CHAPTER 4

The Role of
Government in
Business

Prepared by Michael Wade, Seneca College

© 2019 McGraw-Hill Education Limited

 Learning Objectives
1. List the seven categories of government activities that can
affect business.
2. Trace the historical role of government in the Canadian
economy and explain why Crown corporations were created.
3. Demonstrate why understanding laws and regulations at all
levels of government is critical to business success.
4. Describe how the Bank of Canada influences monetary policy
5. Explain how taxation and fiscal policy the Canadian economy.
6. Describe how government expenditures benefit consumers
and businesses alike.
7. Illustrate how purchasing policies and services assist Canadian
businesses.

© 2019 McGraw-Hill Education Limited 2

 Historical Role of Government in
the Economy
• Canada has a mixed economy; our various levels of
governments play a very large role in our economy.
– some allocation of resources is made by the market
– and some is made by the government
• From the start in 1867 the national policy was to force
trade to flow east–west
• Tariffs were used to deter the natural north–south flow of
goods.

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 Historical Role of Government in
the Economy
• Canada: a railroad was built with government assistance to
achieve national unity!
• Americans have less government involvement in their
economy; more goods and services are provided by the
private sector. Following the terrorist attacks of 9/11, the
U.S. federal government allocated funds to New York City
and the airlines.

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 Government Involvement with
Business
Government activities that affect business may be divided into
six categories:
1. Crown Corporations
2. Laws and Regulations
3. The Bank of Canada
4. Taxation and Financial Policies
5. Government Expenditures
6. Purchasing Policies
7. Services

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 Crown Corporations
• Companies that are owned by the federal or provincial
governments.
• They provided services that were not being provided by
businesses, which is how Air Canada came into being in
the 1930s.
• Crown corporations were created to bail out a major
industry in trouble, which is how the Canadian National
Railway was put together in 1919.
• Lastly, they provided some special services that could not
otherwise be made available, as in the case of the Bank
of Canada.

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 Crown Corporations
Rank Federal Crown Corporation 2017 Revenue ($ billions)

1 Canada Pension Plan Investment Board $36.273

2 Canadian Commercial Corporation $2.657

3 Public Sector Pension Investment Board $15.913

4 Canadian Mortgage and Housing Corporation $9.159

5 Canada Post Corporation $7.891

6 Export Development Canada $2.072

Source: “Consolidated Financial Information for Crown Corporations (Annual Report 2016-2017),” Government of Canada, accessed June 28, 2018,
https://www.canada.ca/en/treasury-board-secretariat/services/reporting-government-spending/inventory-government-organizations/consolidated-
financial-information-crown-corporations-annual-report-2016-2017.html.

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 The Role of Government:
Privatization
Since the 1990s, federal and provincial governments have
embarked upon a series of measures designed to reduce the
role of government in the economy.
Over the years, former large corporations like Teleglobe
Canada, Air Canada, and Canadian National Railway (CNR)
were sold.
– The process of selling publicly-owned corporations is
called privatization.

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The Role of Government: Laws and
Regulations
• Laws and regulations are created by the politicians
who have been elected by Canadians.
• Consequently, the political parties in power can
greatly affect the business environment.

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The Role of Government: Laws and
Regulations
Laws are derived from four
sources:
1. The Constitution
2. Precedents established
by judges
3. Provincial and federal
statutes (laws)
4. Federal and provincial
administrative agencies

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The Role of Government: Laws and
Regulations

The Supreme Court of Canada has the final

decision on constitutional questions and on
important cases of civil and criminal law.

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 The Role of Government:
Responsibilities
The federal government is responsible for issues that affect citizens across
Canada.
Responsibilities that may have an impact on business operations include:
– trade regulations (interprovincial and international)
– incorporation of federal companies
– taxation (both direct and indirect)
– the banking and monetary system
– hospital insurance and medicare
– public debt and property
– national defence
– unemployment
– immigration
– criminal law
– fisheries

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 The Role of Government:
Responsibilities
In addition to the above-noted areas, the federal
government also oversees such industries as:
• aeronautics
• shipping
• railways
• telecommunications
• atomic energy

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 The Role of Government:
Marketing Boards
• Marketing boards control the supply or pricing of
certain agricultural products.
• To smooth out the effects of these unusual conditions
on this sector of our economy, and to ensure a steady
supply of food to consumers at reasonable prices, six
government agencies have been set up to control
wheat and barley, dairy products, and poultry.

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 The Role of Government:
Marketing Boards
• Canadian Dairy Commission
• Canadian Egg Marketing
Agency
• Chicken Farmers of Canada
• Canadian Turkey Marketing
Agency
• Canadian Broiler Hatching Egg Marketing Agency

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The Role of Government: Provincial
Government Responsibilities
Provincial governments are responsible for the following areas:
• regulation of provincial trade and commerce
• natural resources within their boundaries
• direct taxation for provincial purposes
• incorporation of provincial companies
• licensing for revenue purposes
• the administration of justice
• health and social services
• municipal affairs
• property law
• labour law
• education

© 2019 McGraw-Hill Education Limited 16

The Role of Government: Provincial
Government Responsibilities
There are roughly 4,000 municipal governments in Canada
that provide a variety of services.
• Such as water supply, sewage and garbage disposal, roads,
sidewalks, street lighting, building codes, parks,
playgrounds and libraries.
• They also set regulations and laws regarding any
establishment that serves food.
• Zoning requirements also limit the height of buildings and
define how far they must be set back from the road.

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 Bank of Canada
• The Bank of Canada (BoC), a federal Crown corporation, is Canada’s
central bank. As a financial institution, it provides banking services on
behalf of the federal government; however, it does not offer banking
services to the public.
• Monetary policy is the management of the money supply and interest
rates.
• The money supply is the amount of
money the BoC makes available for
people to buy goods and services

© 2019 McGraw-Hill Education Limited 18

 Taxation of Companies
• The federal government relies on income tax and other tax
revenue to fund its activities.
• The provincial governments rely on income tax and sales
tax for revenue.
• Municipal governments rely on property taxes for their
revenue.
• All businesses pay various taxes (a cost of doing business),
which are passed on to the consumer in the form of higher
prices.

© 2019 McGraw-Hill Education Limited 19

 Government Spending of Tax
Dollars
• Fiscal Policy: how governments collect and spend tax
dollars.
– The first half of fiscal policy involves taxation.
– Theoretically, high tax rates tend to slow the economy
because they draw money away from the private sector
and are remitted to the government.
– The second half of fiscal policy involves government
spending.

© 2019 McGraw-Hill Education Limited 20

 Government Spending of Tax
Dollars
• Fiscal Policy: how governments collect and spend tax
dollars.
– If the government spends over and above the amount it
gathers in taxes for a specific period of time, then it has
a deficit.
– if the debt is high, there is less money that can be
dedicated to social programs and initiatives to assist
businesses in becoming more competitive.
– reductions in the national debt have been the result of
surpluses; a surplus is an excess of revenues over
expenditures.

© 2019 McGraw-Hill Education Limited 21

 Government Spending of Tax
Dollars
• With the money it obtains from taxes, the federal
government is the largest buyer of goods and services.
• Federal procurement policies can be used to influence
regional economies and companies.
• NAFTA places limits on the federal government’s ability
to use this spending power.

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Government Spending: Monetary
Policy
• Monetary policy is the management of the money supply
and interest rates.
• It is controlled by the Bank of Canada.
• The more money the Bank of Canada makes available to
business people and others, the faster the economy grows.
• To slow the economy, the Bank of Canada lowers
the money supply.

© 2019 McGraw-Hill Education Limited 23

 Other Government Policies
• Strangely enough, provincial governments put up
interprovincial trade barriers.
• Provincial governments spend billions on health, education,
and social services; these funds are directed to local
companies.
• Various governments may cooperate to provide loans,
grants, or support for projects like Hibernia.

© 2019 McGraw-Hill Education Limited 24

 Government Expenditures
• The federal government has programs to assist
business in depressed regions.
• Governments also spend huge sums of money on:
– education
– health
– roads
– ports
– waterways
– airports
– various other services required by businesses and individuals

© 2019 McGraw-Hill Education Limited 25

 Government Expenditures:
Purchasing Policies
• Most governments are very large purchasers and
consumers of goods and services; indeed, in
Canada they are the largest buyers.
• Contracts are awarded most often to help
Canadian businesses even if they are sometimes
more expensive than bids by non-Canadian
companies.

© 2019 McGraw-Hill Education Limited 26

 Federal Government – Services
• Industry Canada regulates food ingredients, clothing labels,
measurement accuracy of scales, and fuel pumps.
• Business must be aware that this department is responsible
for product and consumer safety.
• There are legal responsibilities placed upon business by the
federal government through various regulations and acts of
Parliament

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 Government Departments
NRC: National Research Council
• Established in 1916
• Employs over 3,000 scientists and technicians
• Responsible for science and technology
• Promotes research and development
• Helps Canadian industry to innovate
and remain competitive

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 Government Departments
DFAIT: Department of Foreign Affairs and International Trade
Canada (December 2015 re-named Global Affairs by the new Trudeau Government)
– Maintains embassies and consulates overseas
– Conducts trade missions
• Communications: regulates telephone, cable, and
broadcasting companies; issues licences; holds public
hearings.

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 Other Government Departments
Protect Consumers
• CDIC insures all deposits in financial institutions up to
$100,000.
(it used to be only $60,000 but recently the government
increased the amount to $100,000)
• Provincial Governments regulate the stock exchanges in
Canada, setting the rules for all public companies.
• Municipal Governments inspect buildings, set zoning
regulations, license businesses, tax water, charge fees,
regulate parking, etc.

© 2019 McGraw-Hill Education Limited 30

 Chapter Summary
1. Historical role of government
– provided services that were not being provided by
businesses.
2. The seven categories of government activity
– The seven categories are Crown corporations, laws and
regulations, Bank of Canada, taxation and financial
policies, government expenditures, purchasing policies,
and services.
3. Understanding laws and regulations at all levels of
government is critical to business success.
– Federal laws, provincial laws, municipal rules and
regulations

© 2019 McGraw-Hill Education Limited 31

 Chapter Summary, cont’d.
4. Describe how the Bank of Canada influences monetary policy.
5. Taxation and financial policies affect the Canadian economy.
– Fiscal policy and monetary policy
6. Government expenditures benefit consumers and businesses
alike.
– education, health, roads, ports, waterways, airports, and
various other services required by businesses and
individuals.
7. Government purchasing policies and services assist Canadian
businesses.

© 2019 McGraw-Hill Education Limited 32