Submission to the Standing Committee on Finance Priorities for the 2000 Federal Budget

October 1999

Summary

The Canadian Council on Social Development (CCSD) is an independent, national, non-profit organization led by a volunteer board of directors from across Canada. Primarily a research organization, the CCSD focuses on issues of social and economic security. The Council's more than 800 members include professionals in human service organizations and businesses, volunteers, union members, academics, and provincial government departments who share a commitment to improving the lives of Canadians.

With the current level of surplus and stable public finances, Budget 2000 provides the opportunity to invest in Canada's future. To lay the conditions for future social cohesion and sustainable economic prosperity shared by all, the CCSD is calling for a Children's Budget focused on the critical needs of Canadian children, youth and families. Building on priorities set out in the 1998 and 1999 federal budgets, and most recently, in the Speech from the Throne, the following program initiatives are recommended:

  • Improve children's well-being by adopting a comprehensive plan of action - with clear objectives, benchmarks, and timetables - in support of Canadian children, youth and families. In Budget 2000, the government should: enrich the Child Tax Benefit and the National Child Benefit Supplement, and re-index the child benefit system; reintroduce a universal, non-refundable tax credit; and provide funds for a co-ordinated national strategy to provide flexible, community-based services in a range of areas.

  • Recognize the value of caregiving, for example, by increasing the value of the Caregiver Credit.

  • Increase funding to post-secondary education, targeting new monies to provide direct assistance to students and rebuild our post-secondary educational institutions.

  • Create a fairer tax system by increasing the basic tax exemption, re-indexing the income tax system, restoring the value of the GST credit, reforming the RRSP system, and introducing an inheritance tax.

  • Reinstate Canadians' right to unemployment insurance.

  • Reform and improve access to, and benefit levels of, maternal, parental and family leave.

  • Enhance disability supports, promote paid employment and volunteer opportunities, and build an integrated and adequate income safety net for persons with disabilities.

  • Invest in secure, well-paid employment opportunities for Canadians in the third sector economy.

Introduction

As we are reaching the end of a decade and the beginning of a new Millennium, it is appropriate to reflect back on Canada's performance over the last few years and the challenges ahead of us.

In the CCSD's view, the salient feature of the last decade has been the deterioration of the economic and social security of Canadians. The 1990s mark Canadians' worst period of income stagnation since the 1930s. Despite the recent growth of GDP, the vast majority of Canadians have less disposable income, higher levels of household debt, and lower levels of savings than at the beginning of the decade. There are nearly 1.5 million more poor Canadians at the end of the 1990s than there were at the end of the 1980s.

This dismal performance is largely due to the rigid monetary policy of the late 1980s and governments' deficit obsession in the 1990s. These policies have depressed economic growth and the labour market, and enlarged social problems such as homelessness and child poverty. According to the 1999 budget plan:

Sharp cuts in program spending have enabled Canada to quickly put its fiscal house in order. Between 1992 and 1997, Canada had the largest reduction in program spending of any G-7 country as a share of GDP: program spending dropped 7.9 percentage points, compared to an average of 1.2 points for the G-7 countries. In relation to the size of the economy, Canada's program spending is now below the G-7 average, a trend that is expected to continue.

While the federal government can take pride in turning around the deficit's direction, it should also take responsibility for creating collateral damage to the country's economic and social state.

How real are worries about the "brain drain," productivity and high taxes?

The sluggish performance of the economy and stagnation in employment and incomes have caused some people to call for immediate across-the-board personal income tax cuts. The current level of taxation is allegedly:

  • driving professionals out of Canada;
  • underlying a dismal productivity performance; and
  • causing the recent stagnation in the disposable income of Canadians.

The CCSD believes that the extent of these problems is vastly exaggerated, and the solutions proposed largely miss the target.

Brain Drain

As the Prime Minister has rightly noted, Canada is a net importer of university-educated individuals. Moreover, according to Statistics Canada, the outflow of educated Canadians has slowed down. Although the flow of temporary emigrants to the U.S. has increased recently, the meaning and the permanence of the phenomenon is unclear. Contrary to Canada, the U.S. labour market has been operating at close to full capacity for some time now, and consequently, job opportunities have been more plentiful and generous south side of the border. We don't know at this point whether this is a temporary phenomenon or a permanent structural problem.

If Canada wants to keep its top researchers and practitioners in the fields of health, education and high technology - all of which have experienced out-migration - the CCSD suggests that the government increase its commitment to those very sectors it has neglected in past years: education, health, and research and development.

Productivity

There is no question that productivity is critical to economic growth over time. But evidence that Canada's productivity growth has slowed in the last decade, especially compared to the U.S., is mixed at best. When one measures the productivity of the entire business sector, Canada actually outperformed the U.S. in the 1990s. There are only two sectors in manufacturing where Canada lags behind - industrial machinery and electronic equipment. When these two industries are removed, the productivity rates in Canada and the U.S. are virtually similar. Overall, Canada has enjoyed greater labour productivity gains in 11 of the 19 main industrial groups, and 15 out of 19 in terms of capital productivity.

Canada's rate of productivity is lower than other G-7 countries. However, there is no correlation between productivity growth and low personal income tax. France, Germany, Italy, the Netherlands, and even Sweden - hardly tax havens - have all outpaced both Canada and the U.S. in productivity growth in the 1990s. This suggests that there are other institutional factors which explain Canada's lag. The industrial makeup of the Canadian economy and the weak capital investment behaviour of the private sector over the last 20 years are more likely causes for Canada's relatively poor performance.

The CCSD does not believe that tax cuts, greater trade liberalization, and privatization are appropriate cures for Canada's productivity problem. Rather, we believe that government, in conjunction with the private sector, has a key leadership role to play in making the necessary investments that will produce an educated and healthy citizenry, new clusters of knowledge and technology, and an inclusive, high-wage labour market. The government's job is to ensure that the benefits of productivity and economic growth are distributed equitably among all Canadians, rather than being concentrated only in the hands of those who have survived downsizing.

Tax Cuts

Some people say that taxation is the main reason that disposable income levels have stagnated in Canada. However evidence suggests otherwise. While it is true that between 1989 and 1997, average after-tax family income decreased by about six per cent, four-fifths of this drop was due to a net decrease in gross earnings and the remaining fifth to smaller government transfers. Partial de-indexation of income tax also contributed to an increase (one per cent) in the proportion of tax paid out of gross income in the same period. However, stagnating personal incomes are mainly the result of the country's poor macroeconomic and labour market performance.

While an overhaul of the tax system is certainly in order to make it fairer and more efficient, an immediate across-the-board personal income tax cut would not deliver the broad economic benefits promised. Further, it would seriously compromise the government's ability to support the economic and social well-being of Canadians in the future. Calls for tax cuts threaten to leave Canadians who are at the bottom of the income ladder even further behind.

Reinvesting in the Social Infrastructure

Canada is at a juncture in its history. The educational, health and income support systems which form the country's safety net are in a dangerous state of disrepair. The past decade has witnessed growing inequality and a serious rise in the number of poor people. At the same time, there has been a growing privatization of health and employment risks in this country, seen in escalating private health costs, as well as a weakening of key income support programs such as employment insurance and social assistance. Canadians are being left alone to struggle with the costs associated with becoming disabled, losing a job, or having to work from contract to contract.

CCSD research shows that Canadians' level of confidence in the social infrastructure is at an all-time low. Only six in 10 Canadians have confidence in the capacity of the health care system to provide them with adequate emergency care, while only one in five believes that they can count on income security programs to help them while they are in job transition. In poll after poll, Canadians indicate that they give higher priority to government reinvestments in areas such as health, education and child well-being and to measures that address unemployment, rather than to debt reduction or tax cuts.

Given the size of the current surplus and stable public finances, Budget 2000 provides the government with an opportunity to invest in Canada's future. Specifically, the CCSD is calling for a Children's Budget focused on the critical needs of Canadian children, youth and families. This will serve as a stepping stone to future social cohesion and sustainable economic prosperity that can be shared by all. We recommend the following program initiatives, building on priorities set out in Budget 1998 and Budget 1999, and most recently, in the Speech from the Throne:

  • Improve children's well-being

    There is no greater need than investing in all of Canada's children. Governments across Canada have already committed themselves to a vision for Canada's children through the National Children's Agenda. The publication of A National Children's Agenda: Developing a Shared Vision and measures announced in the Speech from the Throne are positive first steps. The CCSD now calls on the federal government to make this vision a reality by adopting a comprehensive plan of action - with clear objectives, benchmarks, and timetables - in support of Canadian children, youth and families. Such a plan should include measures to enhance the economic security of children, as well as provide for high-quality public services that are so critical to their healthy development, including education beginning in the earliest years of life, public health, and recreational opportunities, taking into consideration the particular needs of vulnerable groups such as lone-parent households, individuals with disabilities, Aboriginal households, and new immigrants.

  • Income Security

    We believe that the new National Child Benefit System constitutes the most important social policy initiative undertaken by the current government on behalf of children. So far, it has been a success story in terms of federal-provincial co-operation. Given the increased needs in the area of child poverty - amply illustrated in our research studies - it is crucial that the government use some of its current fiscal margin to consolidate this new program. Thus, we continue to recommend that within the next five years, the government raise its investment in the base Child Tax Benefit and the National Child Benefit Supplement (NCB-S) so that their combined value rises to $4,000 for the first child. This amount would substantially assist Canadian families with the costs of raising children. It would also recognize the valuable labour of parenting.

    As an initial step, we believe that the government should take immediate action in Budget 2000 to enrich the Canada Child Tax Benefit to $2,500 per child - the average amount of welfare-delivered child benefits - at an estimated additional cost of $1 to $1.5 billion. Currently, the base benefit stands at $1,020 per child plus $213 for each child under age seven (if the Child Care Expense Deduction is not claimed), while the value of the NCB-S has been increased in the last two budgets. In July 2000, the maximum value of the National Child Benefit Supplement will be $955 for the first child and $755 for additional children, up from the 1998 rates of $605 for the first child and $405 for additional children.

    To date, the federal government has chosen to invest the bulk of additional monies in the National Child Benefit Supplement, with a smaller amount targeted to raising the net family income threshold for receipt of the full benefit (from $25,921 to $29,950 - the threshold of the second marginal tax bracket). While the CCSD understands the rationale for increasing the value of the supplement - establishing an equivalence of monetary benefits for children in welfare-poor and working-poor families - we believe that it is necessary to enrich both the base benefit and the supplement as soon as possible. Enriching the base benefit, in conjunction with raising the reduction threshold level to avoid exorbitant tax-back rates, would extend more support to poor children. Moreover, it would increase benefits to modest- and middle-income families which have, in effect, paid for our highly targeted child benefit system.

    The CCSD also recommends that the government index the child benefit system to inflation (at an estimated cost of $200 million per year) and ensure that benefits flow to all poor children, including those living in families that rely on social assistance. According to the National Council of Welfare, the current design of the NCB system means that only one-third of poor families with children are net beneficiaries under the current child benefit. The goal of increasing support to working-poor families is important, but we believe it is imperative to direct additional monies to the poorest children - those living in families on social assistance. This measure would not be a disincentive to employment for welfare recipients as some people argue; the greatest disincentive is a poorly functioning labour market.

    In addition, the federal government should reintroduce a universal, non-refundable tax credit for families raising children. Canada is one of the few industrialized countries that does not recognize the cost of raising children through its tax system. Previous income tax provisions such as the Child Tax Exemption (converted into a non-refundable child tax credit in 1988) and the Child Tax Credit were eliminated in 1993, along with the Family Allowance. These actions have heightened concerns about the lack of tax equity between families with children and those without. A universal child tax credit would also give tax recognition to families with a caregiver working at home. Finally, with regard to this proposal, we do not believe that a universal child tax credit should be tied to the elimination of the Child Care Expense Deduction or to any other program that benefits families with children.

    We would also urge you to develop new ways for caregivers of children or dependant adults to contribute to pension plans during their caring years, and to expand support to families caring for children with special needs.

  • Social and Community Supports

    Income security is only one component of a comprehensive plan of action to improve child and youth well-being. Other issues - such as adequate child care, early childhood development, safe communities, transitions to adulthood, affordable housing and education - also deserve the government's full attention, especially in light of the willingness of provincial governments to develop and implement a National Children's Agenda. The Community Action Program for Children (CAP-C) and the Canada Prenatal Nutrition Program (CPNP) provide existing models for intergovernmental co-operation. However, we believe that it is necessary to explore different mechanisms - such as designated funds - to develop a community-based service network. It is encouraging that the federal government has set out a timetable for its discussions with the provinces and territories to create a national action plan to support parents and families. However, significant monies need to be set aside in Budget 2000 to develop this plan, paying particular attention to the inadequate and precarious supply of early childhood education and care services and the dearth of affordable housing across the country.

    • Recognize the value of caregiving, for example, by increasing the value of the Caregiver Credit.

      There is a range of possible responses to better assist families in caring for their children and other family members, including initiatives to create greater workplace flexibility, improve leave options, and provide direct support through high-quality public services and tax expenditures such as the new Caregiver Credit. As a start, it is recommended that the government take immediate steps in Budget 2000 to increase the value to the Caregiver Credit, and that it extend eligibility for this type of tax support to a greater number of Canadians who are increasingly involved in providing direct care for family members in a variety of settings.

    • Increase funding to post-secondary education, targeting new monies to provide direct assistance to students and rebuild our post-secondary educational institutions.

      Past cuts in the CHST and in provincial funding have left the post-secondary education system much weakened. One consequence has been a large increase in both tuition fees and student debt across the country, as well as the departure of promising young researchers for better opportunities elsewhere. Paradoxically, in this age of the knowledge-based economy, increasing fees and uncertain job prospects are preventing worthy young people from pursuing post-secondary education and technical training. Universities and colleges are struggling on reduced budgets to meet existing demands. Therefore, we stress the need for the federal government to work with the provinces to re-establish needs-based grants as a form of financial support for low-income students and to lower tuition fees. The CCSD further recommends that the federal government consider a new injection of CHST transfers for post-secondary education institutions and for funding to national research councils. While we welcome the announcement of research dollars in the Speech from the Throne, no mention was made of strengthening our universities and colleges - a significant gap in the government's proposed action plan on skills and learning for the 21st century.

    • Create a fairer tax system by increasing the basic tax exemption, reintroducing a universal non-refundable tax credit for families with children, re-indexing the income tax system, restoring the value of the GST credit, reforming the RRSP/RPP system, and introducing an inheritance tax.

      Fully re-indexing tax brackets, credits and benefits would go a long way to ensuring the long-term equity of the tax and benefit systems. Low- and middle-income households have been the main victims of recent tax hikes that have resulted from de-indexation. We strongly believe this issue should be addressed before any additional tax cuts are considered.

      Any tax-relief measures in Budget 2000 should provide greater support for families with children, as noted above, and should increase disposable income for low- and middle-income Canadians. We recommend that the federal government:

      • Increase the basic tax exemption, which would provide relief to all and most notably, relief to low-income households, many of whom would be exempt from income taxes.

      • Reintroduce a universal non-refundable child tax credit which would recognize the costs all families face in raising children. (See discussion above)

      • Re-index the tax brackets gradually to bring them back to the 1988 levels that existed prior to the partial indexation of the system, a measure that would raise the thresholds for the higher tax rates to about $37,000 (for the 26% tax rate) and $73,000 (for the 29% tax rate).

      • Restore the value of the GST tax credit. Over time, the GST rate should be reduced for it is a regressive tax and encourages the black market economy.

      The Caledon Institute estimates that between 1986 and 1998, 1.2 million people became federal taxpayers due to de-indexation, while one in five taxpayers were pushed into higher tax brackets. Steps to increase the value of the basic exemption in the 1998 and 1999 budgets removed 600,000 individuals from the tax rolls, at a cost of $1.5 billion. But many more Canadians will be pulled back into the system because the government did not correct the underlying problem of "bracket creep."

      The CCSD recommends that the federal government also consider other measures to make the tax system more just. For one, the current preferential tax treatment of capital gains should be abolished: only three-quarters of net realised capital gains are included as income. Second, RRSPs have become the largest federal income tax expenditure. We recommend that to bring spending down in this area and make it more equitable, RRSP contribution limits should be reduced and contributions should be treated as a tax credit rather than as a deduction. Finally, a modest inheritance tax should be reintroduced.

      Regarding RRSPs, the current contribution ceiling of $13,500, as well as the treatment of RRSPs as a tax deduction rather than a tax credit, provide a clear tax advantage for the most privileged Canadians. The contribution ceiling should be brought down to a level more in-line with average wages. With the current ceiling, all taxpayers - low, middle, and high - are subsidizing generous private pensions for above-average-income Canadians through higher taxes. We believe that the government's role should be to help retirees establish pension incomes that are consistent with prevailing average earnings in Canada. Lower ceilings for RRSP contributions should be matched for RPPs in order to keep the playing field level. If people want higher retirement incomes, they can turn to private savings and investments without the support of taxpayers. Our proposed initiatives would not only make the tax system fairer, they would also afford the government greater fiscal flexibility over time.

      Finally, the CCSD recommends that the federal government remain in step with the United States by reintroducing an inheritance tax in the name of intergenerational equity. Much has been said about the increasing tax pressures likely to fall on future generations as Canada's population ages. We believe that this burden could be alleviated to some extent by levying a modest tax on wealth transfers. This tax could be specifically dedicated to increasing the CPP/QPP trust fund to lessen the need for future increases in contribution rates, or it could be more directly applied to meeting the additional health and income needs of Canadians. Using the average rate for OECD countries - where inheritance taxes are equivalent to 0.2 per cent of GDP - and applying it to Canada's 1998 GDP, we estimate that the government could raise about $1.8 billion per year. We recommend that inheritances over $200,000 be taxed at the low rate of five per cent.

    • Reinstate Canadians' right to unemployment insurance.

      In view of the surplus generated by the Employment Insurance program (EI) and the low coverage it now affords, this program is in great danger of losing its legitimacy with premium-payers. The CCSD does not, however, support calls to reduce EI premiums. Any job creation potential of such a cut has been greatly exaggerated. Of more concern is the serious decline in the number of unemployed who are currently covered by EI - a 50 point drop since 1990, from 83 per cent to 33 per cent. As well, there has been a steep reduction in the number of maternity and parental leave beneficiaries. Clearly, the last round of restrictions to the eligibility criteria and to benefits under the EI program have had a far deeper impact than first envisioned. Many people now contribute to the plan with no hope of ever collecting any benefits. For workers in precarious employment situations or those who are working part-time, EI effectively constitutes another tax on their earnings.

      The CCSD recommends that the federal government not only restore EI coverage and benefits to pre-1994 levels, but also extend and improve coverage for part-time workers and the self-employed. The EI program should also be restructured to promote the hiring of new workers, rather than the current system which encourages employers to pay overtime wages to avoid additional EI contributions.

    • Reform and improve the access to and benefit levels of maternal, parental and family leave.

      With the introduction of the new Employment Insurance system in 1996, changes to eligibility regulations have radically reduced the number of workers who can draw upon EI maternity and parental benefits. Between 1996 and 1997, for example, the number of beneficiaries fell by seven per cent, compared to a drop in births of only two per cent. This highlights the critical problems incurred by grafting this type of leave program onto the unemployment insurance system. Restrictive eligibility criteria and the two-week waiting period are two irrational features of Canada's maternity and parental leave program which directly result from rigid conformity with the regulations of the "regular" EI program.

      We recommend that the government - at a minimum - restore the pre-1994 conditions of entitlement, benefit duration, replacement rate, and the maximum insurable earnings level as a key element in a new National Children's Agenda. The announced extension of the program is an important first step, but action is needed immediately to expand access to the program beyond a small core of full-time, full-year employees. It is strongly recommended that the government create a separate maternity and parental leave program that would provide financial support to a broad range of households that currently do not have access to EI.

      Combined leave for parents should be available for at least one year - as is the practice in many other countries - in order to allow parents the option of caring for their young children, without incurring high financial penalties. A new program should also provide for various forms of paid family leave, for example, to attend to ill family members. In addition, we recommend that the government demonstrate leadership by reforming the federal labour code to expand unpaid family leave guarantees for workers in federally regulated industries as one measure to make workplaces more family-friendly.

    • Enhance disability supports, promote paid employment and volunteer opportunities, and build an integrated and adequate income safety net for persons with disabilities.

      In June 1999, the Subcommittee on the Status of Persons with Disabilities released its report, Reflecting Interdependence: Disability, Parliament, Government and the Community. Rather than churning out another report on the status of persons with disabilities and options for change, the Committee decided to investigate "the fate of the mountain of reports and recommendations of the recent past and to establish where disability issues stood on the current government agenda." The committee found that most reports, including the government's own Task Force on Disability Issues report issued in October 1996, were sitting on shelves gathering dust, sidelined by intergovernmental and interdepartmental wrangling.

      Canadians with disabilities have been waiting a long time for concrete action to improve their lives. The promise associated with the release of In Unison: A Canadian Approach to Disability Issues by the Federal-Provincial/Territorial Ministers Responsible for Social Services in 1998 has waned. The CCSD urges the government to move forward on the many positive recommendations that have been made and to stimulate negotiations with the provinces and territories in order to realize the vision of full citizenship for persons with disabilities. As stated in In Unison, specific action is needed to enhance disability supports - including measures to offset the very high costs related to a disability - and to promote paid work and volunteer opportunities for persons with disabilities, while building an integrated and adequate income safety net.

    • Invest in secure, well-paid employment opportunities for Canadians in the third sector economy.

      The polarization of incomes throughout the 1990s clearly threatens the well-being of Canadians. Overall, average disposable incomes have not recovered from the recession in the early 1990s. Between 1989 and 1996, the bottom 40 per cent of families with children under 18 had their share of market income drop by 3.2 percentage points, while the market income of the top 40 per cent grew by the same amount - a shift equivalent to several billion dollars. Even after taxes and transfers, families at the bottom of the income ladder lost ground at the expense of families at the top. While some Canadians have experienced renewed prosperity over the last few years, a large group is being left behind to compete for insecure jobs in a low-wage labour market. It is incumbent upon the federal government to explore options that will improve employment opportunities and conditions for the many individuals and families who now live from paycheque to paycheque.

      In its discussion of Canadian productivity, the Finance Committee argued that the government has an important role to play "creating the environment in which the economy operates" through its monetary and fiscal policies, taxation powers, and by providing backup when markets fail. Productivity with a Purpose makes a variety of recommendations ranging from reducing the debt-to-GDP ratio, establishing internationally competitive tax rates, supporting education and skills development, and greater trade liberalization and privatization. These types of actions are designed to "let the market work." The problem with this orientation to productivity - and to Canada's economic performance more generally - is that it ignores the fact that this same market is creating two classes of Canadians: economic winners and losers. The evidence on this point is quite strong. As noted above, declining market incomes underlie Canada's dismal after-tax income performance this past decade. It is not enough for government to follow behind and attempt - half-heartedly, in most cases - to pick up the pieces. Governments at all levels need to be proactive in creating secure, well-paid employment opportunities for all Canadians.

      The CCSD believes that the federal government could make a positive contribution by investing in the third sector economy, thereby providing jobs and much-needed social and health support services at the community level. This could be done through the creation of a well-endowed National Community Development Fund that would provide financial and technical support to local initiatives throughout the country. Not only would such an investment fund create more jobs than any across-the-board tax cut, it could also help to address the glaring gaps in Canada's social infrastructure, such as the need for affordable housing and child care. In addition, consideration should be given to enhancing the ability of the non-profit sector to increase employment through improvements in the charitable tax credit.

Conclusion

The Finance Committee's report on productivity talks about "getting the fundamentals right." In this instance, the Committee was referring to maintaining low inflation, continual program review, and a productivity covenant, among other things. The CCSD believes that getting the fundamentals right means much more. It means providing economic and social security for Canadians in the face of a rapidly changing global economy and increasingly diverse society. It means ensuring the opportunity of all Canadians to participate in the social, cultural and economic lives of their communities. It means giving our children the best chance possible to grow and develop through coordinated government/private sector/community initiatives under the auspices of a National Children's Agenda. Budget 2000 can - and should - make a difference.

CCSD

Canada's Social Development Convenors

info@ccsd.ca

Phone: 613-236-8977

Kanata, ON

P.O. Box 13713 K2K 1X6

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