Over the past years, federal government transfers to households as a
share of taxes it raises on income has fallen. This, in part, is due to the
fall in unemployment. Compared to the earlier 1980s or the mid-1990s, a higher
proportion of the labor force is earning income, paying taxes, and consequently
receiving less transfers from the federal government [here]. But at the same time,
income inequality is rising.
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| Federal Government Current Transfer to Households and Income Tax, Gross domestic product (GDP), Canada, 1981:Q1-2015:Q4 |
Ways of reducing income inequality is to ease the fiscal burden on the
middle class and increase transfers to low-income households. That is what the
government of Justin Trudeau has done in its 2016 budget.
Among other things, the federal government
- reduced the second personal
income tax rate from 22 to 20.5 percent,
- Improved
the child benefits and employment insurance programs
These budget measures have impacts on growth. Everything else held
constant,
- cutting income tax by one
percentage point boosts growth by .05 percentage point and
- increasing transfers to
households by one percentage point raises growth by .37 percentage
point.
The impact on growth of raising transfers is greater than that of
cutting income tax because a larger number of households benefits from it
whether they have a paid job or not.
Thanks to these budget measures, growth in Canada could be, this year,
higher than expected. But my big worry is the CA$ 29.4 billion deficit
occasioned without any plan of returning to a balanced budget in the near
future.
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