Personal incomes lagging behind economic growth, TD says

(January 18, 2005) It’s something many Canadians may have suspected, but a study released today suggests it’s true: despite solid growth in the GDP, tame inflation, low borrowing costs, high employment and a housing-market boom, our economic well-being has not advanced in many years.

The TD Economics report concludes that the take-home pay of the average Canadian worker has not kept pace with GDP growth. Between 1989 and 2004, real GDP per capita rose 26%, and real income per capita was up just 9%.

“The picture looks even worse if we take inflation-adjusted GDP and after-tax incomes on a per-worker basis,” TD says. Including those factors, real GDP was up 26%, while real income rose a modest 3.6% over that 15-year period.

So why has take-home pay continued to stagnate despite a healthy economy? TD blames taxes: a combination of bracket creep prior to 2000 and higher CPP and QPP premiums.

When tax brackets don’t rise with inflation, many of us get pushed into higher tax brackets, TD notes. Up to the mid-1980s, Ottawa fully indexed tax brackets. But from 1986 to 2000, that approach was loosened, in that indexing was applied only to the portion of inflation that was above 3%.

“Unfortunately, bracket creep still occurs in low inflation environments,” the report explains. “This is exactly what happened to an increasing proportion of Canadian workers from 1992 to 2000, when inflation was contained to around 1% year after year.”

In addition, Canadian and Quebec pension plan contributions rose from 3.6% in 1986 to 9.9% in 2003, in governments’ efforts to address funding shortfalls. “The sharp hike in premiums not only bit deeper into the incomes of all workers, but it also imposed an intergenerational inequity that left younger workers worse off than older workers.”

Fixing these inequities require a three-step approach, says TD chief economist Don Drummond. First, governments need to continue to reduce the debt and take an active role in enhancing Canadian productivity in order to lift the real wages of workers. “A sound healthcare system is an important economic policy, but it can be argued that much of the rapid growth in public spending in recent years is simply financing a more costly system, not a better one. We must also recognize that a rising allocation of public spending on healthcare has sideswiped a lot of areas that could contribute greatly to economic growth, such as education and infrastructure.”

Also, Drummond suggests reducing personal income taxes, noting that the top marginal federal/provincial tax rate is now more than 45%.

“And, families with more modest income levels get hit with the combination of taxes and clawbacks in benefit payments that can raise the effective marginal tax rate to 80%. It simply does not create sufficient incentives to work, save and invest.”

“Putting it all together, debt reduction, a shift in the profile of government spending and reduced taxes would go a long way to reviving real wages and allowing Canadians to benefit from an expanding economy in a more meaningful way.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com