Part 4: Public Expenditures in Canada

Part 4: Public Expenditures in Canada Part 2 (Chapters 4-7) provided the justification for government

involvement:

1) Public Goods (chapter 4)

2) Externalities (chapter 5)

3) Income Redistribution (chapter 6)

As well as a general framework to evaluate any government project:

4) Cost – Benefit Analysis (chapter 7)

Part 4 examines major expenditures of different levels of Canadian government

Part 4:Chapter 10: Social Welfare

ProgramsChapter 11: Employment InsuranceChapter 12: Public PensionsChapter 13: Health CareChapter 14: Education

Canadian Public Expenditure

A large portion of government expenditure goes to Welfare, Health Care, and Education:

Welfare and Income Security (23% of government expenditure - 2002)

Health Care (10.4% of GDP - 2008)Education (16.1% of GDP - 2009)

Canadian Public Expenditure, % of GDP

Canadian Public Expenditure

These programs aim to both:

1) Redistribute Income

2) Achieve Goals mandated in Part II

Often these two issues are intermeshed or opposing

There is a great deal of interaction between the various programs

Chapter 10: Social Welfare Programs

84% of Canadians agree that the government should provide a social safety net (Gallup poll, 1989)

Issues arise in this “safety net” because:People disagree about basic standard of livingWelfare recipients have increased since 1970’sSome welfare recipients are employableSome think welfare is too high, reducing work

incentives

Chapter 10: Social Welfare Programs

History - Descriptions and TrendsTheory - Welfare Programs and

Work IncentivesTheory - Alternatives to Welfare

Theory – Definitions

Social Insurance

-insurance against adverse effects (unemployment, illness, etc)

-mandatory programs not FOCUSED on income redistribution (benefits are paid out regardless of income)

Social Assistance (Welfare)

-provides benefits to low income

History - Welfare Programs: Descriptions and Trends

The Canadian Constitution gives the provinces responsibility for a VARIETY of social welfare programs

BUT the Federal government plays a DIRECT and INDIRECT role:

Direct:

1)Working Income Tax Benefit (WITB)

2)Canada Child Tax Benefit (CCTB)

3)National Child Benefit Supplement (NCBS)


Indirect:

1966 – the Canada Assistance Plan (CAP) provided 50% of a province’s eligible welfare expenditures (had to meet federal guidelines)

Matching grants were replaced by block grants in 1996


Indirect:CAP replaced by the Canada Social Transfer (CST) for social programs and post-secondary education

-per capita cash grant)

-only condition is prohibiting residency requirements

-CAP was $11.2 billion in 2010/11

History – Who Needs Welfare

13% of Canadians were low income in 2009This varies greatly by group (ie: female single-parent families)

Generally higher unemployment creates higher welfare need because:

1)Some people exhaust EI

2)Some people don’t quality for EI

But this is not the only factor……Some argue that wide changes in EI programs have a large effect

Welfare and Unemployment

Although in some time periods (yellow), welfare seems to move with unemployment, in other times (red), it obviously does not

Who Receives Welfare?-Note that OAS/GIS, CPP/QPP and other programs almost eliminated elderly need for welfare.

Welfare Programs & Provinces

All welfare programs are based on needs:The need for food, shelter, clothing, house supplies,

personal care, and special needs (medical and dental) are assessed

Financial Resources (employment, EI, etc) are assessedAssets (with exemptions such as furniture, vehicles, home,

employment tools and small savings accounts) are assessed

Social assistance is calculated as (Needs-Available Resources)

The following table summarizes maximum provincial welfare (including child benefits, GST credits and provincial tax credits):

Welfare Programs & Provinces

Note that special needs and EI are not included

Welfare Programs & ProvincesWelfare varies widely (by thousands), among

provinces and territories:2009 Single Employable welfare person was lowest

at $3,773 a year in New Brunswick and highest at $9,593 in Newfoundland ($15,369 in Yukon to $43,826 in Nunavut)

Variations party due to Cost of livingProvincial financeDifferent welfare programsDifferent welfare preferences (politics)

Canada Child Tax Benefit

The Canada Child Tax Benefit (CCTB) in 2011 was $1,348 per year for the first and second child and $1,442 for further childrenThis is clawed back as income increases

The National Child Benefit Supplement (NCBS) targets low-income families with $2,088 per year for the first child, $1,848 for the second, and $1,758 for each additional child This is clawed back faster as income increases

Is Welfare Enough?

Note that these provincial values are below Stat’s Canada’s Low Income Cut-Off Lines (LICO)2009 Nova Scotia welfare of a single employable

person was 41% of the LICO

Are these amounts enough?Recall:

The LICO may be above the poverty line; basic needs likely lie below this income level

There may be other sources of aid

Is Welfare Enough?

Question:

Should welfare provide a reasonable standard of living?

OR

Should welfare simply prevent extreme deprivation?

Theory – Welfare Programs and Work Incentives

Two Questions dominate the welfare debate:

1)Does welfare reduce work effort and labor force participation?

2)Do generous welfare benefits lead to social assistance dependence?

The following model examines these two questions:

Theory - Labor/Leisure Trade-Off

In economics, time spent working is LABOR, and ALL other time (even chores) is considered LEISURE.A person’s time is divided between labor and leisure

in a time budget constraint, where time spent in labor produces income

People gain utility from leisure activities, and utility from income (therefore indirectly get utility from labor)This allows for typical indifference curves on the

labor-leisure graph:

Labor/Leisure Trade-Off-Utility is maximized at

the point of tangency E

-Here, OF hours are spent on leisure

-Here, FT hours a spent on Work, for an income of wFT (w=hourly wage)

-Available hours are OT

Welfare w/no Earning Exemption

Assume a simple welfare situation where someone is given $500, which is reduced by $1 for every $1 one earnsThis occurs if a province does not have a earnings

exemption on welfare (BC)This creates a vertical kink in the time budget

constraintAll points below the vertical portion of this kink are

effectively ruled outOn the horizontal section, would receive the

same income from working as from not working:

-Without the assistance, this person would work OF hours, but due to the assistance, work falls to ZERO


-Some people would still chose to work and accept no social assistance


Welfare and Partial Earning Reductions

Alternately, welfare could be reduced by a PORTION of job earnings.

Assume again $500 welfare, which is reduced by $0.50 for every dollar earned:This provides a less serious kink in the curve:Effectively, along the lower portion of the curve, the

person receives an EXTRA $0.50 for each hour worked instead of $0.

Welfare and Partial Earning Reductions

-Without welfare this person would work FT hours

-With welfare this person still works KT hours

Theory - Disincentive EffectsHaving a severe “clawback” (reduction in benefits

due to earnings) creates a large disincentive to work.Therefore, many governments have an amount of

earnings exempt from clawbacks, and then reduces by than 100% after that point

Ie: In Alberta $230/month of earnings are exempt, afterwards the benefit reduction is 75%

The following table shows the Marginal Tax Rate (MTR) in Quebec with federal and provincial income tax and tax credits/benefits (does not include Quebec social assistance)

Quebec MTR for 2 Earner Family of Four

Disincentive Effects

Studies have shown that more generous welfare rates do create more and longer welfare cases:

probability of welfare participation by women in 1980 increased (Charette and Meng, 1994)

Welfare collection for 22 to 29 Quebec men increased by 3.8 months (Drolet, 2004)

Welfare Wall – situations that prevent people from leaving social assistance

Welfare & Work

Welfare Labor Disincentives are important BUT cannot be over-emphasized

Income Redistribution is distortionaryThis distortion cannot be removed

If the goal of welfare is to maximize work hours, taken to the extreme this leads to the workhouses (English Poor Law of 1843)The poor in England were segregated from their

families and treated similar to criminalsSimilar to conscription

Other Welfare DistortionsCritics claim that some able-bodied people chose

to stay on welfare. Economically, we worry if welfare:

a) causes laziness/disincentive to work

b) decreases human capital (market skills)

Some studies have weakly suggested this may occur somewhat for those over 24.

Another concern of welfare deals with family make-up. Do the different welfare amounts for different family types encourage marriage, divorce, or even more children?

Theory – Welfare Alternatives and Ongoing Challenges

Two key alternatives to Welfare are:

1)Negative Income Tax (NIT)

2)Workfare

In addition, the welfare system faces ongoing challenges in Canada.

1) Negative Income Tax

One alternative to typical welfare is the NEGATIVE INCOME TAX (NIT)

Under NIT:

1)People are guaranteed a basic annual income (W)

2)If people work and earn income (E), their grants are reduced by an implicit marginal tax less than 100% (t)

3)Benefit (B) received is therefore B=W-tE, until B equals zero at a high income level

1) Negative Income Tax-The NIT has a

smaller kink than zero exemption welfare

-point S, where E=W/t, is break-even earnings where assistance ends

-NIT’s are also called Guaranteed Annual Income (GAI)

1) Negative Income Tax-The NIT allows

for a higher utility than no assistance, while still allowing for work

1) Negative Income TaxCanadian NIT’s include:the Guaranteed Income Supplement (GIS –

Public Pensions Chapter) for those over 65 years

Child Tax Benefits (and NCB Supplement)the GST tax creditAlberta Blue Cross healthcare coverage

NIT’s have advantages and disadvantages...

Negative Income Tax Advantages1) Welfare recipients have more incentive to work

(compared to a 0% earning exemption)

2) The working poor receive some income support if (earnings<break-even earnings)

3) Welfare administration could be simplified Payments according to income requires no

assessment of needs Similar overlapping programs programs (GST

credit, GIS, Child Tax Benefit, housing subsidies, employment insurance) could be replaced

NIT Disadvantages1) NIT would be costly if it gave good incentives

(low t), and a reasonable guaranteed income (W/t – break-even point – is very large)

2) NIT would reduce incentives to work for the current working poor (who currently face a lower marginal tax than under NIT

NIT Disadvantages3) NIT is a PASSIVE income support scheme

it lacks training to allow recipients to become self-sufficient

There is no reciprocal responsibility for the recipient to become a more productive member of society

Due to many of these disadvantages (especially #3), Workfare programs are often proposed:

2) Workfare

In traditional welfare and NIT, individuals CHOOSE how much to work.

In Workfare programs, participants receive benefits only if they:

1) Participate in a work-related activity (including education)

2) Accept employment if offered

Workfare has a variety of advantages and disadvantages:

Workfare Advantages1) The program is more politically popular

(therefore may receive higher benefits)

2) Collecting welfare becomes harder, reducing recipients and lowering welfare costs

3) People are equipped with work skills, allowing them to escape from poverty

Fortin, Truchon, and Beausejour (1993) indicated workfare programs could be potentially superior to current welfare in Quebec

Workfare Disadvantages1) The program may demean the poor (morality)

2) Work-related activities may be difficult to produce (effectiveness)

3) Difficulty distinguishing between those able and unable to participate in work-related activities

4) High administration costs

Workfare ConclusionsGueron (1993) studied US Workfare and

concluded:

1) “implementing participation mandates is feasible but difficult”

2) “such programs result in positive and cost-effective – although modest – gains but do not lift large numbers of people out of poverty”

Workfare ConclusionsWelfare-to-work and workfare have become more

common since the mid 1990’s:

1) Ontario started the Ontario Works program in 1998.

2) In the early 1990’s, Alberta started directing new social assistance applicants to training and work projects.

-These programs empirically reduce new applicants, but don’t cause current cases to leave welfare

Ongoing ChallengesSocial welfare programs have changed over time,

and have many issues. 3 example of issues are:

1) Program interactions and overlap

2) Child Care

3) Asset Stripping

1) Program Overlap1) A single parent living in Toronto with one child

working 37.5 hours a week at $10.25 an hour has net income of $26,979 after $8,154 in social assistance

-But this social assistance comes from 8 different sources, each with different exemptions, clawbacks, and administration costs

-this creates jumps in the welfare wall

-would a single program be more beneficial?

2) Child Care2) Childcare costs can prevent parents from

entering the labor market:

-Some provinces have subsidized child care, some don’t

-Even with fully subsidized child care, child care costs exceed the Universal Child Care Benefit (Federal grant of $100 per month per child under 6)

-There is evidence that stay-at-home parents have a large LONG-RUN benefit to society as the child benefits when they grow up

3) Asset Stripping3) Assets can make a person ineligible for social

assistance, and therefore need to be “stripped away” to fully qualify

-Allowing welfare recipients to retain more assets increases caseloads and program costs

-Some assets can help people become self-sufficient

Ie: Registered Education Savings Plans are exempt, but the debate on what should and shouldn’t be exempt goes on

Chapter 10 Conclusion

Welfare programs are largely administered by provinces but heavily funded and guided by the federal governmentA resulting requirement is eligibility based on

needBenefits vary among provinces

Welfare programs that have high implicit marginal tax rates discouraging work

Negative Income tax and workfare are two welfare alternatives

Various welfare challenges exist

Part 4: Public Expenditures in Canada

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