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Theoretical Review On Infrastructure Spending

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The Theoretical Review on Infrastructure Spending
With Justin Trudeau’s election as the Prime Minister, the Liberal party’s policies were realized in Canada. Recalling from the second section, Trudeau’s policies consisted of tax reallocation, benefits reallocation, and infrastructure spending. Since the tax cut for the middle income people were funded from the tax increase from the higher income people, the impact of this policy was not very obvious for the people, although its effects have been felt.. The same could be said to Trudeau’s second policy which reallocates benefits from the higher incomes to the lower incomes. In contrast to the two first policies suggested by Trudeau, infrastructure spending could bring a lot of impacts to Canada’s …show more content…

GDP can be computed from the formula Y = C + G + I + NX. With the assumptions of a closed economy Y = C + G + I, which can be rewritten as I = Y – C – G and I = (Y – C – T) + (T – G). Y – C – T is the amount of income households have left after paying for their consumptions and taxes, which usually known as private saving while T – G is the amount of income from taxes that the government has left after paying for its spending, which usually known as public saving. The total of private saving and public saving equals national saving (Mankiw, 2015). The infrastructure spending policy requires the increase in government’s spending, thus decreasing the amount of public saving. Moreover, budget deficit means that the government’s spending exceeds the government’s income or G > T, creating a negative public saving and decreasing the national saving. The lack of saving can lead to a national crisis during an emergency period since the country will not have any backup funds. This situation would force the country to borrow from other countries, which can ask for a …show more content…

Although Trudeau’s policy included balancing the tax rate with an increase and a decrease, a measure will have to be taken in order to balance the budget in the future. It is possible that in the long run, the government will have to increase its tax rate. After a huge deficit budget, the government will need more income to return the nation’s economy to budget surplus. One of the way to induce a budget surplus is by increasing the tax rate and increasing the government’s income. The increasing tax rate will reduce the household’s income and saving thus can reduce the standard of living of the

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