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How to tackle inequality and poverty in Canada

By Michael Hatfield      

It is important to avoid structuring income-support programs in such a way that they provide a disincentive to taking low-paying jobs.

Prime Minister Justin Trudeau's Canada Child Benefit is much more generous than its predecessor, the National Child Benefit, writes Michael Hatfield. The Hill Times photograph by Jake Wright
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The first two articles in this series made the following points:

  • Between 1990 and 2000, market and disposable income inequality in Canada rose significantly, poverty rates rose or remained stable for people under 65, the real incomes of the poorest 10 per cent fell, and the only significant gains in real incomes were experienced by the richest 10 per cent. However, between 2000 and 2014 market and disposable income inequality declined slightly, poverty rates for the non-elderly, particularly children, declined significantly, and substantial real increases in disposable income were experienced throughout the income range with the poorest 10 per cent recording the largest percentage gain.
  • This reversal challenges the belief among many politicians and much of the public at large that high levels of poverty and rising inequality are inevitable.
  • A large part of the explanation for the positive trends in these indicators after the millennium were real increases of 25 per cent or more in minimum hourly wages in eight of the 10 provinces, significant increases in income-tested child benefits, and modest enrichment of welfare and Employment Insurance benefits. The previous decade had witnessed only small increases in real minimum wages and cuts to real welfare and EI benefits.
  • Both Conservative and Liberal federal governments, and provincial governments of all political stripes, participated in these policy reversals, although the Harper minority Conservative government did so reluctantly in its 2009 budget under threat of defeat in the House of Commons by the combined opposition parties.
  • Thus, real disposable income gains throughout the income range and further progress against inequality and poverty among non-elderly Canadians and their children does not require the election of new parties, or even radical new policies. Instead, it requires building on the policies which, since 2000, have already reduced child poverty in Canada to an all-time low, provided significant real income gains to those at the bottom and in the middle as well as those at the top of the income distribution, and stopped and slightly reversed rising market and disposable income inequality.

But most non-elderly Canadians, even those in the bottom half of the income distribution, are not minimum-wage workers. Nor do they depend on government benefits for most of their income. They will escape poverty and add to their real disposable incomes by finding entry-level, low-paying jobs, hanging on to them and gradually earning more as they gain work experience. It is important to avoid structuring income support programs for this group in such a way that they provide a disincentive to take such jobs.

Between 1986 and 1992, real welfare benefits in Ontario increased much more than median and minimum wages. As well-paying jobs became harder to find in the aftermath of the 1990-1991 recession, the share of Ontario’s non-elderly population depending on welfare rose from 5.8 per cent in March 1986 to 14.5 per cent in March 1994. The backlash was swift and substantial. Nominal welfare benefits in Ontario were cut by 20 per cent in late 1995 and frozen at these reduced levels for several years, further reducing their purchasing power in inflation-adjusted dollars.

Fortunately, since that time policy-makers have found ways to improve the real incomes of households at the bottom of the income range without creating such disincentives to taking low-paying jobs.

The first major new tool was an expansion of benefits to families with children through income-tested refundable tax credits under the National Child Benefit (NCB) and associated provincial and territorial programs beginning in 1997. Unlike welfare benefits which are reduced in most provinces almost immediately when the recipient begins earning income, refundable tax credits retain their maximum value until families have reasonably adequate incomes from other sources. They then are gradually reduced over a wide range of income and provide no benefits to families with children at the top of the income distribution. They thus provide no disincentive to taking entry-level jobs. These benefits have been progressively enriched in real terms since 1997 in what Ken Battle of the Caledon Institute has aptly described as a policy of “relentless incrementalism.”

In 2007, a decade after the introduction of the National Child Benefit, the Harper government introduced a small program called the Working Income Tax Benefit (WITB), which actually provides an incentive to take low-paying, entry-level employment. In 2015, when annual earnings exceeded a base level of $3,000, single people were eligible to receive 25 cents for every dollar they earned between $3,000 and $7,060, producing a maximum benefit of $1,015. This benefit remained at that level up to earnings of $11,525. It was then reduced by 15 per cent for every dollar earned between $11,525 and $18,292, after which the benefit was reduced to zero. For families, the maximum benefit was $1,844 for earnings between $10,376 and $15,915. At earnings of $28,209, the benefit fell to zero.

Contrast the stinginess of this program with the Canada Child Benefit, the Trudeau government’s successor program to the NCB introduced this July. It pays maximum benefits of $6,400 for each child under six and $5,400 for each child aged 6-17. These tax-free benefits do not begin to phase out until net family income exceeds $30,000. A family with two children aged 6-17 would receive a maximum of $10,800 in benefits that would not be reduced to zero until its net income reached $171,579.

As of 2014, the low-income rate for children under age 18 was 8.5 per cent and for all adults aged 18-64 it was 10 per cent. But for single adults living alone in this age group, it was 31.2 per cent. Clearly the latter group should be the focus of the next major initiatives in incomes policy. I would suggest a threefold strategy to address the situation of employable, non-elderly singles.

  • The provinces and territories should increase their real welfare benefits so that incomes available to non-employed single employable persons from all sources at least reach a level of $1,000 per month.
  • To prevent this increase from creating disincentives to taking entry-level jobs, provinces and territories should continue to increase real adult minimum hourly wages until they reach half of average hourly wages, and then index them at that level. For example, as of 2014, the average hourly wage in Ontario was $24.82 while the adult minimum hourly wage was $10.75 (43.3% of the average hourly wage). This policy should also reduce income inequality.
  • To address the needs of working single adults who cannot obtain full-time employment, the federal government should substantially increase the scope and generosity of the WITB, particularly for single persons. I would propose that the maximum benefit be raised from $1,015 to $3,000, that it not begin to phase out until net incomes exceed $20,000 and that it not be completely phased out until net incomes reach $35,000. The maximum family benefit should also increase from its current level of $1,844 to $3,000 and should not begin to phase out until net family incomes exceed $28,000. This would mean that it would be reduced to zero at a net family income of $43,000. The program should then be indexed to inflation.

These steps, combined with the recent enrichment of the federal Child Tax Benefit, should significantly improve disposable incomes of the bottom half of the income range while improving incentives to take low-paying work. If necessary, they should be financed by increasing taxes on those in the top fifth of the income distribution, which will also improve disposable income inequality.

Michael Hatfield is a retired  senior economist from Human Resources and Skills Development Canada.

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