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.
|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.