FINA Committee Report

SUPPLEMENTARY OPINION OF THE LIBERAL PARTY OF CANADA

Introduction

The Liberal Party would like to thank the witnesses who came forward to share their expert testimony with the Finance Committee. Members heard from stakeholders representing a wide range of political backgrounds and an even wider range of professional fields. It is clear from their testimony that income inequality and equality of opportunity should not be seen as partisan issues, but as complex and pressing policy questions.

According to the OECD, income inequality in Canada was above the OECD average before the 2008 recession and remains so today. Miles Corak noted that while our intergenerational economic mobility remains high, there is a strong correlation between income inequality and inequality of opportunity. If Canada does not address its growing levels of inequality, it faces costly economic and social consequences, from decreased productivity to poor health outcomes. The Liberal Party urges the federal government to work with other levels of government on early childhood education, the tax-transfer system, and the Crown relationship with Aboriginal Peoples, with a view to strengthening equality of opportunity for all Canadians.

Accessible, High-Quality Early Childhood Education

Early childhood education and care (ECEC) must have a key role in any strategy for addressing both income inequality and equality of opportunity. ECE is a high-yield investment: it empowers children to reach their full potential; gives parents greater freedom to return to work; and supports economic growth.

While estimates vary, there is consensus that every dollar spent on  affordable ECE produces significant returns. The Ypsilanti/High Scope Study, referenced in the Mustard-McCain Reversing the Real Brain Drainreport on ECE, estimated that every dollar invested in ECE for high-risk children paid off sevenfold. Similarly, the Canadian Medical Association puts the rate of return at between 1:6 and 1:8. TD Chief Economist Craig Alexander cited more varied but equally dramatic estimates:

“The rate of return on the investment in early childhood education is enormously high. In terms of the rate of return, for every dollar you invest, most academic studies show anything from $1.50 to $2.50 of economic and social return, and if you focus on people from disadvantaged backgrounds, it’s quite possible to have a double-digit return. Within the OECD, Canada ranks dead last in terms of investment in this area at a mere quarter point of GDP.”

Given the potential returns, it is troubling that Canada is falling short in this area. TD Economics estimates that Canada has a $3 to $4 billion shortfall in ECE investment relative to the average of industrialized nations.

In addition to the nationwide funding shortfall, there is tremendous regional variation in the provision of ECE, with serious disparities in funding, access, and quality. The most recent Mustard-McCain Early Years Study highlights several of these disparities between provinces. In 2011-2012, the percentage of provincial budgets allocated to ECE ranged from a high of 4.67% in Québec to a low of 0.86% in Newfoundland and Labrador; the percentage of 2-4 year-olds regularly attending an ECE centre ranged from 31% in Alberta and Newfoundland and Labrador to 69% in Québec; the number of early childhood educators required per group of three-year olds was 1:12 in Québec, Ontario, and Manitoba but 1:28 in New Brunswick and 1:32 in Alberta.

It is clear that Canada needs to take a more strategic approach to ECE. Some witnesses commented on international best practices: for instance, Diana Carney of Canada 2020 pointed to the Nordic countries as potential models for early childhood policy. It is also worth considering the OECD’s Starting Strong III report, which highlights five policy levelers: setting out quality goals and regulations; designing and implementing curriculum and standards; improving workforce conditions, qualifications and training; engaging families and communities; and advancing data collection, research and monitoring. As Peggy Taillon of the Canadian Council on Social Development noted, jurisdictional complexities should not dissuade policy-makers from confronting this challenge. 

Personal Income Taxation and Income Supports

According to the OECD, Canada’s tax-transfer system, once among the most effective at reducing inequality, has become markedly less so over the past twenty years. There are practical, achievable policy steps that the federal government can take to reverse this trend.

The Liberal Party believes that the government should work towards making personal income tax credits refundable and should not introduce any new credits until existing credits are fully refundable. Poorly-targeted, non-refundable tax credits offer weak value for money, doing little to change behavior but imposing a significant cost on the treasury. As Benjamin Eisen noted, “[b]enefits wind up going to people whose behaviour is exactly the same as it was before”.  Moreover, the current tax regime renders low-income Canadians ineligible for many tax benefits, including the Disability Tax Credit and the Family Caregiver Tax Credit. This regressive approach to tax policy is a true missed opportunity when it comes to addressing inequality.

Furthermore, the Liberal Party believes that the federal government must take action to address the phenomenon of the “welfare wall”. In his testimony to the Committee, Craig Alexander highlighted the difficulties Canadians face when trying to move out of poverty. When Canadians begin to earn enough to become ineligible for government income support, they face an “enormously high marginal effective tax rate” as “for every dollar of additional income [they] generate, [they] might lose 50¢ on the dollar of government income support”. In Mr. Alexander’s view, “[t]he transition is so steep that it actually works as a disincentive and a barrier for people getting out of poverty”. He also stressed that limits on asset accumulation for Canadians on government support are too low: “Ultimately, I think if you give people a bit more of an opportunity to build assets, it actually will be self-reinforcing.” The federal government must take action to ensure that Canadians can make the transition from welfare to work without  incurring punitive financial penalties.

Many witnesses highlighted the Working Income Tax Benefit (WITB), introduced by the previous Liberal government in Fall 2005 and implemented by the current government in 2007, as an important means of reducing income inequality while strengthening economic growth. In his contribution to Canada 2020’s Reducing Income Disparities and Polarizationreport, Mark Cameron wrote that the WITB “supplements the incomes of low earners and helps remove disincentives to seeking paid work instead of remaining on social assistance programs”, making it easier for Canadians to return to work and contribute to the national economy. The government should build on the success of the WITB which is, as Miles Corak noted, “a best practice in the provision of income support”.

First Nations, Métis, and Inuit Peoples

In the modern economy, access to jobs requires both high school and a post-secondary credentials, be it a college diploma, trade certification or university degree. 

Yet only one in three First Nations students on-reserve are graduating high school. In her 2011 report, the Auditor General of Canada found that the government, in terms of the education gap, “has not maintained a consistent approach and cannot demonstrate improvements to date”. Appallingly, students attending school on reserve are funded on average at two thirds that of provincial systems. The current government’s denial of this funding gap and refusal to close it is depriving the economy of a desperately needed pool of talent and depriving Aboriginal People of a prosperous future. The government must immediately commit to working in full partnership with First Nations communities to close the current funding gaps for K-12, based on the real cost of delivering First Nations-led, high-quality, culturally-relevant education for every First Nation student.

First Nations, Inuit and Métis youth are also significantly under-represented in postsecondary education. For example, whereas 23% of the non-Aboriginal population had successfully completed a university degree, only 8% of the Aboriginal population reported completing a university education. The government must work with Aboriginal communities to enhance Aboriginal access to and completion of post-secondary education programs, beginning with increasing of funding provided through the Post-Secondary Student Support Program. Each year, this program receives applications from more qualified students than the program can fund. For those students who do receive funding, this money often does not cover the costs of a student’s education.

Conclusion

Income inequality is not a partisan issue. Rising inequality affects us all, regardless of age, income level, or political affiliation. The consequences of excessive inequality are both serious and wide-ranging: a weakened economy, poorer health outcomes, more vulnerable communities, and a diminished quality of life.  The government has a responsibility to meet this challenge with concrete policy solutions and with real determination to strengthen equality of opportunity for all Canadians.

Recommendations

The Liberal Party of Canada recommends:

1.     That the government provide significant new investments in affordable early childhood education and care (ECEC) programs.

2.     That the government increase the value of the Working Income Tax Benefit (WITB) and move toward widening eligibility for the WITB to include all households with earned income below the after-tax low income cut-off (LICO).

3.     That the government work towards making the Disability Tax Credit and the Family Caregiver Tax Credit fully refundable so that low-income Canadians are not excluded from these programs.

4.     That the government refrain from introducing new personal income tax credits until existing personal income tax credits – in particular, the Disability Tax Credit, Family Caregiver Tax Credit, Volunteer Firefighters Tax Credit, Children’s Arts Tax Credit, Children’s Fitness Tax Credit, Public Transit Tax Credit, and the education tax credits – are made fully refundable so that low-income Canadians can also benefit from them.

5.     That the government reduce high marginal effective tax rates for low-income workers by reducing income claw-backs in federal income support programs.

6.     That the government increase allowable asset thresholds in federal income support programs.

7.     That the government design and implement a federal poverty reduction plan.

8.     That the government reverse its decision to increase the age of eligibility for Old Age Security (OAS) benefits.

9.     That the Government of Canada recognize the urgent need to work in partnership with Aboriginal communities to improve socioeconomic outcomes of Aboriginal Peoples in Canada by eliminating the funding gap for First Nations-led K-12 education, increasing financial support for Indigenous languages and culture education, and fully funding the Post-Secondary Student Support Program so that every Aboriginal student is able to access a high-quality post-secondary education

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