CCSD's Response to the 1997 Federal Budget

March 1997

With its continued emphasis on deficit reduction, the 1997 federal budget is a "stay the course" budget. New measures were announced in the areas of post-secondary education and health care, and the foundation was set for a new national child benefit with what the government has referred to as a "down payment" on child poverty. Unfortunately, these measures do not offset the continuing reductions in social transfers to the provinces through the Canada Health and Social Transfer (CHST) announced in the 1995 Budget, and they do not sufficiently deal with key social needs such as child care and unemployment.

The Canadian Council on Social Development will continue to pressure the federal government to make much needed investments in Canada's social infrastructure, and to address issues related to the social and economic security of Canadians. The following is a brief analysis of some of the changes announced in this year's federal budget, along with several recommendations on how the government of Canada can create jobs, reduce child poverty, and protect our social safety net.

The Context – How are we doing?

By some selective indicators, the Canadian economy is doing well. Interest rates and inflation are at their lowest levels in a generation, the federal government is approaching a balanced budget, the stock market is booming and many private sector analysts are predicting that several years of rising economic growth – and job creation – are just around the corner. But there is another side to the story.

Several years of corporate and government downsizing and the emergence of the so-called "new economy" has produced clear winners and losers. Those with skills and education, commonly referred to as "knowledge" workers, are enjoying escalating salaries and benefits as the demand for their skills increases with the onset of new technologies and the growing wealth in high-end service industries such as management and financial consulting. By contrast, those with less education and fewer marketable skills are facing either unemployment or low wages and insecure forms of work.

The unemployment rate in Canada remains near 10 per cent, and poverty has grown substantially in recent years despite the positive financial data that has sent Canadian stock markets skyward. The so-called "fundamentals" of low inflation and low interest rates have done little to ease the burden on those unable to find work or trapped in low wage jobs. Nowhere has the growth of unemployment and poverty been more widespread than among younger Canadians. More than 43% of young families now live in poverty compared to 15.6% of all families. This disturbing trend is also reflected in the much-reported fact that one in five children now live in poverty – 45 per cent more than in 1989, the year Parliament unanimously pledged to eradicate child poverty by the year 2000.

Youth unemployment is also on the rise. Over 16 per cent of youth are currently unable to find work. The divide between younger and older workers is reflective of a longer term trend. Over the past decade, more than two million jobs (net) have been created for adults, but the number of jobs for youth has fallen by 20,000. Young people with lower levels of education have experienced the greatest difficulties finding work throughout this period.

Another disturbing trend has been the drop in the labour force participation rates of youth. Today, only 60 per cent of young people are either employed or looking for work; this is down from 70 per cent at the begining of the 1990s. This trend speaks to the difficult labour market conditions faced by youth, as more and more young people have become discouraged by their unsuccessful search for work.

The 1997 Federal Budget

In text of the 1997 budget, the federal Government recognized the need to address some of these emerging social problems, but did not commit sufficient resources to deal with them. The Finance Minister is now more than $5 billion ahead of his deficit targets; therefore the CCSD believes that the federal government has the "fiscal room" to deal with some of the country's most pressing social concerns.

Falling Social Transfers

Despite the current improved fiscal situation, major cuts to social spending continue to be implemented. The $7 billion reduction in social transfers (between 1995 and the year 2000) to the provinces for health care, post-secondary education and social assistance and services will continue as announced in the 1995 budget. This year alone, the provinces will lose an additional $2.5 billion in support from the federal government.

Table 1: CHST spending, 1995-2000 (in billions of dollars)
1995-96 1996-97 1997-98 1998-99 1999-2000
$18.6 $14.9 $12.5 $11.8 $11.1

The CCSD believes that given the progress the federal government has already made in reducing the size of its deficit, spending on the CHST should be frozen at the 1997-98 level of $12.5 billion.

Support for Poor Families with Children

Currently, the federal government provides direct income support for families with children through a system of child benefits. The largest component of this system is called the Child Tax Benefit (CTB). All families with incomes up to $25,921 are eligible for the maximum annual CTB of $1,020 per child (plus $70 for the third and subsequent children), regardless of their source(s) of income (i.e. labour market earnings, employment insurance or social assistance). It is paid to eligible families on a monthy basis (based on their previous year's income) and it is tax-free. Payments are gradually reduced for families with income aboves $25,921, and are eliminated when family income (for those with one or two children) reaches $66,700. Families with children that do not claim the annual child care deduction (for child care expenses) are eligible for an additional $213 per child, for each child under the age of seven.

Some low-income families with labour market earnings are also eligible for the federal Working Income Supplement (WIS). The WIS is structured very differently than the CTB. It is designed to provide minimal benefits at lower levels of earnings (starting at $3,750), which rise as earnings increase. The maximum WIS of $500 is paid to families with incomes between $10,000 and $20,921 after which benefits decline and eventually dissapear at $25,921. Unlike the CTB, the WIS is paid on a per family, rather than a per child basis. It is calculated according to a family's previous year's earnings and income.

The 1997 budget sets out the "foundation" for a new national effort to address the growing problem of child poverty in Canada by announcing the federal government's intention to combine the current Child Tax Benefit with the Working Income Supplement to form a new Canada Child Tax Benefit (CCTB) in 1998. This single benefit would be paid to all low- and modest-income families regardless of their source(s) of income.

This announcement is the first of several steps required to develop a National Child Benefit System – that is, a more coordinated federal/provincial/ territorial approach to child benefits based on the enriched federal income platform provided by the new CCTB, plus provincial/territorial investments in complementary benefits.

In the 1997 budget, the Finance Minister announced his intention to devote an additional $600 million by 1998 to an expanded and redesigned Canada Child Tax Benefit, plus the $250 million increase in the Working Income Supplement announced in the 1996 Budget. The total cost of federal child benefits is set to rise from the current $5.2 billion to $6 billion by 1998, the anticipated inaugural year of the National Child Benefit System.

The move to create an enriched and coordinated child benefit system is contingent upon federal and provincial/territorial leaders reaching an agreement on the design and implementation of the benefit system. The budget states the federal government's desire to have an agreement in place by July 1998, or sooner if possible. As part of this agreement, a reallocation framework will be negotiated, outlining how the provincial/territorial savings in social assistance (resulting from the expanded and enhanced Canada Child Tax Benefit) will be reinvested in other programs "targeted at improving work incentives and supporting children in low-income working families." ("Working Together Towards a National Child Benefit System", page 19, 1997). The process of negotiating this framework over the coming months will be critical to the success of the entire federal/provincial/territorial child benefit initiative.

As part of the transition to the new system, the Working Income Supplement will move to a per child basis in 1997, paving the way for its merger with the Child Tax Benefit in July of 1998. At this point, the combined benefit – the Canada Child Tax Benefit – will provide families whose annual incomes are below $20,921 (a reduced maximum benefit threshold) with a maximum of $1,625 for their first child and $1,425 for each additional child. (The supplement of $213 per child for children under seven will be retained for families not claiming child-care expenses).

The following table shows the impact of the changes to the Child Tax Benefit and the Working Income Supplement scheduled to take effect in July 1998.

Table 2: Impact of changes to the Child Tax Benefit/Working Income Supplement (for families with incomes below $20,921)
Family Size
(number of children)
Today
(CTB+WIS)
(dollars)
July 1998
(CCTB)
(dollars)
Difference
(today - July 1998)
(dollars)
one 1,520 1,625 105
two 2,540 3,050 510
three 3,635 4,475 840
four 4,730 5,900 1,170

Families who are currently receiving the Child Tax Benefit and the Working Income Supplement and are under the new income threshold (of $20,921) will be better off under the new system. Families with one child will be eligible for up to $105 more a year under the Canada Child Tax Benefit in 1998 (compared to the current combined CTB/WIS maximum). The maximum for families with two children will rise by $510, families with three children will potentially see $840 more a year, and families with four children could get as much as an additional $1,170 a year. The government estimates that roughly 1.4 million families and 2.5 million children will potentially receive higher benefits.

It is important to note, however, that families who rely primarily on provincial social assistance as a source of income and eligible families with incomes above the new income threshold will see no improvement in their benefits. If and when the federal government implements and enriches the Canada Child Tax Benefit, provincial governments will reduce children's benefits delivered through social assistance by a commensurate amount.

The CCSD supports the 1997 federal budget's first step towards establishing a National Child Benefit System, and applauds the efforts of both levels of government to build a more coordinated approach to the devastating problem of child poverty. However, we believe that much work still needs to be done.

To start, the CCSD has called upon the federal government to protect the child benefits currently in place – and any new benefits – against the eroding power of inflation. Each year, total spending on the Child Tax Benefit falls by $170 million because the income thresholds and benefit levels are only partially indexed. The 1996 Budget recognized the need to protect benefits for seniors against inflation by fully indexing the new Senior's Benefit; the CCSD recommends that the same protection be given to poor families with children.

The CCSD is also calling for a more substantial, multi-year financial commitment to the development of a National Child Benefit System. Our research shows that an additional investment of $2 billion would reduce the number of poor children by about 20 per cent. The announced $600 million, distributed among poor children across Canada, makes an important but ultimately small dent in child poverty.

The CCSD will also continue to press the federal and provincial/territorial governments to set realistic targets and a firm timetable for reducing child poverty just as they have done with their deficits. In 1997, we are nowhere near meeting the lofty commitment of Parliament to "eradicate child poverty by the year 2000". Realistic targets, matched by a substantial financial commitment, would demonstrate that the federal and provincial/territorial governments are serious about dealing with the problem of child poverty.

As the CCSD has noted in the past, a single child benefit – even a substantial one – will not in itself adequately deal with the issue of child poverty. A more comprehensive strategy is required. Children are poor because their parents are poor. A serious federal/provincial/territorial strategy to reduce child poverty will have to tackle problems such as low wages and insecure employment, high levels of joblessness, inadequate social assistance, disappearing social services, and inadequate child care and housing.

The CCSD calls upon both levels of government to demonstrate continued leadership and to commit to an open policy development process so that families, community groups, and other interested parties can help shape the future child benefit system in Canada. Furthermore, we are urging governments to design and implement the changes in a way that improves incomes and services for working and non-working poor families alike.

Support for Young People

In response to the growing need to prepare young people for a labour market that demands increasing education and skills, the 1997 budget makes some targeted investments by: providing funds for upgrading university research facilities; supporting public-private research partnerships; expanding individual tax assistance for post-secondary studies; establishing greater labour market information supports via the Internet; extending interest payment relief through the Canada Student Loans program; and expanding the availability of internships and work placements for young people with post-secondary education who lack job experience. The CCSD supports these measures. They are among the most positive in the budget.

These changes will provide opportunities for young people pursuing post-secondary education, and those who have completed their studies and are seeking employment. But unfortunately, they will do little for the most vulnerable young people – those lacking skills and education. Since the provinces will soon have jurisdiction over both education and training, it is the provincial governments who will be responsible for assisting young people who are experiencing the most difficulty in the labour market. To have a real impact on youth unemployment, greater emphasis – by either or both levels of government – must be placed on preparing the most disadvantaged youth for the labour market. This task will become increasingly difficult though, as federal support for post-secondary education through the CHST continues to fall between now and the year 2000.

Job Creation

The federal budget outlined a number of targeted measures as part of their job creation strategy, including the extension of the Canada Infrastructure Works Program, the announcement of the Youth Employment Strategy and the establishment of the Canada Fund for Innovation – a fund designed to spur research and development. These programs should help to reduce unemployment in Canada, but much more is needed. The federal government has a number of "policy levers" at its disposal to encourage activities that will stimulate employment. The following are a few additional initiatives that the federal government could take to expand the available pool of work in Canada and reduce the unemployment rate:

  • encourage employment in the voluntary/third sector through partial wage subsidies, tax recognition of employment creation, and improved incentives for charitable donations;

  • remove disincentives to new hiring by calculating the employer portion of Employment Insurance and Canada Pension Plan contributions on total payroll costs rather than on employee earnings up to the maximum insurable/pensionable earnings;

  • encourage voluntary reductions in hours of work for employees in federal departments and agencies;

  • establish limits on the use of overtime and provide incentives for working time reduction in federally-regulated sectors of the economy; and,

  • provide flexible retirement options in the public retirement income system.

Tax Assistance for Charities

The budget announced several measures to encourage charitable giving in response to strong pressure from the voluntary sector. At the same time that charitable organizations have seen their budgets cut in recent years as a result of reductions in government spending, the demand for services delivered by these organizations has increased. It has been argued that enhanced incentives for corporate and personal charitable giving will help reduce the financial pressure on these organizations, and help them respond to increased demands for their services.

Among the changes announced was a reduction of the capital gains tax on charitable donations on gifts of publicly traded securities such as stocks and bonds. The budget also increased the size of donations eligible for a tax credit or deduction (as a percentage of the donor's personal income). Both of these measures will assist charities in increasing their donation base of funding, but it should be noted that these measures will tend to encourage high-end giving (wealthy donors and corporate giving) and support the charitable activities of larger institutions such as hospitals and museums. For this reason, the CCSD continues to advocate the adoption of measures (such as tax incentives) aimed at charitable giving by middle-income donors to smaller as well as larger charitable organizations.

Conclusion

The CCSD supports the package of modest social investments in this budget. However, the CCSD is disappointed that, in light of the faster-than-anticipated reduction of the deficit, the federal government has not reconsidered some of the more severe decisions announced in previous budgets which continue to be implemented, particularly the deep cuts to the CHST announced in 1995. This rapid slide in federal social transfers between now and the year 2000 continues to reduce the resources available at provincial and local level.

The CCSD will continue to press the federal government to take the steps necessary to protect and enhance the social and economic security of Canadians. The Council will follow closely the implementation of measures announced in this budget, and we will urge further action throughout the coming year.

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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