.
Conclusions
The results of this article indicate that conventional macro-economic factors—the business cycle in the U.S., monetary policy restraints, and indirect tax increases—largely
explain both the depth of the recession in
Canada and the sluggish recovery of the Canadian economy of 1991-92.
zation and the restructuring of Canadian industry should be at its peak. The associated
productivity gains are stretched out, with the
largest increase in total factor productivity
growth achieved in the late 1990s.
A Look Ahead
Although this is not an article about forecasting, we venture a comment on the future
strength of the recovery in Canada. At this
point it appears reasonably clear that each of
the four negative factors, which have acted to
restrain real growth in the recent past, has
been reversed. The U.S. economy continues
to recover; monetary growth has resumed at a
pace consistent with positive real income
growth at current inflation rates; federal tax
rates have been reduced slightly; and the transitional effects of the GST have been digested.19
In the absence of other adverse economic
shocks, the reversal of the four factors which
we have examined would therefore be consistent with a vigorous recovery this year. Unfortunately, several provinces increased taxes in
their 1992 and 1993 budgets.20 While the
1994 federal budget included some effective
tax increases through base-broadening measures, it also included a small future reduction
in federal payroll taxes. The federal budget
plan also incorporated the major reductions
in tobacco excise taxes which were put into effect two weeks before the budget. Whether on
balance these tax measures will exert a drag
on the recovery is a topic for future research.
While the restructuring of industry in response to the FTA and to other international
competitive pressures may well affect the regional and industrial composition of economic activity,18 and may explain the resurgence of productivity growth despite
continued weakness of final demand, there is
no need to enlist these factors to explain the
current business cycle.
Our previous analysis of the FTA (Dungan
and Wilson, 1991) indicated that it should
have favourable effects on aggregate demand
as well as aggregate supply in the middle
years of this decade. This is the period when
the investment associated with the rationaliWinter 1994
Canadian Business Economics
8
were somewhat higher (10.2 per cent and 10.4 per
cent, respectively) in 1990 and 1991.
Notes
*
1.
Earlier versions of this paper were presented to the
Canadian Economics Association annual meeting in
Ottawa (June 1992), and to the European meetings
of the Econometric Society in Uppsala, Sweden (August 1993). The research support of the University
of Toronto and PEAP members is gratefully acknowledged.
Aggregate output declined for four quarters. However, Statistics Canada did not formally declare the
recession over until the fall of 1992 (Statistics Canada, 1992).
2.
See for example Stokes (1992) and Fortin (1993).
3.
For a description of the current version of FOCUS
see Dungan and Jump (1992). An earlier version of
FOCUS was used in Wilson’s (1985) work on the
previous business cycle.
4.
The historical base case was constructed using actual values for all endogenous and exogenous variables. Each equation in the model was adjusted
using add-factors (constant adjustments) so that the
base case solution exactly replicated the historical
data.
5.
The U.S. National Accounts have subsequently been
revised with GNP growth stronger than previously
estimated. However, the key linkages to the U.S.
economy in the FOCUS model use industrial production and auto demands, which did not change significantly. The impacts of the revisions are therefore
negligible.
6.
We are indebted to our associate, Hung-Yi Li, for
providing the LINK model results.
7.
The targets are for the Consumer Price Index excluding food and energy, and are net of indirect tax effects. For a discussion of these issues, see Bank of
Canada (1991b).
8.
Although the Bank of Canada targets are defined for
the ‘core’ inflation rate, this rate is not generated
within the FOCUS model. We therefore targetted the
aggregate CPI inflation rate. The two rates were very
close over the 12 month period ending in December
1992.
9.
Since we model the impact of the overshoot of the
disinflation target, we make no allowance for any
adverse effects of the setting (and achieving) of the
targets themselves. Previous work by one of the
authors (Dungan, 1990) indicates that the adverse
real output effect of achieving disinflation targets
depends critically on the credibility of the announced policy targets.
10.
Unemployment Insurance contribution rates were
treated as a payroll tax and hence were held constant
at their 1989Q1 levels. Since CPP and QPP contributions are not federal taxes, their rates were set at
historical values.
11.
Government spending excluding unemployment insurance payments and interest payments on the
public debt was 10.0 per cent of potential output in
1989 and 10.1 per cent in 1992. However, the ratios
9
12. See the Federal Budget Papers of 1989, 1990 and
1991.
13. The unemployment rate in 1989 was 7.5 per cent,
which lay within the range of estimates of the NAIRU
for Canada.
14. The 3 per cent growth of potential output is consistent with the trend growth of output over the 197989 period.
15. The results presented in Table 8 are based on a direct
price level impact of 1.2 per cent for the GST, which
is close to the estimate published by the federal government in 1991. However, the revised national accounts data indicate a revenue gain from sales tax
reform which is lower than that implied by the 1.2 per
cent price increase. A simulation based on the revenue
impacts would show smaller real output effects—real
GDP would be 0.4-0.5 per cent lower in 1991-92,
roughly half of the impact shown in Table 8.
16. The quarterly pattern of effects within 1992 suggests
that this attenuation had already started.
17. If potential output were not adjusted for the effects
of the FTA, virtually all of the shortfall would be
explained.
18. In particular, central Canada has been hit relatively
harder by the recession.
19. Our previous analysis (Dungan and Wilson, 1989)
indicated that the adverse effect of the GST lasted
for two years. However, the Liberal government is
committed to a major review of the GST. Of the available alternatives, we believe the most likely replacements will be broad-based indirect taxes with the
same net effect on the CPI, and hence will have little
transitional effect on real output. Some other alternatives would involve reduction in the indirect tax
component of the CPI. For a discussion of alternatives see Dungan, Mintz and Wilson (1990).
20. Moreover, some of these tax increases involved sales
taxes—for example, British Columbia increased its
sales tax rate by one percentage point in its 1993
budget, and Ontario broadened its sales tax base to
include insurance in its 1993 budget.
References
Bank of Canada (1991a) Press Release on
“Targets for Reducing Inflation and
Reaching Price Stability in Canada,” February 26.
Bank of Canada (1991b) “Targets for Reducing Inflation: Further Operational and
Measurement Considerations,” Bank of
Canada Review, September.
Crow, John W. (1988) “The Work of Canadian
Monetary Policy,” Bank of Canada Review, February.
Department of Finance (1989) Goods and
Services Tax.
Canadian Business Economics
Winter 1994
Dungan, Peter (1990) “Getting to Zero Inflat i o n : S i m u l at i o n s w i t h t he FO C U S
Model,” PEAP Policy Study 90-10, University of Toronto.
Dungan, Peter and Gregory V. Jump (1992)
FOCUS: Forecasting and User Simulation
Model, Version 92A, Institute for Policy
Analysis, University of Toronto.
Dungan, Peter, Jack Mintz and Thomas Wilson (1990) “Alternatives to the GST,” Canadian Tax Journal, May-June.
Dungan, D.P. and T.A. Wilson (1989) “The
Proposed Federal Goods and Services
Tax: Its Economic Effect Under Alternative Labour Market and Monetary Policy
Conditions,” Canadian Tax Journal,
March-April.
Dungan, D.P. and T.A. Wilson (1991) “The
Canada-U.S. FTA: Macroeconomic Effects and Sensitivity Analysis,” Journal of
Winter 1994
Policy Modelling, Vol. 13, No. 3, pp. 43557.
Fortin, Pierre (1993) “The Unbearable Lightness of Zero-inflation Optimism,” Canadian Business Economics, Vol. 1, No. 3,
pp. 3-18.
Harris, R.G. (1991) “The Canada-U.S. FTA:
Economic Impact and Transition Effects,”
Journal of Policy Modelling, Vol. 13, No.
3, pp. 421-34.
Statistics Canada (1992) Canadian Economic
Observer, Catalogue No. 11-010, November.
Stokes, Ernie (1992) “Has Monetary Policy
Been Too Tight?” Canadian Business Economics, Vol. 1, No. 1, pp. 3-15.
Wilson, Thomas A. (1985) “Lessons of the
Recession,” Canadian Journal of Economics, XVIII, No. 4, pp. 693-722.
Canadian Business Economics
10
Table 4 National Impacts of U.S. “Soft Landing”
(Percentage changes unless otherwise indicated)
1989
1990
1991
1992
Real Output and Components
Real Gross Domestic Product
-0.02
0.63
2.18
1.06
Consumption
0.00
0.23
1.27
2.19
Government Current & Capital
0.00
0.00
0.00
0.00
Residential Construction
-0.10
0.99
3.56
0.06
Non-Residential Construction
-0.03
0.77
2.78
1.12
Machinery and Equipment
-0.04
0.62
3.33
3.86
Exports
0.04
1.84
7.37
6.26
Imports
-0.01
0.69
4.79
8.04
Consumer Price Index
0.00
0.00
0.00
0.00
Average Wage
0.00
0.18
0.72
0.81
-0.01
0.20
0.92
0.94
0.01
-0.13
-0.60
-0.58
Employment
Unemployment Rate (% Pts)
Interest Rates, Exchange Rate and Balance of Payments
90-day Paper Rate (% Pts)
0.01
0.20
0.02
0.69
Industrial Bond Rate (% Pts)
0.01
0.24
0.02
0.81
Exchange Rate
0.07
0.40
2.86
5.33
Current Account Balance ($ Bill)
0.04
2.23
6.66
2.03
Deficits and Debt
Total Government Surplus/Deficit
($ Bill)
-0.08
1.79
7.20
4.98
Federal Surplus/Deficit ($ Bill)
-0.06
1.22
4.44
2.13
0.02
-0.33
-1.65
-1.99
Ratio of Federal Debt to GDP (% Pts)
11
Canadian Business Economics
Winter 1994
Table 5 National Impacts of Monetary Policy Achieving 1992 Inflation
Target
(Percentage changes unless otherwise indicated)
1989
1990
1991
1992
Real Output and Components
Real Gross Domestic Product
0.52
1.48
2.88
4.02
Consumption
0.06
0.29
0.80
1.67
Government Current & Capital
0.00
0.00
0.00
0.00
Residential Construction
0.85
2.66
5.06
5.98
Non-Residential Construction
0.71
2.13
4.14
6.61
Machinery and Equipment
0.58
2.46
4.48
6.78
Exports
0.46
1.42
2.91
4.13
Imports
-0.64
-1.13
-1.58
-0.83
Prices, Wages and Unemployment
Consumer Price Index
0.15
0.66
1.77
3.17
CPI Inflation Rate
0.16
0.53
1.16
1.40
Average Wage
0.25
1.01
2.47
4.42
Employment
0.15
0.54
1.18
1.82
-0.10
-0.35
-0.74
-1.10
Unemployment Rate (% Pts)
Interest Rates, Exchange Rate and Balance of Payments
90-day Paper Rate (% Pts)
-0.17
-0.28
-0.15
-0.01
Industrial Bond Rate (% Pts)
-0.19
-0.33
-0.17
-0.01
Exchange Rate
-1.16
-3.32
-6.48
-8.90
1.26
3.18
5.76
8.13
Current Account Balance ($ Bill)
Deficits and Debt
Total Government Surplus/Deficit
($ Bill)
1.44
4.96
10.29
15.11
Federal Surplus/Deficit ($ Bill)
0.99
3.33
6.69
9.47
-0.31
-1.24
-3.21
-5.90
Ratio of Federal Debt to GDP (% Pts)
Winter 1994
Canadian Business Economics
12
Table 6 National Impacts of Stable Federal Tax Rates
(Percentage changes unless otherwise indicated)
1989
1990
1991
1992
Real Output and Components
Real Gross Domestic Product
0.49
1.60
2.38
5.08
Consumption
0.45
1.87
3.27
5.18
Government Current & Capital
0.00
0.00
0.00
0.00
Residential Construction
0.47
1.11
1.07
5.40
Non-Residential Construction
0.37
1.26
1.33
4.40
Machinery and Equipment
0.39
2.36
3.34
4.27
Exports
0.23
0.72
1.08
2.67
Imports
0.21
0.42
1.17
0.22
Prices, Wages and Unemployment
Consumer Price Index
0.32
0.66
1.23
1.81
CPI Inflation Rate
0.34
0.36
0.60
0.60
Average Wage
0.04
0.13
0.12
0.75
Employment
0.18
0.80
1.39
2.50
Unemployment Rate (% Pts)
0.13
0.54
0.90
1.59
Interest Rates, Exchange Rate and Balance of Payments
90-day Paper Rate (% Pts)
0.03
0.23
0.48
0.03
Industrial Bond Rate (% Pts)
0.04
0.26
0.56
0.04
Exchange Rate
0.51
1.23
1.54
4.38
Current Account Balance ($ Bill)
0.34
0.67
2.48
0.18
Deficits and Debt
13
Total Government Surplus/Deficit
($ Bill)
0.99
2.01
3.52
2.77
Federal Surplus/Deficit ($ Bill)
1.49
4.06
6.69
4.25
Ratio of Federal Debt to GDP (% Pts)
0.05
0.16
0.78
0.83
Canadian Business Economics
Winter 1994
Table 7 National Impacts of Stable Federal Tax Rates with
Expenditure Restraints
(Percentage changes unless otherwise indicated)
1989
1990
1991
1992
Real Output and Components
Real Gross Domestic Product
0.32
1.29
1.83
4.31
0.38
1.63
2.82
4.52
-0.69
-1.35
-1.95
-2.49
Residential Construction
0.45
1.21
1.05
5.03
Non-Residential Construction
0.32
1.22
1.23
4.22
Machinery and Equipment
0.34
2.33
3.38
4.36
Exports
0.24
0.77
1.12
2.68
Imports
-0.33
0.03
0.63
-0.94
Consumption
Government Current & Capital
Prices, Wages and Unemployment
Consumer Price Index
-0.32
-0.66
-1.23
-1.81
CPI Inflation Rate
-0.34
-0.36
-0.60
-0.60
Average Wage
-0.07
0.03
-0.08
0.43
0.12
0.64
1.11
2.11
-0.08
-0.43
-0.72
-1.35
Employment (% Change)
Unemployment Rate (% Pts)
Interest Rates, Exchange Rate and Balance of Payments
90-day Paper Rate (% Pts)
-0.08
0.08
0.32
-0.14
Industrial Bond Rate (% Pts)
-0.10
0.09
0.37
-0.17
Exchange Rate
-0.51
-1.30
-1.53
-4.32
0.60
0.24
-1.01
2.45
Current Account Balance ($ Bill)
Deficits and Debt
Total Government Surplus/Deficit
($ Bill)
-0.35
-0.53
-1.48
5.43
Federal Surplus/Deficit ($ Bill)
-0.65
-2.05
-3.65
-0.21
Ratio of Federal Debt to GDP (% Pts)
-0.03
0.03
0.37
0.00
Winter 1994
Canadian Business Economics
14
Table 8 National Impacts of Reversal of Sales Tax Reform
(Impacts are percentage changes unless otherwise indicated)
1991
1992
Real Output and Components
Real Gross Domestic Product
0.76
0.94
Consumption
1.69
1.74
Government Curr & Capital
0.00
0.00
Residential Construction
0.49
1.18
Non-Residential Construction
-0.68
-0.06
Machinery and Equipment
-1.65
-3.10
Exports
0.08
0.34
Imports
0.38
0.08
Consumer Price Index
-1.15
-1.10
CPI Inflation Rate
-1.21
0.05
Average Wage
0.01
0.43
Employment (% Change)
0.51
0.74
-0.34
-0.47
Prices, Wages and Unemployment
Unemployment Rate (% Pts)
Interest Rates, Exchange Rate and Balance of Payments
90-day Paper Rate (% Pts)
0.12
0.01
Industrial Bond Rate (% Pts)
0.14
0.01
Exchange Rate
-0.19
-0.74
Current Account Balance ($ Bill)
-0.79
-0.20
Revenues and Deficits
1990*
*
15
1991
1992
Total Government Surplus/Deficit
($ Bill)
1.34
-1.75
-1.05
Fed. Sales and Oth. Excise Taxes ($ Bill)
0.00
-2.66
-2.90
Federal Surplus/Deficit ($ Bill)
1.56
-1.82
-1.27
This simulation begins in 1990:4 when the federal government is deemed not to have paid credits
intended to offset MST already paid on goods in inventories at the end of 1990.
Canadian Business Economics
Winter 1994