This report argues that inflation protection is essential for children to realize the positive and potentially significant advances in the Child Tax Benefit. Indexation will provide the same inflation protection to children that we have extended to seniors.

By indexing the Child Tax Benefit the government can demonstrate that it wants this initiative to have a permanent effect. Without inflation protection the announced increases are temporary, an illusion of progress of limited duration.

"The federal government and provincial governments are working together to create a National Child Benefit (NCB) System to provide better support for low-income families with children. This co-ordinated effort of both levels of government is an important initiative designed to combat child poverty and to support low-income parents to enter and stay in the labour force to support their families. Over time, this initiative will build a more secure base of benefits and services for Canada's neediest children, providing them with a better start in life and laying the foundation for their future participation in Canadian society". (The Budget Plan, 1998; Finance Canada, 1998)"

If this description of the National Child Benefit and its impact were accurate, it would have been welcomed by anti-poverty groups unanimously. Yet this description over states the impact of the CTB and ignores some flaws which are fatal to its eventual impact.

The changes to the Child Benefit System announced in the budgets of 1996, 1997 and 1998 include some welcome features which could potentially assist many low-income Canadian children. First, the announced increased spending of $850 million is the first reversal of inflation induced reductions since 1992. Also, the redesign of the Child Tax Benefit clearly emphasizes extending the supports to working-poor children which are presently available to poor children on welfare; a laudable objective.

Yet single-minded concentration on working-poor children threatens to undermine the whole exercise. Indeed; the increase in support for working-poor children is being paid for, in part, by reductions (via inflation), in support for other vulnerable children; children on welfare and children in families with incomes over $26,000.

Total spending is being increased by $850 million, over what it would otherwise have been. But, the purchasing power of the CTB does not increase by $850 million because of the erosion over time due to inflation. The increased support for working-poor families is recognized but also we must recognize the support for families on welfare is declining, as is support for families with incomes over $26,000. Over the decade 1993 to 2002 an increase in spending of $1.7 billion has been announced; just about balancing the amounts removed by inflation over the same time period.

The Inflation Induced Reductions to the CTB

The current changes to the Child Benefit will, we are told, "provide better support for low-income families with children". This phrase is consistent with the quotes below. All the changes in the CTB since 1984 were intended to increase support for low-income children, we were told.

"Changes in these programs which may result from this review should improve benefits for those most in need." Child and Elderly Benefits - Consultation Paper - January 1985, Health and Welfare Canada, Government of Canada.

"The changes will ensure greater assistance to families with lower incomes, …". Budget Papers, Finance Canada, May 23, 1985, page 42.

"The federal Government promises less child benefit money in coming years for wealthy families and more for the needy." The Globe and Mail, More child benefits promised for needy, April 26, 1989

"Lower-income families with one child will receive a monthly payment of up to $144, significantly more than the monthly payment of $35 they now receive. Approximately two million families with incomes below $50,000 will receive larger monthly payments than they do now." Health and Welfare Canada, The Child Benefit - A White Paper on Canada's New Integrated Child Tax Benefit, Feb. 1992.

"Some 1.4 million families with 2.5 million children would receive higher federal benefits." Working Together Towards a National Child Benefit System, Finance Canada, Feb. 1997.

"… provide better support for low-income families with children. … Over time, this initiative will build a more secure base of benefits and services for Canada's neediest children."" (The Budget Plan, 1998; Finance Canada, 1998)"

All of these quotes suggest that the revisions were intended to increase support for low-income children. The facts tell a different story.

Indeed, income support has fallen since 1988 for 90% of children, the only exception being the children in working-poor families. In particular, as the attached Table shows support for all families with incomes over $26,000 has fallen by hundreds and even thousands of dollars. Most striking is that support for the poorest of children, those without earned income peaked in 1988 and has fallen by about $200 since 1988 (see attached Chart).

The Child Tax Benefit is now worth about $1 billion dollars less than the spending in 1984 (after adjusting for inflation). The poorest of children get less now than they did in 1984, yet the only public announcements have been of increases in support not reductions. How did this happen? The sporadic hyped increases were no match for the inexorable silent cuts, courtesy inflation.

When were these cuts in support announced? They weren't. Without inflation adjustments, the value of this support erodes each year. This erosion is quiet, insidious, attracting no media or public attention. This downward trend has been off-set on occasion by ad-hoc increases. These pre-election increases are greeted with fan-fare, press-releases and bloated boasts about government compassion for children.

The casual observer is left with an impression of increased support for children based on much ballyhooed additions to spending unaware that increases were swamped by secretive inflation induced cut-backs.

The Importance of Inflation Protection

The argument put forward against the inflation protection for the Child Tax Benefit is that indexation of the Child Tax Benefit would require inflation protection for the entire tax system which the government can not afford. Yet the Senior's Benefit was full-indexed without indexing the full tax system. Indeed, the argument for full-indexation was well understood by the government when discussing the Senior's Benefit.

"The new system entrenches the principle of inflation protection for assistance to seniors. This is especially important for lower-income seniors who depend on these benefits for the bulk of their income. The Seniors Benefit fully indexes the benefit levels and also extends full indexation to the threshold where benefits begin to be reduced. This is an improvement over the current system where the threshold is not fully indexed." (The Seniors Benefit - Securing the Future; Finance Canada; March 1996 )

The Child Tax Benefit should be indexed to inflation even if the government is not ready to do the same for the general tax system. This is because the de-indexation of the Child Tax Benefit effects the poorest of children but they do not pay income taxes and are not effected by the de-indexed tax system. As well families with children are disadvantaged doubly by indexation. As long as both the income tax system and the Child Tax Benefit are not indexed to inflation, families with children lose far more each year, due to inflation, than families without children; they lose like other families when they pay their taxes and then they lose again in reduced support from the child tax credit. Families with children, who can least afford it, contribute more to deficit reduction then families without children.

It has also been argued by some that indexation is not necessary because government can be trusted to improve support levels regularly to maintain the value of the Child Tax Benefit:

"... a senior official in the Health and Welfare Department, acknowledged that there will be 'a slippage' in the value of the child benefit. 'There is a loss in each year where the inflation rate is greater than zero'. 'I don't dispute that.' However, the child benefit could be increased 'on an ad-hoc basis ... when the government feels it is necessary.'"

Globe and Mail, Report Blasts Child Benefits - Says New System Lowers Incomes, March 10, 199

"There have also been suggestions that families will receive less and less every year under the child tax benefit because of partial indexation of the benefit … the government is committed to reviewing the level of benefits over time and to increasing them as physical [sic] conditions permit."

Finance Official - Senate Committee on Social Affairs, Science and Technology, October 7, 1992.

" The budget will increase by $850 million as of July 1, 1998, and by another $850

million during this mandate. This is a lot more important than indexing the benefits. We are working on improving the system itself and not only on indexing the benefits. This is a much broader initiative."

Hon. Pierre S. Pettigrew; Hansard; Feb. 16, 1998

The most eloquent response to this argument was penned some 8 years ago by members of the Finance Committee when discussing the indexation of the GST credit.

"Virtually all social groups were unanimous that the lack of full indexation of the refundable tax credits will make an already unfair GST system even more unfair over time:"

"In response to these concerns the Finance Minister has replied that the protection for low-income Canadians does not need to be fully indexed to inflation because the government, if necessary, would adjust the credits and the thresholds to protect the poor."

"The Liberal Members of the Finance Committee simply cannot believe this assurance. If the government really intended to fully protect the poor from inflation by adjusting the credits and the thresholds, then there is no reason not to fully index the protection for the poor in the first place, unless of course the Conservative government intends to shift even more of the GST burden onto low-income Canadians in the future. The Liberal Members cannot support this Conservative attempt to increase taxes on the poor."

(Liberal Minority Report, Report on the Technical Paper on the Goods and Services Tax, November 1989).

Conclusion

Anyone familiar with the political process understands that the deception possible because of de-indexation is hard to give up; it minimizes the cost of pre-election increases in support. Yet, the past 15 years prove that without full-indexation increases in support for poor children will be temporary - an illusion.

The current government has invested substantial funds in increasing the level of the Child Tax Benefit. Full indexation of that benefit will demonstrate government will that the positive effects of the Child Tax Benefit be permanent.

Richard Shillington

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