Federal Budget Should Include Fairness Test
Mar 16, 2011
Recent reports have highlighted an issue that countries around the world are grappling with: how to deal with the problem of growing income inequality in modern society.
Even staunch defenders of free market economics like the International Monetary Fund, the World Economic Forum and The Economist magazine are sounding alarm bells about the need to swiftly deal with the problem. The problem is acute in both developing and developed countries from China to Brazil and from Britain to right here in Canada.
How bad is it in Canada? Really bad. And it is getting worse. The income trend over the last 30 years shows that a few Canadians at the top have made out well, but the vast majority of us have been getting nowhere or falling behind. Canada is becoming a radically less equal society. There are no serious economists who dispute this trend. It is just not possible.
In fact, Canada has one of the worst records in the world when it comes to the inequality gap. In 2008, the Organization for Economic Co-operation and Development warned that Canada is on a slippery slope and that our inequality gap is growing faster than almost all other developed countries in the world.
According to Statistics Canada, between 1980 and 2005, the income of the richest one-fifth of Canadians grew 16.4 percent while the poorest fifth saw their income drop 20.6 percent. Income was stagnant for everyone else in the middle. The reality is that millions of Canadians are not making any more today than they did 30 years ago. That is not an easy fact to swallow.
The trend really accelerated over the last 10 years. While we had unprecedented economic growth, the richest Canadians took the lion’s share of the gains. In fact, the richest one percent accumulated one-third of all income gains during this period. This helps explain why so many families were struggling even when the economy was growing. It is a shocking situation.
Why is income inequality a problem? Less money in the pockets of poor and middle-class families diminishes demand for products and services and that means less economic growth. Research shows that countries with greater inequality have worse health outcomes for everyone (not just the poor) on key indicators such as life expectancy, infant mortality and mental illness. Large and growing inequality undermines social cohesion – rather than going forward together with a common purpose, we become a society full of diverse economic groups suspicious of each other and our future together.
Make no mistake about it: rising inequality is an issue that can affect the temperament of a country and cause massive social unrest. Just look at Egypt, Tunisia and Libya for the proof.
There are many causes (tax cuts for the rich and attacks on unions) and many ways for the federal government to tackle the problem (like a greater focus on redistribution). But rather than debate specific causes and remedies, surely we can all agree on the basic point that future federal budgets should strive to close the gap or, at the very least, not make the problem worse. Fortunately, there is an easy and quick step the government can take to ensure this is the case.
The federal government should develop a Fairness Test to assess the impact of key tax and spending policies in future federal budgets on income inequality. Such a test could be developed and applied by the Department of Finance. The results could be published in the budget as part of the fiscal planning framework. Establishing a Fairness Test for federal budgets would be a transparent and verifiable way for the government to show, rather than simply assert, its commitment to tackling the problem (or at least not make it worse).
This is especially important in the wake of the financial crisis and recession, with the government facing the challenge of rebalancing the budget. A Fairness Test would ensure that the poorest Canadians are not hit the hardest by deficit reduction policies.
The federal government must develop and implement strategies to deal with the growing inequality gap and including a Fairness Test in the federal budget is a good place to start. I hope the prime minister and finance minister give this idea serious consideration. But I’m not going to hold my breath. I know there is nothing more dangerous in politics than a new, simple and good idea.
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