Policy Statements | Growing Together

October 5, 2000

Growing Together:
Priorities for the 2001 Federal Budget

Section 2

Will we grow together, or grow apart?

Recently released income data for 1998 show that many Canadians have finally begun to recover from the recession and slow recovery of the mid-1990s. The data also show, however, that a significant number of Canadians are being left behind, and both market and after-tax income inequality have grown, even as economic growth and job growth have accelerated. This growing income inequality is compounding and exacerbating other divisions in Canadian society, and it raises troubling questions for governments and citizens alike.

Family incomes improved significantly between 1997 and 1998, and average after-tax family income in 1998 ($49,626) reached its highest level in a decade, finally surpassing the average family income achieved in 1989, the peak of the last business cycle. Among unattached individuals, average after-tax income also increased. An increase in the number of jobs, with more full-time jobs, and modest growth in wages led to these higher earnings.

The poverty gap is growing

Higher average incomes in 1998 led to a drop in the proportion of Canadians who are living below Statistics Canada's low income cut-offs. The poverty rate among all Canadians fell from 18.2% in 1997 to 16.9% in 1998. An estimated 5.1 million Canadians lived in poverty in 1998. Of this number, 1.3 million were children, representing a child poverty rate of 18.8% [1]. However, poverty rates in 1998 remained higher than those recorded in 1989 [2]. And although fewer people lived in low-income households in 1998, the poverty gap - the amount of money required to raise the income of poor households up to the poverty line - actually grew in 1998 compared to both 1997 and 1989. For families, the average gap between their incomes and the low income cut-off was $8,219; for unattached individuals, the average poverty gap was $6,154 [3].

Unequal shares

This widening poverty gap points to a very disturbing trend. While average incomes have improved, Canadians at the bottom of the income ladder and even those in the middle are not sharing equally in this new-found prosperity. All households saw an increase in their after-tax incomes between 1997 and 1998, but those in the top quintile gained $3,404 (or 4.1%), while those in the bottom quintile gained just $63 (or 0.6%), and those in the middle quintile gained $692 (or 2.1%) [4].

This income gap among Canadians has been growing throughout the 1990s, and notably so since 1994. According to Statistics Canada's most recent data, market incomes in particular have become more polarized. In 1989, the top 20% of households received 46.3% of all market income; by 1998, their share had grown to 50.1%. In contrast, the income shares among households in the lowest, second and middle quintiles fell over this same period by 0.8, 1.3 and 1.7 percentage points, respectively. In other words, households in the top quintile in 1989 received $18 in market income for every $1 earned by households in the lowest quintile; in 1998, those in the top quintile got $27 for every $1 earned by those in the lowest quintile [5]. As shown in the chart, only those in the top quintile have seen real income gains since 1989.

The human face of poverty

While it is important not to generalize too broadly, it is equally important to understand the human face that underlies this income distribution. Research by the CCSD and others has shown that among the working-age population, those at particularly high risk of low income - and for extended periods of time - are single-parent families, most headed by women; persons with disabilities; recent visible minority immigrants who are having a much more difficult time finding decent jobs than previous immigrants; Aboriginal Canadians; and single persons who are, by definition, dependent upon only one income and are therefore not cushioned by other family earners. Younger families are also increasingly vulnerable. All of these groups tend to have a relatively high incidence of unemployment over the course of a year, and they receive relatively low pay during periods of employment.

Cuts to social assistance and to EI during the mid-1990s have also adversely affected working-poor households and those on the margins of poverty. As shown in the CCSD report, Urban Poverty in Canada, there is growing evidence that low-income Canadians have become increasingly concentrated in very low-income neighbourhoods, particularly in the larger urban centres. While there are hopes that continuing job growth may reverse some of these trends by spreading the available work to those with fewer skills and experience, major barriers and traps still remain. Further, it appears that wages are growing faster for those at the higher end of the pay scale, thereby increasing differences, even among those who can find steady employment.

'Letting the market work' isn't working

Over the first half of the 1990s, the impact of government transfers and taxes helped offset the widening gap in market incomes. Since 1994, however, the gap in after-tax incomes has been growing: households in the top quintile saw their income share grow by 2.1 percentage points, while those in the lowest quintile saw their share fall by 0.7 points, and the ratio of after-tax incomes between the top and bottom quintiles widened from 7.2 to 1 in 1994, to 8.5 to 1 by 1998 [6]. The equalizing effects of the tax and transfer system on the highly unequal distribution of market incomes continues, but after-tax income inequality has been rising since the mid 1990s. Market-driven inequality is now overwhelming the counterweight of taxes and transfers.

Last year, the Finance Committee urged the federal government to "let the market work" by maintaining public spending on a downward trend as a share of GDP, by cutting personal and corporate taxes, establishing a lower tax threshold for capital gains income, and promoting greater trade liberalization and privatization. Such a growth agenda, it was argued, would enhance productivity and ultimately, the standard of living of all Canadians.

Targeting social investment

While the CCSD does not question the importance of economic growth and job creation to social progress, we do question the premise that tax cuts for the relatively affluent have a more powerful impact on growth than does the alternative of social investment. Both tax and expenditure changes can contribute to more growth-generating investments in human and physical capital, and there is abundant evidence that public investment in such areas as child care and child development, public education, job training, university research, infrastructure and so on help raise productivity at least as much as lower taxes. A review of the economic literature reveals that tax cuts are, at best, only a weak instrument for promoting growth and higher productivity. At the same time, across-the-board tax cuts seriously undermine the public programs that sustain basic economic and social objectives [7].

A key problem with the one-sided market orientation to Canada's economic performance is that the market, left to its own devices, creates wide disparities of outcomes and opportunities, and it creates winners and losers, as documented above. While income safety nets such as EI and social assistance are very important in protecting the unemployed and those outside the labour market, it is not enough for governments to just compensate for market failure through such transfers.

Governments at all levels must be active, not just in securing overall job and income growth through good macro-economic policies, but also by equalizing access to decent employment opportunities for the most vulnerable and excluded groups, by supplementing low market incomes through income support programs (such as targeted tax credits like the Canada Child Tax Benefit), and through wider access to non-market goods and services (such as enhanced Medicare coverage and social housing). If we are to grow together, rather than grow apart, governments must take measures to promote greater equality of access to good jobs, and to shape the distribution of market incomes through equalizing tax and transfer measures and through targeted social investment.

INCLUSION THROUGH SOCIAL INVESTMENT

The evidence of a growing polarization, despite this period of relative prosperity, raises several fundamental questions. With a large - and still growing - federal fiscal surplus in hand, the CCSD believes that it is now possible and desirable to make the long-term social investment which is so essential to building a shared future. This investment is critical to promote greater equality of both opportunity and outcomes, and it will have positive economic impacts.It is time to set aside the simplistic notion that only private investments are productive, and to recognise that social and private investments are complementary.

In the CCSD's Budget 2000 submission, we noted that the educational, health and income support systems which constitute Canada's safety net are in a dangerous state of disrepair. The results can be seen in the growing income inequality and marginalization, but also in the growing privatization of health, education and recreational costs (for example, for drugs, home care, and tuition fees). Those less affluent and the poor must pay for more out of their falling incomes, while the relatively affluent are increasingly tempted to forego the deteriorating public services and use their rising incomes to buy what they need for themselves. The broad equality of conditions and opportunities which Canadians used to take for granted is being undercut on many fronts by the accumulated deficit in social investment.

Budget 2000 did offer some good news. The enhanced Canada Child Tax Benefit and changes to maternity and parental leave will help many working families with children, and some useful, if modest, expenditures were announced. However, the excessive focus on tax cuts and the government's reluctance to make significant longer-term spending commitments ignored the scale of the social deficit and our collective responsibility to ensure that we grow together.

It is worth remembering that higher taxes were the least important factor in the turnaround of the federal balance sheet between 1994 and 1999. Reductions in program spending accounted for almost two-thirds (64%) of the improvement, while lower debt service charges accounted for one-fifth (21%). With the tax cuts announced in the 2000 budget, the federal government will have almost completely rolled back the taxes they increased in the first years of their mandate [8].

Promises to keep

The erosion of federal program spending continues, however, despite balanced budgets having been achieved. In 1997/98, when the deficit was eliminated, federal program spending was 12.4% of GDP; in 1999/2000, it is 12.2% and is expected to fall again next year to 11.6% - despite new program spending announced in the 2000 budget. Total program spending remains at its lowest level since the 1950s. Stepping up the tax-reduction plan in the forthcoming budget would only further erode Canada's social safety net.

While the division between tax and expenditure measures is somewhat artificial, it is the CCSD's belief, and that of many others, that the federal government has not lived up to its 1997 election promise to commit 50% of future surpluses to reinvestments in programs. Certainly, it has fallen short of a longer-term plan to gradually restore social investment as a share of GDP. The social investment we support would be significant, but affordable in the current economic context, and they would make a very real difference in the challenge of growing together.

Public opinion surveys show that the great majority of Canadians support targeted investment to meet our growing social needs, and they oppose the selfish tax-cut agenda of the very affluent. Now is the time to invest, not to further increase the gap between rich and poor Canadians.

A National Children's Agenda

There is no greater need than to invest in all of Canada's children. Governments across Canada have now committed themselves to a vision for Canada's children through the National Children's Agenda (NCA), building on the enhancement of the Canada Child Tax Benefit.

The CCSD applauds the federal and provincial governments for moving the vision for Canadian children and youth closer to a reality by adopting a framework for action. We believe that a National Children's Agenda should include not only an overarching set of values, goals, and principles, but also an effective accountability mechanism. A clear timetable with goals and targets is still needed in order to finalize the National Children's Agenda, to determine program priorities, and to establish new supports and services.

While recognizing that the focus of the current agreement is on early childhood development, the new initiative must be set within the context of a comprehensive plan for all children and youth. Such a plan would include steps to address the challenges and opportunities facing school-aged children and youth over the long term. As well, the NCA should include measures to further enhance the economic security of children and provide for the high-quality public services that are so crucial to their healthy development. The NCA must also take into consideration the particular needs of especially vulnerable groups such as lone-parent households, individuals with disabilities, Aboriginal households, and new immigrants.

In our publication series, The Progress of Canada's Children, the CCSD has documented the fact that there is a very uneven patchwork of child and family services across the country. Despite the expansion of child care under Quebec's $5 per day child-care plan, the number of national child-care spaces has not kept up with demand. Access to recreation, cultural and art programs has also declined as municipalities and community groups have raised user fees and privatized delivery.

Most Canadian children do not even have access to public dental programs beyond the basic care provided for children of social assistance recipients. While the Social Union Framework Agreement states that governments are committed to ensuring "access for all Canadians, wherever they live or move in Canada, to social programs and services," the above examples illustrate that there are huge gaps in the availability of such services.

In particular, the National Children's Alliance - which includes over 30 national organizations - has pointed out there are critical needs for investment in:

• early childhood care and education, including flexible, affordable child care
• safe and affordable housing
• programs for children at risk
• pre- and post-natal services
• parenting supports
• community-based recreation, and
• preventive health services.

To build such a network of supports and services for Canadian children, the CCSD recommends the following:

• Substantial federal funding should be set aside in Budget 2001 to implement the National Children's Agenda. The CCSD views the recently announced investment in the NCA as a very welcome first step which will lead to important new investments. We do, however, have concerns over the level of funding, the reporting arrangements, and accountability. In Year One, we recommend that the federal government provide additional funds for the development of early child development supports. Since the funds will be delivered through the CHST, monitoring of the implementation will be crucial. We believe that federal funding should have been provided through a separate block fund transfer mechanism.

• Ongoing federal funding should be designated for the National Children's Agenda in order to sustain the Year One commitments and to finance much-needed programs for school-aged children and youth in subsequent years. These monies would also used to establish accountability mechanisms between governments, and between governments and citizens.

In addition, the CCSD recommends:

• The federal government should advance its timetable for the announced increases in the Canada Child Tax Benefit (CCTB). Because the federal surplus has grown, the CCSD believes that the government should proceed as quickly as possible with Phase III increases to the CCTB, towards a target value of $4,000 for the first child. Additional dollars in the hands of Canadian families with children will start to mitigate the debilitating impact of low family income and will increase equity between families with and without children. As elaborated below, the CCTB should also be phased out at a slower rate as income rises, in order to provide more support to moderate-income families and reduce the high marginal rates for those with low incomes.

• The federal government must improve the plight of the poorest children in Canada by prohibiting the clawback of National Child Benefit Supplement from families on social assistance. The vast majority of welfare-poor families in Canada receive only the base CCTB benefit because most provincial and territorial governments claw back the NCB supplement from 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 system. Close to 1 million children in families on social assistance derive little support from Canada's premier child poverty program.

The non-profit sector and public citizens more broadly have a key role to play in setting program priorities and by participating in program planning, design and implementation. Citizen participation in ongoing monitoring, research, evaluation and public reporting is critical. National and local research agendas are needed, along with co-ordinated data collection systems and reporting mechanisms that build on existing initiatives. Information should be expressly tied to the vision and goals for Canadian children contained in the National Children's Agenda.

A National Disability Agenda

Canadians with disabilities have waited a long time for concrete action to improve their lives. The promise associated with the 1998 report, In Unison: A Canadian Approach to Disability Issues by the Federal/Provincial/Territorial Ministers Responsible for Social Services has waned. There have been a few small steps taken to provide greater support to persons with disabilities in past budgets. In Budget 2000, for example, the child care expense deduction was increased to $10,000 for children eligible for the Disability Tax Credit (DTC), and a supplement to the DTC of up to $500 recognized caregivers of children with severe disabilities. As well, permanent funding of $30 million was established for the Opportunities Fund for Persons with Disabilities. Much more remains to be done, however.

As stated in In Unison, specific action is needed:

• to enhance disability supports, including measures to offset the very high costs related to living with a disability.
• to promote paid work and volunteer opportunities for persons with disabilities.
• to build an integrated and adequate income safety net.

The CCSD urges the government to continue its work with the provinces and territories to create a National Disability Agenda. It is time to move beyond the "relentless incrementalism" of past budgets. A National Disability Agenda would provide a comprehensive action plan for much-needed reforms to income, employment and support programs for persons with disabilities.

In particular, the CCSD recommends:

• The federal government and the provinces must move forward to create a national network of supports and services to assist persons with disabilities in their daily activities. Currently, the services available vary widely across the country. Persons with disabilities must cobble together a patchwork of private and public arrangements, of varying quality. While some services may be available in institutional settings such as hospitals or rehabilitation centres, those same supports are too often not available in the community, or are only available at a very high cost. Some services are provided to low-income individuals and families, but only to those who rely on social assistance. In effect, the link between services and income support programs creates further divisions based on cause of disability, living arrangements, employment history, family status, and so forth.

  The Canadian Council on Disability has identified acute needs in three areas:

  • prescription drugs and related health needs
  • personal support services of all kinds (such as self-directed attendant care, home support services, communications supports, remediation and tutoring in the workplace)
  • assistive devices and supplies (such as mobility aids, home oxygen, communication aids).

• Ensuring participation

  These services are critical in ensuring that persons with disabilities can participate fully in Canadian society. The CCSD's own research has confirmed that the lack of support creates almost insurmountable barriers to employment. Persons with disabilities - and women with disabilities in particular - lack necessary assistance with household tasks or personal care which are key to finding and keeping employment [9].

  When, or if, persons with disabilities find employment, supports may be withdrawn - particularly if they are part of an income support program - or a large portion of the support costs are transferred to the individual, thus creating a vicious cycle and threatening their employment.

  A national network of supports and services is essential to ensure that these necessary supports are available to persons with disabilities, regardless of the type of disability, their age, geographic location, or living arrangements. Access should not be restricted by co-payment requirements, nor linked to income support programs. Ideally, such a program could form the basis of a new national home care program. In this vision, home care would not simply be confined to medical care in the home, but would include supports and services designed to foster independent living over the life cycle and in different settings. We urge the government to continue its negotiations with provincial ministers of health and social services to create a framework for a support network for persons with disabilities.

• The federal government should move immediately to offset the costs related to living with a disability by substantially improving the existing disability credits and working towards a new refundable disability tax credit. As noted above, there have been incremental improvements to the medical expense tax credit, the disability tax credit, the infirm dependant tax credit, the caregiver tax credit, and the child care expense deduction for parents of children with disabilities. However, these credits still fall far short of meeting the very high costs related to disabilities. The eligibility criteria for the disability tax credit remain very restrictive. The medical expense tax credit only partially recognizes some health and disability-related costs. Moreover, both of these credits are non-refundable and are of value only to those with taxable incomes.

  Improving access and increasing the value of the existing income tax provisions would be an important step towards creating a new refundable disability tax credit that would recognize the broad range of disabilities and the actual costs related to having a disability. A new refundable credit could also help sustain, in part, the creation of a national network of supports and services for persons with disabilities. Canadian governments are currently exploring alternatives for the development of services aimed at healthy child development. They must now take action to realize the citizenship rights of persons with disabilities.

A Fair Tax Agenda to Promote Greater Equality

In 1999, there was a major national debate over tax cuts. Proponents of deep cuts attributed Canada's economic woes to allegedly excessive levels of taxation, particularly for high-income earners and corporations. Tax cuts for the affluent, they said, would serve the goal of equity by "growing the pie" and creating new resources for social programs and investments. Critics of deep cuts, like the CCSD, noted that tax cuts at the high end would only deepen the growing income inequalities and foreclose much-needed social investment.

The question should be: Which combination of tax and spending measures will best promote shared progress and "growing together?" As noted above, growth and job creation are vitally important to social progress, but there is no proof that low taxes lead to strong economic growth. Many relatively high tax jurisdictions in Europe have done as well as or better than the U.S. in the 1990s, indicating that social expenditures financed from taxes are productive as well as equalizing. A decent income floor and good health, education and training for all are necessary for socially sustainable economic growth, and they promote the growth of "human" and "social capital" which are needed in a knowledge-based economy. (This issue will be explored at length in a forthcoming CCSD study. Working title: The Myth of the Equity/Efficiency Trade-off: Why we don't have to choose between social justice and economic growth.)

Section 3: A truly balanced approach

Canadian Council on Social Development, 190 O'Connor Street, Suite 100, Ottawa, Ontario, K2P 2R3
Tel: (613) 236-8977, Fax: (613) 236-2750, Web: www.ccsd.ca, Email: council@ccsd.ca