Transfer Money to Individuals, Not Governments

Commentary, Equalization, Steve Lafleur

Canadians benefit from a quality of life that few in human history could even conceive of. Unfortunately, many Canadians at the lower end of the income spectrum haven’t shared in those gains.

A recent Statistics Canada report shows that while the middle class is gaining ground, lower income Canadians are falling further behind. Additionally, younger Canadians are losing out to older Canadians. While the middle class has been at the centre of the national debate, lower income and younger Canadians are the ones losing out.

The failure of traditional social welfare programs has many analysts scrambling for an alternative. One increasingly popular option is a guaranteed annual income (GAI). Many on both the left and the right consider this an upgrade over the labyrinth of social welfare programs that lock many Canadians into a cycle of dependence.

There isn’t much precedence for a GAI. One experiment in Dauphin, Manitoba yielded positive results, but a limited experiment isn’t sufficient to justify a national program. However, a GAI makes intuitive sense. People are generally better at spending money than governments. Moreover, unconditional transfers, like a GAI, have less administrative costs than traditional programs.

A GAI would be very expensive unless it replaced existing spending. Rather than taking a giant leap, the federal government could start with a more limited effort, specifically, by replacing transfer payments to provinces with unconditional cash transfers to citizens.

While governments are always tempted to spend more, we already spend heavily on social programs. However, not all spending is effective. Ineffective programs should be converted into unconditional cash transfers. Provincial transfer payments are the ideal place to start.

Transfer payments are designed to ensure a uniform quality of services nationwide.
In reality, they allow “have-not” provinces to provide better services than “have”
provinces. While the constitution mentions equalization, it doesn’t mandate an equalization program. Cash transfers to individuals would equalize provincial wealth since wealthier provinces would still pay a greater share, and some of the revenue from those transfers would be recovered by “have not” provincial governments in the form of income and sales taxes. Additionally, it wouldn’t engender perverse incentives that punish provinces for sound economic stewardship.

The equalization program transferred $16.105 billion from have to have not provinces in 2013-2014. That is enough to give $546.22 annually, or $45.52 per month to each of the 29,484,200 Canadians aged 15 and over. If all transfer payments were converted to cash transfers (excluding the Territorial Formula Financing), Canadians would have $59.009 billion to distribute. That would amount to $2001.38 per year, or $166.78 per month for every adult Canadian aged 15 and up.

While $166.78 per month may sound trivial, it could have a significant impact for lower income Canadians. That is enough for a single person to pay for groceries every month. Transferring $2000 per year would allow 15 year old students to save enough to pay up front for first year college or university.  Additionally, provincial governments would continue to provide social welfare benefits.

Young people see little of the federal government’s largesse, despite having much lower incomes. Given the massive unfunded healthcare and pension liabilities and government debt these Canadians will face as the Baby Boomers retire, as well as the staggering housing cost escalations over the past decade, giving them a sliver of the federal treasury pie seems reasonable.

Replacing transfer payments to provincial governments with cash transfers to individuals would cost provincial governments revenue. However, since the income would be taxable, some of the money would be taxed back. Top provincial income tax rates vary form 10%-25%, so higher income earners would pay back a large portion to provincial governments, as well as 29% to the federal government.
Additional revenue would be recaptured through consumption taxes, and the additional benefit could reduce dependence on existing social welfare programs.

As an example, Manitoba residents would receive roughly $2 billion, and the provincial government would receive $258 million assuming that the average taxpayer is in the middle income tax bracket. The Manitoba government, obviously, would lose substantial revenues. They could compensate for this loss by pruning its bloated public sector, which has 22.6% more employees than the Canadian average. Shifting revenue from the public sector to individuals would help stabilize “have not” economies.

While a GAI may not be viable in the short term, moving away from bureaucratic redistribution and towards unconditional cash transfers is a reasonable step. We need better social policies, and converting transfer payments to transfers to individuals is a good start.