The arrival of universal, monthly Family Allowances in 1945heralded the second phase: ‘untargeted universality.’ Child benefits wereextended to include low- and modest-income families. But better-offhouseholds still got more because they received both the children’s tax exemption and FamilyAllowances.
The 1970s ushered in the third phase: ‘progressiveuniversality.’Family Allowances were tripled, indexed to the cost of living and madetaxable. A new income-tested program administered through the personalincome tax system the refundable child tax credit delivered its maximum payment to low-income families. Itpaid a declining amount to middle-income families and nothing to thewell-off.
The fourth phase, ‘progressive targeting,’ began in the 1980s. Itevolved through a series of changes culminating in 1993 with a single,income-tested Child Tax Benefit. It increased payments for working poorfamilies with children, maintained benefits for other low-income families,reduced amounts for middle-income families and excluded high-incomefamilies.
Canada recently entered a fifth phase: an ‘integrated childbenefit.’ Itbroadens the scope of reform to include provincial child benefits and promisesto strengthen both the anti-poverty and horizontal equity objectives.
Rationale for reform
To understand the rationale behind Canada’s unfolding National ChildBenefit reform, it is helpful to explain briefly the major weaknesses of thechild benefits system that it is replacing. The old ‘system’ was not really a system in thetrue sense of the word. Rather, it was an uncoordinated group of programsprovided by two levels of government.
Throughout much of its history, the federal child benefits systemsuffered from an irrational distribution of benefits. The separatecomponents of the system were integrated in 1993 into a single, familyincome-tested Child Tax Benefit. The latter was renamed the Canada ChildTax Benefit in 1997. The new program is similar to the former one in thatprovides maximum payments to low-income families and diminishing benefits tomiddle-income families.
While achieving its anti-poverty objective in its distribution ofbenefits, the federal child benefit is not narrowly targeted to the poor.This ‘broadbased’ characteristichelps advance the goal of social inclusion. The large majority offamilies are served by the same program and no vulnerable group isexcluded.
Among the Canada Child Tax Benefit’s other virtues are itsanonymous, nonstigmatizing and relatively efficient administration through thesame income tax system that covers Canadians in all income groups andthroughout the country. Recipients qualify for benefits based only on asimple test of their income. There is almost never any direct contactbetween recipients and administrators. Benefits are delivered on afrequent (monthly) basis.
Meanwhile, until very recently, all the provinces delivered whatamounted to cash child benefits through their social assistance systems, whichprovided benefits on behalf of children as well as adults. There waslittle coordination with the federal child benefits system. The twodiffered in purpose, design and delivery.
Child benefits delivered through provincial social assistancesystems pursue only an anti-poverty objective. Along with adult benefits,they are intended to provide funds for a family to meet basicnecessities. By contrast, federal child benefits are intended only tosupplement other sources ofincome.
Unlike income-tested child benefits’ good performance in terms ofinclusion, needs-tested social assistance in Canada has always been anexclusionary and social program. The social assistance system isdiscretionary and involves extensive client-worker interaction.
The scope of federal and provincial child benefits also differssignificantly. Federal child benefits have served all or almost allfamilies with children. Social assistance-delivered child benefits, bycontrast, are restricted mainly to non-working poor families. Socialassistance excludes most other low-income families, such as those on EmploymentInsurance and the working poor. Social assistance benefits have beenpolitically vulnerable to cuts.
One of the major problems inherent in the uncoordinated patchworkof federal income-tested child benefits and provincial needs-tested childbenefits is that the system could never deal effectively with the problem ofpersistent and extensive child poverty in Canada. Social assistance isnarrowly targeted and unpopular. The reality is that social assistancebenefits will always be extremely low.
Another significant problem with the two-tiered system has beencharacterized as the ‘welfare wall.’ Social assistance families with children traditionallyreceived child benefits from two sources: provincial social assistance benefitspaid on behalf of children and federal child benefits.
Other low-income families, notably the working poor andUnemployment Insurance poor, typically got federal child benefits only.Social assistance families enjoyed considerably larger indeed, about double child benefitsthan those paid to other low-income families. Neither does this cashadvantage count the value of the social assistance system’s ‘in kind’ benefits, such as supplementaryhealth and dental benefits, shelter allowances and winter clothingallowances.
Just before the introduction of the National Child Benefit in July1997, combined federal-provincial child benefits ranged annually from around$2,220 to $2,820 per child for social assistance families in mostprovinces. Another $213 per year was paid for each child under age 7 forwhom the child care expense deduction is not claimed. By contrast,federal child benefits for children in working poor families were a maximum$1,520 annually for one child.
For two children, the gap between social assistance and otherlow-income families was wider. For example, for families with one childunder age 7 and one child over 7, total child benefits for a social assistancefamily from the federal and provincial governments amounted to $5,253 peryear. That amount is close to double the $2,753 in federal child benefitsfor other low-income families with children.
The term ‘welfare wall’ was coined to dramatize the features of the tax/transfer system in this case,child benefits that can erect barriers to moving from social assistance to theworkforce. Parents on social assistance who managed to find paid workrisked losing thousands of dollars in social assistance-provided child benefitsand ‘inkind’ benefits.Moreover, their typically low wages were reduced by federal and sometimesprovincial income taxes as well as federal payroll taxes. They also hadto pay employment-related costs, such as child care, clothing andtransportation.
Structural reform: TheNational Child Benefit
The reform of child benefits known as the federal-provincialNational Child Benefit seeks to lower the welfare wall by creating an integrated,nonstigmatizing child benefit. It treats all low-income families equally,whether they are working or not. It also enables provinces to takeadditional actions to assist low-income families.
The main engine of reform is the new federal child benefit.As the federal government increases payments under the Canada Child TaxBenefit, provinces are allowed to reduce their social assistance-provided childbenefits by the amount of the federal child benefit increase. Provincesmust reinvest the resulting savings in other programs and services forlow-income families with children.
Over time, governments’ objective is to raise the CanadaChild Tax Benefit to the point where it alone, or in combination withprovincial income-tested child benefits, fully displaces socialassistance-delivered child benefits. These are estimated at a target ofabout $2,600 in today’s dollars.
A $2,600 maximum Canada Child Tax Benefit would come close toachieving the goal of an integrated child benefit. All low-incomefamilies, regardless of their major source(s) of income, should receive thesame level of child benefit. The distinction between child benefits forthe working poor and the non-working poor would beeliminated.
The federal and provincial governments have set three formalobjectives for the National Child Benefit. It is intended to help preventand reduce the depth of child poverty. It seeks to promote attachment tothe workforce resulting in fewer families having to rely on social assistance by ensuring that families willalways be better off as a result of finding work. It is intended toreduce overlap and duplication through closer harmonization of programobjectives and benefits, and through simplified administration.
The Caledon Institute which played a key technicaland political role in developing the National Child Benefit supported the choice ofdepth of poverty ratherthan incidence or rate ofchild poverty as an objective. Depth of poverty refers to reducing theaverage distance of families below the poverty line.
Progress in lowering incidence is a poor indicator of theeffective reduction in poverty. If governments were to employ reductionin incidence as a key indicator, a program that reduced the depth of poverty ofthose who were least well off but failed to bring them above the poverty linewould be judged inferior to a program providing a few dollars to those who arebest off among the poor, thereby bringing many people above the povertyline. Reduction in the depth of poverty is, on the other hand, a goodindicator of the extent of change in the experience of poverty amongfamilies.
We argued that it is unrealistic to set the prevention of childpoverty as a formal objective of child benefits, though other programs(including some of the provincial reinvestments under the National ChildBenefit) can play a preventive role. We also endorsed the work incentiveobjective, with the caution that the National Child Benefit is no magicsolution. Rather, it is one among a range of initiatives required todismantle the welfare wall. We supported the harmonization objective,which should underlie all intergovernmental relations.
We added some objectives to supplement governments’ three: adequacy, fairness,dignity and independence, and economic stabilization.
Once the displace-social assistance target of $2,600 per child peryear is reached, the Canada Child Tax Benefit should be raised further, withinthe first decade of the 21st century, to reach about $4,200 maximum per child annually.That amount is a rough estimate of the annual cost of raising a child in alow-income family. We recommended that a study be conducted to come upwith more accurate and detailed estimates. The $4,200 goal is an estimateof the amount needed to achieve the anti-poverty objective.
We urged the federal government to improve child benefits formodest- and middle-income families. These households have seensubstantial losses since the 1980s. This improvement would help achievethe horizontal equity goal.
Adequacy also requires full indexation of the benefit to the costof living. While the federal government did fully index the benefit as of2000, the provinces have not yet followed suit.
The objectives of dignity and independence will be advancedthrough the broad based, income-tested Canada Child Tax Benefit. Finally,Caledon recommended that the system be seen as an important part of economicstabilization. The program is an efficient vehicle to put cash into thehands of parents and thereby maintain consumer demand during downturns and helpcushion the effect of recessions.
Over the past few years, the federal government has made a seriesof substantial increases to the Canada Child Tax Benefit. These haveboosted payments to low-income families. The increases have enabledprovinces to redirect social assistance savings into a range of income programsand social services for low-income families with children.
Provincial reinvestments to date total $305.2 million in 1998-99and $498.2 million in 1999-2000. Child care took first place 39.4 percent in 1998-99 and34.6 percent in 1999-2000. This was followed by income-tested childbenefits and earnings supplements (31.1 percent in both fiscal years),initiatives by Ontario municipalities and by Aboriginal communities (21.8 and20.9 percent), early childhood development (4.5 and 9.3 percent) andsupplementary health care (3.1 percent the first year and 4.1 percent the nextyear).
By 2004, Ottawa will spend a forecast $9 billion on the CanadaChild Tax Benefit. This amount represents, in inflation-adjusted 2004dollars, a $3.3 billion or 58 percent increase since the reform began.Low-income families will receive about $6 billion or two-thirds of the $9billion total spending in 2004. Non-poor families will get the other $3billion or one-third.
The federal government’s stated target is to increasethe maximum Canada Child Tax Benefit to $2,400 for one child and $2,200 foreach additional child by 2004. These rates will come close to meeting theCaledon Institute’sproposed $2,600 level (which in 2004 dollars will come to $2,800).
The other crucial advance is that the federal government, in its1999 and 2000 Budgets, began restoring child benefits for non-poor (mainlymodest- and middle-income) families. In so doing, the federalgovernment has broadened the scope of reform beyond the child benefitsystem’s anti-povertyobjective to begin bolstering its horizontal equity performance. Thus thetwo fundamental objectives of child benefits are being simultaneouslystrengthened.
The complexity of the National Child Benefit and ofCanada’s childbenefits system more generally have placed the reform beyond the understandingof the Canadian public, most journalists and, indeed, most politicians.So the National Child Benefit debate has been confined largely to socialadvocacy groups, most of which have opposed the reform.
a. Treatment of social assistancefamilies
The chief criticism of the National Child Benefit is that itdiscriminates against social assistance families. These families areoften referred to as the ‘poorest of the poor.’
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