March 13, 2000
With the current level of surplus and stable public finances, Budget 2000 was an opportunity to invest in Canada's future. While Budget 2000 offers some good news to many families with children, others will feel little positive effect. The tax measures including an enhanced Canada Child Tax Benefit and changes to maternity and parental leave will help many working families with children, but the Canadian Council on Social Development is disappointed that the poorest families in Canada will not receive any significant benefits from this budget. The almost exclusive focus on tax cuts obscures the scope of the serious social deficit in Canada and our collective responsibility to address the needs of vulnerable Canadians.
What the CCSD was looking for:
Increased funding for the Canada Child Tax Benefit
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. While Budget 2000 moves to put money in the pockets of modest to middle-income families, the Budget falls short in setting out a comprehensive plan of action - with clear objectives, benchmarks, and timetables - in support of Canadian children, youth and families. The government adopted such a plan to address the deficit and taxes. Canadian children and families deserve no less.
A comprehensive action plan for children 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. In this budget, the federal government took steps on the income side of the equation. Notably, it committed additional money to increase the Canada Child Tax Benefit (CCTB), a benefit which is targeted to low- and modest-income families.
The CCTB has two main elements: the base benefit which is paid monthly to an estimated 80 per cent of Canadian families with children, and the National Child Benefit Supplement (NCB-S) which goes to low-income families with children. The current value of the base benefit (1999-2000) is a maximum value of $1,020; it is phased out at net family incomes above $27,750. The reduction rate - the rate at which child benefits are reduced for each additional dollar of net family income above the threshold - is 2.5 cents for one child and 5 cents for two or more children. Families with incomes above $70,000 generally receive no benefits. (On top of the base benefit, a benefit of $213 is available for children under age 7 if no child care expenses are claimed, as well as an additional $75 dollars for third and subsequent children.)
The current value of the Supplement is fixed at $785 for the first child, $585 for the second child, and $510 for each subsequent child. For low-income families, then, the total maximum benefit comes to $1,805 for one child (i.e., the $1,020 base benefit plus the $785 NCB-S) and $1,605 for the second child (i.e., $1,020 plus $585). The full value of the Supplement is available to families with net incomes under $20,921; it is phased out sharply at family incomes over $27,750. In July 2000, the Supplement was to have increased to $955 for the first child and to $755 for each additional child, and the income threshold was to rise again to $29,590 - which is the taxable income level where the second (26 per cent) income tax bracket begins.
Maximum Value of Canada Child Tax Benefit (first child), 1999
Maximum Base Benefit*
Total Value CCTB
* Recipients in Alberta receive different maximum amounts depending on the age of the child.
In 1997, the federal government introduced the Canada Child Tax Benefit and allocated additional funding of $850 million (Phase I) on top of existing child benefit expenditures (an estimated $5.1 billion) to launch the new program in July 1998. In the 1998 Budget, Phase II increases were announced B $425 million in 1999 and $425 million in 2000. The 1999 budget provided the details of Phase II.
Budget 2000 provides details on Phase III of the Canada Child Tax Benefit. The government announced an additional investment of $2.5 billion by 2004. At that time, overall annual investment in the CCTB will top $9 billion. The goal, by 2004, is to raise the maximum amount to the CCTB benefit (base benefit plus supplement) to $2,400 for the first child and $2,200 for the second child.
The government plans to increase the base benefit by $70 in July 2000 - to $1,090 (including indexation) - and to proceed with the slated increase in the value of the supplement ($170 per child). In July 2001, the supplement will be increased again by $200 per child so that the value of the supplement reaches approximately $1,155 for the first child, on the way to a target of $1,230 in 2004.
Maximum Value of Canada Child Tax Benefit (first child) Maximum Base
1996 $1,020 $500 $1,520 1999 1,020 785 1,805 2000* 1,090 966 2,056 2001* 1,110 1,155 2,265 2004* 1,170 1,230 2,400 * These are estimated values. They include cost-of-living adjustments, calculated at 1.8% per year.
These projections include for the first time cost-of-living increases. In a surprising and very welcome move, the federal government has restored full indexation to the child benefit system - both benefits and income thresholds - as of January 2000. This has been a serious flaw in the design of the CCTB since its inception, eroding the value of the benefit while at the same time lowering the effective income threshold each year. The CCSD congratulates the government on this very important contribution to child and family well-being.
In addition, the government plans to increase benefits for middle-income families by increasing the income levels where families receive full benefits, and by reducing the benefits more gradually for families with incomes beyond these levels. The income threshold above which the base benefit begins to be reduced, and the supplement is fully phased out will be set equal to the second tax bracket, targeted to be $35,000 by 2004. For family net income in excess of the threshold level, the reduction rate at which the base benefit declines will be lowered to 2.07 per cent for the first child, and 4.14 per cent for the second and additional children. As a result, by 2001, the base benefit will be fully phased out for families with net incomes of roughly $80,000; by 2004, families with incomes of up to $90,000 will receive a child tax benefit transfer.
Changes to the Income Thresholds of the Canada Child Tax Benefit
As of July 1, 1999
As of July 1, 2000
As of July 1, 2001
Enhancing the CCTB will directly affect the lives of Canadian children. Modest and middle income children will definitely benefit through higher benefits. As well, more middle income children will benefit from the program as income thresholds are increased and the reduction rate reduced. It is this group of families who have in effect funded a more highly targeted children's benefit system through the 1980s and 1990s through the elimination of universal benefits and increased income targeting. The government estimates that the program will cover 90 per cent of children under 18 by 2004.
These gains are important, but we can't forget that the poorest of poor children will see no real benefits from this additional investment. The vast majority of welfare poor families in Canada only receive the base benefit as most provincial and territorial governments claw back the supplement from their social assistance cheques. According to the National Council of Welfare, the current design of the CCTB system means that only one-third of poor families with children are net beneficiaries under the current child benefit. Children in families receiving social assistance - an estimated 955,000 - will continue to bear the brunt of poverty for the foreseeable future.
Earmarked funds in support of National Children's Agenda
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. 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 in keeping with the vision laid out in The National Children's Agenda: Developing a Shared Vision. The CCSD was hoping that the government would set aside funds in Budget 2000 to develop this plan. While the Budget extends again an invitation to the provinces to participate in this process, there is a real fear that provincial governments - preoccupied with federal transfers for health - will ignore this overture. Once again, children are left waiting.
Improved access to maternal, parental and family leave
With the introduction of the new Employment Insurance system in 1996, changes to eligibility regulations have substantially 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.
Budget 2000 takes steps to improve Canada's system of maternity and parental leave. Currently, the program provides 15 weeks of maternity benefits and 10 weeks or parental leave for adoptive and biological parents. Benefits range from 55 per cent of insurable earnings up to 80 per cent for low-income families eligible for the Family Income Supplement. With this budget, child-related leave will be doubled from six months (including the standard waiting period) to one year. Specifically, parental leave is being extended from 10 weeks to 35 weeks - for children born or adopted after December 31, 2001.
As well, in a welcome move, the total hours of work needed to qualify for leave is being reduced to 600 employment hours over the past year, down from 700 hours. This step will improve accessibility particularly among women who are engaged in part-time or temporary employment situations. It begins to address the problematic drop in maternity/parental claims resulting from eligibility changes introduced with the 1996 Employment Insurance program. The government is also eliminating the second two week waiting period when parents share the leave, and increasing allowable part-time earnings while on parental leave. All together, it is estimated that these measures will cost $900 million a year, and will affect 150,000 families.
These are very positive changes to the maternity and parental leave system. Yet, much remains to be done to improve accessibility - especially for those families who do not have access to the system at all - to improve benefit levels so that families can afford to exercise these benefits, and to extend support to families struggling to balance employment, family and community obligations through improved family leave.
It is worth noting here that no changes were introduced to improve access to the "regular" Employment Insurance system. 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. 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.
Increased funding to post-secondary education
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.
In response to this situation, the federal government has provided a one-time cash transfer of $2.5 billion to the provinces for health and education, to be drawn over the next four years (2000-01 to 2003-04). This combined transfer which may or may not be used for post-secondary education, fell far short of the provinces demand for $3.7 billion for the sector. In addition, the government announced an increase in the non-taxable allowance for scholarships, by increasing the allowance from $500 to $3,000. The value of this measure is estimated to be $30 million.
In sum, the budget all but ignored the education sector. While new investments in research through the Canadian Foundation for Innovation, the Canada Research Chairs initiative and other research organizations is welcome, the real problems facing students who are facing debt loads upwards of $25,000 upon graduation have not been addressed. Moreover, it is not clear whether additional CHST funds will strengthen our universities and colleges.
Enhanced supports and an adequate income safety net for persons with disabilities
Canadians with disabilities have been waiting a long time for concrete action to improve their lives. 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.
There are a number of small but significant measures in Budget 2000 that assist persons with disabilities, including an increase in the child care expense deduction to $10,000 for children eligible for the Disability Tax Credit (DTC), a supplement to the DTC of up to $500 to recognize caregivers of children with severe disabilities, broadened eligibility for the DTC, and an increase in the Medical Expense Tax Credit to include modifications made to new homes. Permanent funding was provided to the Opportunities Fund for Persons with Disabilities in the amount of $30 million, and $11.5 million for the new Health and Activity Limitations Survey.
We hope that ongoing federal-provincial/territorial work on a national disability agenda that will result in much needed reforms to income, employment and support programs for persons with disabilities.
A comprehensive plan to create affordable housing
Aside from the $750 million announced in December, Budget 2000 did not respond to calls for a national housing strategy or targets for new affordable housing. Members of the National Housing and Homeless Network had called for an additional $2 billion in federal spending on housing and services for the homeless. The Federation of Canadian Municipalities had laid out a plan for 20,000 new affordable units a year over ten years, 10,000 renovated units and 40,000 rent subsidies.
The only other mention of housing in the Budget was under plans for a new infrastructure plan. The government plans to consult with the provinces and municipalities as well as the private sector to reach an agreement on multi-year plan to improve highways and municipal infrastructure - including affordable housing and green infrastructure (i.e., water treatment, waste diversion, etc.)
The government is allocating $100 million in 2000-01, $350 million in 2001-02, and $550 million in 2002-03, and the three years following for joint initiatives with the provinces and municipalities. (In addition, the government is providing $200 million a year up to 2002-03 to up date federal government infrastructure.) Funding for federal-provincial-municipal projects hinges on an agreement which may or may not include affordable housing initiatives. This falls far short of what is needed to address what many have called Canada's crisis in housing and homelessness.
Support for the charitable sector
Budget 2000 introduced a number of small tax-related measures concerning the treatment of charitable donations. For example, it extended the charitable donations tax credit to donations of RRSP, RRIF and insurance proceeds that are made as a consequence of direct beneficiary designations, and reduced from two thirds to one third the income inclusion rate on capital gains arising from the donation of ecologically sensitive lands and easements.
No mention was made of the ongoing work of the Federal Voluntary Joint Table Process - in which CCSD has played an active role - and proposed recommendations to improve the standing of the voluntary sector. However, officials confirm that money has been set aside to continue the joint table process and that an ad hoc committee of Cabinet will be set up to deal to provide political leadership on voluntary sector issues. This new committee will be chaired by the President of the Treasury Board, Mme. Lucienne Robillard. Voluntary sector representatives are positive about this new development and expect movement on their agenda priorities over the next few months.
Measures to create a fairer tax system
The centrepiece of the Budget is a five-year tax reduction plan that will:
- immediately restore full indexation of the personal income tax system;
- reduce the middle income tax rate to 23 per cent from 26 per cent by 2004, starting with a 2-point reduction to 24 per cent in July 2000;
- increase the basic personal exemption threshold from $7,131 to $8,000 over five years;
- raise the income thresholds of the second tax bracket to $35,000 and the threshold for the top bracket to $70,000 over five years;
- eliminate, as of July 1, 2000 the 5 per cent surtax on tax payers with incomes up to about $85,000 and completely eliminate it by 2004;
- raise to 25 per cent for 2000 and to 30 per cent for 2001 the permissible foreign content of investments in RPPs and RRSPs.
In addition, the government plans to reduce the corporate tax rates to 21 per cent from 28 per cent within five years for the highest taxed business sectors, lower capital gains taxes by reducing the amount of capital gains included in income for tax purposes to two-thirds, and ease taxes on small businesses. Overall, the government estimates that taxes will be reduced by a cumulative amount of at least $58 billion over five years. Two-thirds of the tax cuts announced will be legislated this year. If projected surpluses are larger, the government has indicated it may move sooner on implementing the rest of the tax reduction plan and considering new reductions.
Low- and middle-income families will clearly benefit from the surprise move to reindex the tax system. These families have watched over the past 15 years as their tax credits have eroded in value and as they have been pushed into higher tax brackets by inflation. The CCSD and other progressive groups have been advocating for such a move for a long time, and are very pleased that income thresholds and various credits are being indexed. It will be particularly meaningful for Canadians on fixed incomes, such as seniors. And certainly, the increase in the basic personal exemption will mean that fewer poor Canadians will be required to pay income tax. For other tax payers, the increase will provide a flat benefit of up to $300 per year in 2004.
Taken together, however, this tax package does relatively little to assist low-income Canadians, especially those with little taxable income. Moreover, the government's claim that this tax reduction plan is aimed principally at middle-income Canadians is somewhat misleading. (The government defines individuals and families with incomes under $85,000 as low- and middle-income.) The real winners are high-income Canadians who will realize the greatest gains by dint of the fact that they pay a larger amount of income in tax and are in a position to benefit from measures such as the revised income inclusion rate for capital gains and the elimination of the five per cent surtax.
This is not to say the lowering the middle income tax rate to 23 per cent and increasing the bracket threshold from $29,590 to $35,000 is unimportant. But to take these examples, the maximum dollar benefit of this measure (an estimated $1,200 when both are fully phased in) will go to those in the top bracket with taxable incomes above $70,000. Those in the bottom tax bracket will derive no benefit from this move.
Moving the income threshold of the top bracket - from $59,180 to at least $70,000 - again creates a fairer tax system, but those who will benefit are tax payers with incomes above $60,000: $10,000 of income will be taxed at the new middle rate of 23 per cent rather than the current rate of 29 per cent. The elimination of the federal surtax on Canadians with incomes above $65,000 and changes to capital gains inclusion rate target benefits to only six per cent of tax payers. Indeed, 66 per cent of total capital gain in 1996 - the latest year for which data is available - was reported for income tax purposes by the highest one per cent of taxpayers.
The fact of the matter is that more than half of all Canadian tax payers in 1996 reported incomes below $30,000, while 70 per cent have incomes below $40,000. Based on an analysis of 1996 Revenue Canada data on perusal income tax revenue , Hugh MacKenzie of the United Steelworkers estimates that 70 per cent of tax payers will receive approximately 36 per cent of the total benefit from this tax package when fully phased in (at least $58 billion by 2004), while 64 per cent will go to the highest 30 per cent of taxpayers. The two per cent of tax payers with incomes above $100,000 will receive 19 per cent of the benefit from the tax cut.
On balance, federal tax package introduces important changes to the system - namely full indexation - which will appreciably improve the economic standing of all Canadians. Improvements to child benefits and the increase in the personal exemption will increase the disposable income of many modest income Canadians, especially those with children. But the task remains to create a more progressive tax system which will deliver - in conjunction with income security programs and key public services - a better quality of life for Canadians and their children. With these mechanics out of the way, the time is right to deliver "real" tax relief to low- and modest-income Canadians.
Increased support for health care, post-secondary education and social services
Budget 2000 provides a one-time grant to the provinces of $2.5 billion, to be drawn down over three years, through the Canada Health and Social Transfer (CHST). This amount falls far short of the provincial request to restore the cash portion of the CHST to 1993-94 levels, adjusted for inflation, a total of $6 billion a year.
The political battle taking place over health care and around the CHST threatens to leave Canadians behind. The federal government maintains that through actions in past budgets - notably the $11.5 billion increase for health care over five years announced in Budget 1999 - that it has already restored funding levels to 1993-94 levels, the year before federal cuts to transfers began. Moreover, taking the current value of the tax points awarded to the provinces in 1977 into account, the government claims that transfers are now actually higher than 1993-94 levels.
Canada Health and Social Transfer (CHST)
1993-94, 1999-2000 to 2003-2004, billions of dollars
1993-94 1999-00 2000-01 2001-02 2002-03 2003-04 Budget 2000 increase (1) 1.0 0.5 0.5 0.5 Budget 1999 increase:
CHST supplement (2)
2.5 2.5 Budget 1998 cash 12.5 12.5 12.5 12.5 12.5 Total CHST cash 18.8 14.5 15.5 15.5 15.5 15.5 CHST tax transfers (3) 10.2 14.9 15.3 15.8 16.5 17.2 Total CHST 29.0 29.4 30.8 31.3 32.0 32.7
1) The $2.5 billion cash supplement will be paid to a third-party trust and accounted for in 1999-2000 by the federal government. Provinces and territories can draw down their per capita share at any time of the four years.
2) the $3.5 billion cash supplement was paid to a third-party trust and accounted for by the federal government in 1998-1999.
3) All figures for 2000-01 onward, with the exception of CHST cash, are projections.
There are arguments on both sides of this debate. For the provinces, the only relevant figure is the amount of cash transfers each year having factored the tax points into provincial accounting years ago. Moreover, they are angered by the federal governments reluctance to restore and index base cash levels, instead relying on one-time cash infusions to publicize time and again the federal presence in health care. Provinces such as Alberta and Ontario are using the issue of reduced transfers to push the privatization of health care.
The federal government, for its part, is clearly trying to contain transfers to the provinces while exerting more pressure on the whole process of health care restructuring. It has hinted that more money may be available if the provinces come together with the federal government to discuss how to better direct Canada's health care spending - an estimated $60 billion annually.
As noted above, Canadians are being left behind in this federal-provincial battle, especially low-income Canadians. On the health care front, both levels of government appear to be more interested in attributing blame for lack of staff and waiting lists for surgeries and diagnostic testing, rather than exploring ways to sustain the public health system. Moreover, it has been completely lost in the rhetoric that services for the poor, notably social assistance, is cost-shared under the CHST. The exclusive preoccupation on health care - with the occasional mention of post-secondary education - serves to legitimize reductions in social assistance benefit levels, stricter eligibility criteria, mandatory employment requirements, and cuts to services for the poor.
Secure and stable funding for Canada's income programs and public services
Budget 2000 signals a shift in priorities from reinvestment in programs that suffered through years of deficit-cutting to tax cuts. The liberal government has been very cautious about restoring public programs, announcing limited investments in research, infrastructure and the like. Indeed, program spending as a percentage of GDP continues to fall. In 1997-98, the year that the deficit was eliminated, program spending was 12.4 per cent of GDP. In the current fiscal year, 1999-2000, it is 12.2 per cent and expected to fall again next year to 11.6 per cent - despite the new program spending announced in Budget 2000. Total program spending remains at the lowest level since the 1950s.
This budget shows that the government is moving away from its 1997 election promise to commit 50 per cent of future surpluses to program spending and 50 per cent to tax cuts and debt reduction. The government in fact proposes to allocate at least $58 billion of a projected five year surplus to tax cuts, with another $15 to $25 billion for debt relief. While the government is committed to sustaining current programs and has made some new investments, there is really no plan to address the social deficit that opened up through the 1990s. Some programs such as EI are so weakened, there is real concern that when the next downturn in the economy hits, as surely it will, that Canada's social safety net will crumble. Shifting revenue away from the personal tax base - and corporations who already pay comparatively low levels of taxes - is troubling. This sets the stage for more radical reductions to income programs and public services in future.
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. On balance, Budget 2000 represents a step in the right direction, but much work remains to be done to address the needs of poor Canadians.