The Broadbent Institute is an independent, non partisan organization that promotes progressive change. Grounded in social democratic values and ideas, the Institute seeks to deepen our democracy, encourage strong action to counter growing economic and social inequality, and fuel a transition to a more innovative and sustainable economy. This submission lays out concrete policy proposals that the government should consider if it is serious about implementing progressive reforms in Budget 2016.
New Beginnings: A Progressive Policy Agenda
In the run-up to the recent federal election, the Broadbent Institute argued that there should be a major focus on the key issue of growing income and wealth inequality. We advocated that this should be countered by a shift to a more progressive tax system starting with the repeal of regressive tax measures introduced by the Harper government, such as family income splitting and a doubling of TFSA contribution limits, and significant increases to re-distributive income support programs, such as child tax credits, public pensions, and the working income tax benefit.
We argued that a progressive government should expand public services provided to citizens mainly outside of the market, especially a much-needed universal national not-for-profit child care program and expansion of public health care to cover elder care and prescription drugs with the creation of a national pharmacare program. We also called for a major focus on a renewed relationship with Indigenous peoples, for long overdue investments to be made to make reconciliation with Canada’s Aboriginal, Inuit, and Métis populations possible.
We argued for much higher levels of public investment as part of an agenda for good jobs and economic renewal, and for targeted investment from government and the private sector to address persistent youth unemployment and underemployment. Finally, we advocated there is a key role for strategic public investments to shift to a more productive, green, and innovative economy. We have therefore called for active federal government leadership in building a new economy that is much less reliant upon crude resource extraction and its attendant environmental impacts.
The platform on which the new government was elected set some progressive goals while being inadequately ambitious or offside with respect to other important progressive initiatives. We applaud the commitment to act on the recommendations of the Truth and Reconciliation Commission. And we applaud the commitment to greater equality through some reformed income-security programs, as well as investments to spur a low-carbon transition. We are encouraged by promises for a more robust democracy and enhanced public interest regulation, and to a stronger economic leadership role on the part of the federal government.
We also support the quick implementation of the new and more redistributive system of child benefits. The proposed Canada Child Benefit will deliver higher benefits to all but the most affluent families with children and will significantly reduce inequality and poverty by being income-tested. This is the approach that has long been called for by child poverty advocates, building on the child benefit reforms of the Chretien government.
But there are important policies the Liberal party committed to in the election that must now be delivered or ramped up. These priorities include:
- Addressing inadequate retirement savings by expanding CPP, the only universal defined benefit pension plan;
- Increasing the Guaranteed Income Supplement for all seniors, not just single seniors, in order to lift nearly 150, 000 seniors out of poverty.
- Delivering on the commitments, with requisite finances needed, made to Indigenous Canadians and communities;
- Increasing federal government support to expand Canada’s public health care to include elder care and pharmacare.
- Immediate reforms to employment insurance measures to increase access, and temporarily expand duration of benefits.
- Expand on the unspecified commitment on early childhood education and care to include funding a universal, not-for-profit childcare program
To chart a truly progressive path, however, this budget can and must do much more.
Fiscal Capacity: A Significant Problem Without Progressive Tax Reform
The Liberal government has set out a short-term plan with some progressive elements. But they have made inadequate commitments in a number of important areas, like child care and health care. There is a tension between an active progressive social agenda and the new government's fiscal plan, which is to run modest deficits for the next three years but to return to a balanced budget by 2019-20 and to reduce the federal debt to GDP ratio over the course of its first term. As the Parliamentary Budget Office and others have shown, this fiscal policy anchor will significantly constrain new spending, particularly in a context of slow economic growth.
A key problem is that the government has not proposed to significantly increase overall federal fiscal capacity. While we applaud the government's decision to increase the top income tax rate applicable to the top 1% earning more than $200,000 from 29% to 33%, this increase will not fully offset the cost of the ill-advised so-called middle-class income tax cut. Increases to the corporate tax rate (as well as the GST) have been excluded from consideration. In this context there is a concern that some promised social policy expenditures may be reduced or delayed, even if they were very modest to begin with.
The Broadbent Institute believes the government should modify or reverse the tax cut for the so-called “middle-class.” This will apply above an individual income of $45,000 and deliver a maximum of $670 per year to individuals earning over $89,000 and will cost $3 billion per year in lost revenues. The threshold for the tax cut is almost exactly the same as average taxable income, so anyone with a below average income fails to qualify. In fact, this measure fails to benefit the great majority of Canadians since Canada Revenue Agency data (for 2012) show that only one in three individual tax filers (8.5 million out of 25.5 million) had taxable incomes above $45,000 in that year, roughly the income threshold needed to benefit from the new tax break. It can be calculated from Statistics Canada data on high income taxpayers that fully one half of the $3 billion in savings flowing from the “middle class” tax cut will in fact go to the top 10% of individual tax filers who had taxable incomes of more than $89,200 in 2012.
The government should accelerate and pursue with determination the review of “tax loopholes that particularly benefit Canada's top one percent” that was promised in the Liberal platform. Even more specifically, the government should restrict favourable tax treatment of stock options. Some 75% of the benefits of taxing gains from stock options at a lower rate (just 50% of earnings are currently counted as taxable income) goes to 8,000 very high-income taxpayers who average $800,000 in gains from options, according to a Department of Finance study referenced in the Liberal platform. This costs more than $500 million per year in lost revenues. A study by experts Brian Murphy, Mike Veall and Michael Wolfson just published in the Canadian Tax Journal finds almost all of the benefit of the stock options deduction goes to the top 1%.
The government should also increase the proportion of capital gains income subject to income tax. While all wage and salary income above basic deductions is subject to tax, just 50% of capital gains has to be included in taxable income. Prior to 2000, 75% of capital gains were taxable. Murphy, Veall and Wolfson estimate that 87.4% of the benefit of the capital gains deduction goes to the top 1% of taxpayers, with almost one third of the benefit going to the top 0.1% (i.e. the richest person in every one thousand.) The Parliamentary Budget Office calculates that increasing the capital gains inclusion rate by ten percentage points would raise $840 million in additional revenues.
Recent research (by Gabriel Zucman, for example) suggests that significant tax revenues could be gained by more actively auditing high income individuals and corporations who use offshore tax shelters. This must be explored seriously.
The government should also immediately review the litany of boutique tax credits on the books with an eye to eliminating those with regressive distributional impacts. The Children’s Fitness Tax Credit, for example, has been shown to disproportionately benefit upper-income families without encouraging participation in youth sport.
Finally, the government should also modestly increase the corporate income tax rate by two percentage points. This would still leave it well below the level in the United States. The evidence clearly shows that recent cuts to the corporate tax rate have failed to raise the rate of new business investment in innovation, research and new capital equipment. More targeted industrial support would be a much more cost efficient incentive to boost needed new investment.
Building an Innovative and Sustainable Economy
Canada's record of business sector productivity growth over the past decade has been abysmal compared to our own past and compared to almost all other advanced economies. Business investment in research and development, a key driver of productivity, is very low and falling in dollar terms and as a share of GDP, and the Conference Board of Canada has just reported that Canada rates an overall grade of C when judged by key indicators of an innovative economy, and a D for business enterprise R&D. Analytica Advisers, an Ottawa-based clean technology research provider, calculate that we are bit players in the fast growing global market for clean technology. Our global market share is just 1.3% and falling, and we rank just nineteenth in the world, behind even Malaysia, Denmark, the Czech Republic and tiny Singapore.
While the resource economy and traditional manufacturing struggle, we have largely failed to build new sources of wealth in knowledge-intensive goods and services. This is despite real strengths in university based and public sector innovation through bodies such as the National Research Council that have, to some degree, offset the business innovation deficit. There are, of course, significant exceptions and islands of Canadian excellence in innovation-intensive sectors like aerospace, renewable energy, information technology, software, engineering services, pharmaceuticals, medical devices and biotechnology, to name but a few. But they remain the exception rather than the rule.
The global economy will continue to provide a fast-growing market in all of these areas, not least as the world begins take climate change and other environmental priorities seriously. The influential UK economist Mariana Mazzucato argues that strategic government leadership and public investments are critical to building innovative economies. She has shown that publicly funded research, well in advance of immediate commercial opportunities, as well as direct support for strategic corporate investments through agencies like DARPA have been central to the growth of innovative capacity in the United States. Corporate R and D and venture capital often follow in the wake of ground-breaking public sector entrepreneurship.
In a similar vein, an expert panel appointed by the Harper government (the Jenkins panel) called for more public sector venture capital and a shift in emphasis from broad tax incentives (like the SR & ED credits) to direct government support for corporate investments in innovation. In a partial response, the government has directly invested in venture capital funds through BDC and has increased to modest levels funding for strategic investment funds to support the aerospace and auto industries.
There is, however, much further to go in a more interventionist direction. Strategic long-term investments through equity and loans need to be made across a much broader range of sectors, including renewable energy and other clean technologies. This could be done at arms length through existing agencies such as SDTC, BDC and EDC which have the required technical and financial expertise and are not subject to direct political pressure, or through new public investment banks. For some investments, it will be appropriate to take a long term equity position so as to ensure that taxpayers justifiably share in the returns from winning technologies. Current public sector venture capital is, by contrast, geared to a quick exit once a company goes public.
Notwithstanding the constraints of trade and investment agreements, governments at all levels should give preference in their procurement decisions to innovative Canadians companies, especially small start-up companies that need to establish an initial presence and credibility in the market. At the end of 2015, the Institute, together with the Mowat Centre released a report in October entitled Step Change. It outlines seven concrete policy ideas, in addition to carbon pricing, that could make up an ambitious governance agenda to aggressively and rapidly begin the transformation of Canada’s economy toward a more sustainable low carbon path. These include:
- Green Bank of Canada – Establishing a state-sponsored financial entity that promotes greater private-sector investment in the low-carbon economy through a variety of mechanisms, such as credit enhancements, guarantees, project aggregation and securitization.
- Tax Code Retrofit – A suite of changes to the tax code in favour of energy efficiency, renewable energy, and other sustainable technologies, supported by a phase-out of remaining fossil fuel subsidies promoting low-carbon solutions
- Accelerated Coal Phase-Out – Amendment to legislation requiring carbon dioxide emissions reductions from coal-fired electricity generation
- Green Building Compact – A packaged suite of federal energy efficiency and renewables policies, including a revamp of codes and standards, a National Deep Retrofit Program, and a renewable heating program.
- ‘Lead by Example’ Mandate – A suite of ambitious initiatives for federal facilities and institutions, including on heat and power, transportation, and institutional investing.
- Clean Transportation Strategy – A packaged suite of policies pertaining to transportation, including a progressive Vehicle Emissions Tax, a Zero Emission Vehicle mandate, and a revamp of infrastructure spending and transfer criteria to include GHG goals.
- Bio Strategy – A suite of policies promoting best practices in the agricultural and forestry sectors.
Deficits and Public Investment
As argued by many prominent economists, including former Bank of Canada Governor David Dodge, there is a strong case for deficit financing of productive public investments at a time of economic stagnation and very low interest rates. The government should make major investments in physical and environmental infrastructure such as public transit, social housing, and basic transportation infrastructure which will give a badly-needed short term boost to growth and job creation, and help raise business investment and productivity.
An independent study by the well-respected Centre for Spatial Economics - and commissioned by the Broadbent Institute - confirms the argument that a major public investment program would give an important short-term boost to the economy and significantly improve the longer-term performance of the private sector. The study models the economic and fiscal benefits of a plan to invest $10 billion per year for five years in basic municipal infrastructure. The study estimates the short and longer term impacts of the investment program relative to an economic and fiscal base.
The short-term stimulative impacts of public infrastructure investment are confirmed. Over the term of the building program from 2015 to 2019, GDP would be boosted by $1.43 per dollar spent. This finding is especially relevant today given very slow growth. There would be an additional 42,150 construction jobs per year, up 4.5% compared to the base case. About as many jobs again would be created in other private sector industries such as manufacturing and business services due to the direct and second round impacts of the program.
The longer term, post-construction impact of the program from 2020 to 2040 would depend upon the degree to which it lowered business costs and promoted higher business investment and higher productivity. The study shows that business investment after 2020 would increase by $3.1 to $4.7 billion per year, or by 0.7% to 1.1% compared to the base case. Labour productivity growth would increase significantly, by 0.3% to 0.5% per year.
The study estimates that the overall benefits to Canadians of the initial investment program would be a very significant $2.46 to $3.83 per dollar spent, and that GDP would rise by between $7.6 billion and $13.9 billion. The study further finds that the long term impact on government finances would be at worst marginally negative or even positive due to increased revenues from a larger economy.
The economic outlook for 2016 is dismal, with growth expected to fall below 2% and unemployment expected to remain at about 7%. But growth could be significantly boosted by a public investment stimulus twinned to major increases in income transfers to lower income Canadians. Broadly in line with the Broadbent Institute study, the Department of Finance estimates that infrastructure investment has a high multiplier impact of 1.5 after one year, meaning that each $1 spent boosts GDP by $1.50. This is much more than a multiplier of 0.9 for personal income tax cuts. These impacts are said to be even greater when, as now, interest rates are effectively as low as they can go.
Public infrastructure investment has a much greater short term impact on growth and jobs per dollar spent than tax cuts since the import content is low and there is no leakage to higher savings. Increased income benefits for low income households, as through the proposed new system of child benefits, also have a relatively large impact on GDP.
The new federal government has promised to boost infrastructure investment by $5 billion next year, equally divided between public transit, and “green” and “social” infrastructure, including water and waste water treatment, clean energy, affordable housing and child care facilities. Given the sharply deteriorating economic environment, priority should be given to projects within these broad areas that are relatively job intensive but also promote longer term social, economic, and environmental goals. As economist Angella MacEwen of the Canadian Labour Congress has pointed out, "the most shovel-ready and targeted fiscal stimulus is employment insurance."
The federal government has an opportunity to bring forth a budget that sets the investment and revenue generating priorities to secure progressive change. By expanding fiscal capacity, the government can ensure that all needed investments are met. An economy that tackles glaring inequalities and creates secure jobs is within reach. So too is one that shows federal leadership for a transition towards a prosperous, sustainable and innovative economy.