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Drummond and the "Welfare Wall"

Blog posts reflect the views of their authors.

Social services face some of the deepest cuts in Don Drummond's report on Ontario's finances. The report suggests that the envelope for social service spending be held at 0.5% per year increases. If population growth and inflation total 3% per year, we might expect welfare spending to go up by 12.6% over the next four years just to keep pace. Instead, the budget will only go up by 2%, the rest being absorbed by people who depend on social services. One key recommendation was scrapping the planned $210 annual increase in the Ontario Child Benefit.

There is another review on the horizon, led by Frances Lankin and Munir Sheikh, which specifically tackles social assistance programs. For this reason, Drummond says relatively little about benefit levels and structures, but the cap on overall spending makes their report of secondary interest to most people in need of benefits.

The Ontario Coalition Against Poverty (OCAP) has called for a 55% increase in financial payments as an immediate step to restore the real value of benefits that have been lost since the 1990s. Presently, social assistance payments cost the province about $7 billion a year. It seems unlikely that the province will sharply increase welfare payments in the absence of a large public mobilization in favour. Towards that end, OCAP is mobilizing with community partners for a March 16th rally to confront the provincial government.

One problem that people on assistance face is the high barriers to returning to work. Both Drummond, and Lankin and Sheikh, acknowledge the "welfare wall" that people face in the form of lost benefits if they work. These "perverse incentives" are the high effective rates of taxation that people face when they try to work because of how this affects their welfare payments. For example, an individual loses 50 cents on the dollar of everything they earn above a basic exemption of $200 a month.

As importantly, as a person moves into more full-time work, they lose coverage for things like prescription drugs. Drummond specifically suggests moving the Ontario Drug Benefit towards an income-tested program, rather than age and assistance as it currently stands. Municipal housing programs also contribute to the reduced income a person can face as they move to work. In all, people on welfare are often the highest taxed people in Canada.

The federal government has tried to "make work pay" by introducing a work tax benefit that targets very low income earners. This offsets some of the clawbacks that people face, but unfortunately it includes a high tax rate on its own benefits, which can sometimes compound the problem of the high tax rate while boosting incomes.

One way to reduce the "welfare wall" is to move to a guaranteed annual income. For a good discussion of the federal experiment with a "mincome", see Vivian Belik's article "A Town Without Poverty" in the September 2011 online issue of The Dominion. By unifying benefits into a simple guarantee, a guaranteed income can make the effective rate of taxation of income for low-income earners more obvious and, potentially, much lower.

Guaranteeing incomes is not a particularly radical idea in itself. There are many Conservatives that push for a minimum income, most prominently Senator Hugh Segal. A poll of American academic economists from 2009 suggested that 79% support income guarantees as a welfare reform measure. As UBC economist Kevin Milligan suggests, much of the support for minimum incomes depends on what the base payment and standard tax rate is - conservatives tend to like low base payments, people on the left want payments that abolish poverty. The idea that the left and right could easily unite on a compromise policy is probably misguided. Unions, for example, have tended to be skeptical about minimum incomes, because they want full employment as their main goal and are wary of programs that might distract from that.

Two important things seem to follow from the above. The first is that Ontario needs an income security policy that will really meet our needs by raising incomes. The other is that there are fairly obvious ways to make it easier for people to find rewarding work by guaranteeing more benefits and lower the high tax rate low-income people face.

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