CCSD Analysis of October, 2000 Economic Statement / Mini Budget

October 19, 2000

Summary

As anticipated, the Economic Statement leans heavily towards further tax relief as opposed to new investment in social programs. The CCSD is disappointed that there were no major new social investments to help Canadians grow together by narrowing the growing gap between rich and poor. However, it should be noted that substantial surplus amounts remain to be allocated in this and future fiscal years. Notably, $6.2 billion of surplus remains to be allocated when the actual 2001-02 Budget is introduced.

Social advocates must insist – in the wake of major middle and upper class tax cuts – that the first priority for these future surpluses must be social spending.

The challenge in the coming election campaign will be to have a major national debate on how to ensure that Canadians grow together rather than apart; to ensure that income and opportunity inequalities are narrowed rather than widened.

In today's statement, further significant tax relief has been given to the more affluent, mainly building on the plan introduced in the last Budget. These measures will widen the already large and growing inequalities of income and opportunity, since lower income households get comparatively little on either the tax or spending side.

That being said, credit needs to be given for new increases in child benefits, disability credits, support for students and special payments to meet home heating costs, coming on top of the new investments in health and children recently agreed upon with the provinces.

It is disappointing that most participants in the policy debate see tax reduction for the affluent and corporations as the central element of an economic growth agenda. This overlooks the fact that social investment is not just about fairness, important though that is. It is also directly productive. Investment in children, or in the skills of the marginalised, will yield large long-term returns.

 

THE FISCAL PLAN
  1999-002000-012001-022002-03
 
Program Spending $112B $120B $125B $130B
   as Share of GDP 11.7% 11.6% 11.4% 11.4%
 
Debt Reduction $12.3B $10B ? ?
 
Revenues $166B $174B $174.5B $178.4B
    as Share of GDP 17.3% 16.8% 16% 15.6%
 
Contingency Reserve/Prudence     $4B $5B
 
Remaining Balance   $1.9B $4.3B $2.6B
 
Source: Economic Statement, Ministry of Finance, Table 1.4

 

As shown in the Table, federal program spending will increase modestly from 1999, reflecting the previously announced increases in the CHST for health care and children's programs. The statement adds small amounts for the environment ($500 million) and research and higher education ($500 million.)

There was no new funding announced for health or for social programs delivered on the expenditure side of the budget, though the recent federal-provincial agreement is confirmed.

Total federal program spending will continue to fall from 11.7% of GDP this year – a fifty year low – to 11.4%, and this despite the already announced increases.

Meanwhile, the tax cuts delivered in the last Budget and this statement will reduce the federal tax share of GDP from 17.3% to 15.6%. Details are examined below.

The government has announced that debt will be reduced by $10 billion this fiscal year, and the future budget will feature a debt reduction target over and above the $3 billion contingency reserve fund.

This still leaves quite substantial amounts of surplus to be allocated – almost $2 billion this year, and more than $4 billion in the next fiscal year.

This surplus must be allocated to new social spending. On the expenditure side, the CCSD has identified the following as the key priorities:

  • Substantial additional funding for the National Children's Agenda to provide additional programs and services (eg. major investments in early childhood education and child care) and to extend new programs to school-age children and youth

  • A national network of supports and services for persons with disabilities

  • Major federal investments in affordable housing, in conjunction with the provinces and municipalities

Tax Measures

The statement accelerates tax changes announced in the 2000 Budget, moving most measures forward to January 2001.

Setting aside the effects of the one-time increase in the GST credit, the tax cuts are heavily tilted (in percentage savings terms) to 'middle-class' taxpayers earning more than about $35,000. Interestingly, the Finance minister has effectively introduced a new top tax rate within a 4-bracket system. This makes the system somewhat more progressive. Though tax rates will be cut for the most affluent, they will be cut by more in percentage terms for those in the 'upper middle' range of about $50,000 to $100,000.

Cuts for the Affluent

  • The 5% high-income surtax (now applicable only to $85,000 plus) will be eliminated in 2001 instead of 2004. (Total revenue cost of elimination - $650 Million)

  • The top tax rate threshold was set to rise from $59,180 - $64,000 in 2001, to 'at least' $70,000 in 5 years. This statement raises the threshold for the top rate of 29% to $100,000.

  • The capital gains inclusion rate (ie the % subject to tax), set to be cut from 75% to 66% in the Budget, now goes to 50% (Cost $295 Million). (Half of all capital gains income goes to persons earning more than $100,000 per year, and one third goes to those earning more than $250,000.)

  • The former top tax rate is cut from 29% to 26% for those making from about $70,000 ($60,000 taxable income) to $100,000.

'Middle-Class' Tax Cuts

The last budget announced a cut in the middle income tax rate from 26% to 24% (effective July, 2000) to 23% in 5 years. (Each 1 percentage point cut costs about $1 Billion) It now goes to 22%. The income threshold for the middle rate is $32,000 in 2001. (Note that the maximum dollar amount of these changes also goes to those in the top tax bracket.)

Tax Structure/Savings - 2000 Budget and Economic Statement Combined
  Before After $ Saved
       
Income <$35,000 17% 16% $145
       
Income $35-$70,000 26% 22% $145 Plus $1292
       
Income $70-$100,000 29% 26% $145 Plus $1292 Plus $1155
       
Income $100,000 + 29% 29% As Above, Plus Surtax Saving
Taxpayers in higher brackets get all savings from changes in lower brackets.
Income is gross pre tax.
Savings reflect tax structure changes only, not reindexing impacts.
Impact of larger child benefits not included.
Capital gains changes not included.
Source: CCSD

Assistance to Low and Modest Income Households

The 17% rate from about $7,200 to $32,000 of income is to be cut to 16%. This does little for the working poor compared to the alternative of raising the amount of income which can be earned free of tax. The rate cut saves $10 in tax per $1000 of extra income whereas raising the threshold by $1000 – as called for by the CCSD – would have yielded tax savings of $170.

The 2000 Budget restored full indexation of all credits and tax thresholds to inflation, which preserves the full value of the GST credit, the CCTB and the basic tax exemption.

There will be a one-time increase to the GST credit of $125 for singles and $250 for families to cover higher home heating costs this winter. The CCSD called for a permanent increase in the credit, which goes to low income households (phased out for families at about $30,000). The credit was greatly eroded in the past by lack of full indexing to inflation.

The Canada Child Tax Benefit maximum benefit for the first child - raised in the last Budget to $2,265 by July 1, 2001 and to $2,400 for the first child ($2,200 second) by 2004 (from $2,056 in July 2000) - goes up by another $100. The last Budget and this statement introduce changes so that the phase-out of benefit with rising income is slowed. (Each $100 increase in base benefit costs $600 million.)

Significant increases have been made to the disability tax credit (from $4,293 to $6,000) and to the caregiver credit ($2,386 to $3,500).

On the tax and tax credit side the CCSD said tax relief should be directed more in line with need, to help close the growing gap between the rich and poor. We opposed further tax relief for the affluent. We called for:

  • Immediate increase in the Basic Income Tax Exemption to $8,000

  • Permanent increase to GST Credit by $70 per adult and $30 per child or $200 for family of 4.

  • Significantly increase in CCTB benefits (to target of $4,000 for first child); pass on of full CCTB to children on social assistance; slower phase-out of CCTB with rising family income; and work towards restoration of a universal child benefit. (A CCTB of $4000 would roughly cover the costs of raising a child, and would be of very substantial assistance to all families with children while reducing the unacceptable level of deep poverty now experienced by far too many children.)

  • Work towards a refundable disability tax credit to improve/go beyond existing specific measures

  • Improve the progressivity of the personal income tax system by introducing a new top income tax bracket for those with very high incomes.

CCSD

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