A wish list for Carney’s fall budget

Introduction to Canada’s Economic Weakness

Canada’s economy weakened in the second quarter, putting a spotlight on the weakness of Canadians’ income and savings. This presents an opportunity for the November 4 federal budget to protect financial well-being in the coming months.

The Income Gap is Reaching a New High

The income gap, or the difference in the share of disposable income between households in the top 40% and bottom 40% of the income distribution, is a common measure that makes headlines. It was at a record high of 49% in the first quarter, with a slight decline in the second quarter, and has increased every year since the pandemic. Interest rates had a lot to do with it, as household interest payments fell by almost 5% in the first quarter for the first time since 2022.

Impact of US Tariffs

US tariffs have also played a role in the economic picture. Lower-income households tend to suffer the most during times of uncertainty, and that remains true now. Statistics Canada reported falling average wages, largely due to shorter working hours in the first quarter. Workers in the mining and manufacturing sectors, as well as in the professional and private services sectors, were particularly affected.

Government Transfers

Among households with the lowest income, income grew at an above-average rate in the second quarter (+5.6%). However, this was due to an increase in government transfers, including unemployment insurance (EI), social assistance, and pension benefits. Unfortunately, tax revenues – the real source of these payments in the future – will also decline.

Diversification of Investments is Important

Despite a good start in the first quarter of the year, Canadians’ financial well-being was impacted by the impact of tariffs imposed in the second quarter. Consider the following investment trends:

• Households with lower incomes tend to earn interest income, and net investment income fell the most among low-income households.
• Higher-earning households have more diversified portfolios and hold more stocks, leading to more tax-efficient capital gains and dividend income.
• The richest 20% of households had accumulated nearly two-thirds (64.8%) of Canada’s total net worth, an average of $3.4 million per household, while the bottom 40% of households accounted for 3.3% of total net worth, an average of $86,900.

The Rich Will be Fine, Others Need Help

The wealthiest households can continue to grow their net worth even when incomes fail or fail to keep up with inflation and the costs of servicing debt are threatened by unemployment, disability, or retirement. This is because their investment returns and capital appreciation make up for the income gap. What are the opportunities for lower-income households? There are two: being able to continue saving consistently and achieving more tax-efficient capital gains.

Building Income and Capital: A Six-Part Plan

To help all Canadians build both income and wealth, the following six-point plan is proposed:

1. Protection of interest income: Phases of high interest rates to combat inflation are particularly damaging to average households that earn interest income. If this monetary policy is necessary, protect these fragile savings from both inflation and taxes.
2. Deduction for professional help: Canadians need help with their tax and financial literacy. Make income tax preparation and financial planning costs tax deductible to remove barriers to professional help.
3. Avoid CRA penalties and interest from auto-filing: The CRA should have the authority to permanently waive interest or penalties resulting from honest errors in automated tax return processes.
4. Help young people start saving: Provide matching subsidies for starter savings plans for the first five years after post-secondary education to encourage healthy savings habits.
5. Recognize community service as a tax deduction: Keeping track of volunteer hours doesn’t take much more effort than keeping track of money donated to charity. The resulting tax savings could help create community wealth.
6. Change retirement planning options: Governments should encourage TFSA savings by making contributions tax deductible for both employees and employers who contribute to their employees’ accounts.

Conclusion

In conclusion, Canada’s economic weakness has put a spotlight on the weakness of Canadians’ income and savings. The income gap is reaching a new high, and the rich will be fine, while others need help. To address this, a six-part plan is proposed to help all Canadians build both income and wealth. By implementing these measures, the government can help protect financial well-being in the coming months and encourage healthy savings habits among Canadians.