Putting money in the hands of low- and moderate-income Canadians as a way to stimulate spending is an idea with remarkably wide consensus. The big banks in Toronto believe in it. Economists in Western Canada believe in it. The poor apparently don't object, either. In the current situation, it makes more sense than broad-based middle-class tax cuts.
Money spent on stimulus needs to stimulate. (Middle-class tax cuts wouldn't.) It should also improve Canada's long-term productivity, where possible (permanent tax cuts would), and it should not saddle taxpayers with a permanent budget deficit (the tax cuts might). And there's an onus on government to protect those who will be hardest hit in bad times.
Employment insurance is an obvious place to start. It is said to be an “automatic stabilizer” of the economy, in hard times, because it puts money in the hands of those most likely to spend it. But it is neither automatic nor terribly stabilizing, at the moment. Across Canada, just 40 per cent of those who lose their jobs qualify for benefits; in Ontario, fewer than 30 per cent do. And those who don't qualify for benefits do not qualify for training programs through the employment-insurance system. On several levels, these holes in the net will be harmful as unemployment rises.
Reducing the qualifying period is one option; extending the benefit period, and making the benefits more generous, are others. Recognizing the economic argument, the United States has put money on the table to allow state-based programs to provide longer benefit terms. Prime Minister Stephen Harper has expressed concern that more generous benefits would be unwise in the long term. But there is no reason the changes could not be temporary.
Another program that should be strengthened is the Working Income Tax Benefit, a small support for the working poor that gives up to $500 for individuals and $1,000 for those with an eligible spouse or dependant, at a cost of $400-million a year. Another $600-million in the pockets of the working poor would be more likely to find its way back into the economy, rather than bleeding into savings. Because it increases the gap between low-wage work and welfare benefits, it should be sustained. Similarly, an increase in the GST credit would reach into moderate-income households, using a benefit structure already in place.
Saving the country through the pockets of the less well-off is not likely to a big vote-getter. The votes, as always, are in the bulk of the middle class. Especially at a time when auto companies and virtually everyone else seem to have their hands out, people can be excused for asking, “What about me?” But the sensible answer is not to treat the country as a collection of interest groups, to be appeased and stroked according to their means. It is to get a bang for the buck, and not to dig the country into a hole it can't get out of.
There is ample evidence that short-term tax cuts or rebates, such as those offered by President George W. Bush last spring, are useless. At worst they are hoarded; at best, they pull demand forward a month or two. Economists are excoriating about the Bush rebate. “A classic case of the most extraordinarily bad policy I have seen in a long time,” says Craig Wright, chief economist of the Royal Bank of Canada.
Long-term tax relief would encourage work, saving and investing, all good things, but its costs are enormous. A one-point cut in the marginal tax rates would cost roughly $6-billion a year. Raising the income thresholds at which the marginal rates are set would cost $2.9-billion a year. Any such cuts will be nearly impossible, politically, to cancel.
What, then, should the government do to aid the middle class in a responsible way? One measure would be to lower the employment-insurance premiums paid by employers and workers, at least until unemployment falls again (reversing how the system works, stupidly, now). The new Tax Free Savings Account, which took effect on Jan. 2, is a form of middle-class tax cut, since only those with savings can use it. That is the wrong policy at the wrong time, although it is too late to change now. Providing further relief for middle-class consumers will not promote spending. “Dumb beyond belief,” Don Drummond, the TD Bank's chief economist, says of lump-sum tax relief at this time. The wait-and-see psychology is too strong. If it wasn't, lower interest rates would have done the trick.
In these times, putting money in the hands of those who need it is good policy. The test of leadership is to make good policy succeed politically.