Economy

Are All Goodies Being Offered by Parties Vying for Power in 2019 Election Make Sense?

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Introduction
It’s election time in Canada. Canadians go to the polls on October 21, 2019. All political parties and their leaders vying for power are offering their election manifestos, that is the menu of goodies along with their projected costs to be offered to families, things and tasks that they will do and/or accomplish, if elected to govern. Nothing unusual. Parties and leaders in all democratic countries, developed and undeveloped, follow the same procedure. Canada is no exception. For politicians, the election time is the time to show who can offer voters the best of goods and services with voters’ own money. That’s also considered bribing voters with their own money. 

And what’s the politicians’ source of providing financial help to voters? Money collected by government as direct income and sales taxes from taxpayers, their mandatory and voluntary contributions and deductions on several federal and provincial plans, excise, corporate taxes, and all other indirect taxes – the key sources of government revenue, besides borrowings.

In the upcoming October election, there are six parties vying to form a government: the incumbent Liberals, Conservatives, New Democrats, Green, Bloc Quebecois, and People’s. This blog is not intended to synthesize the manifesto of each of these parties. It’s simply focused on the two specific goodies being offered by the two main contenders, the Liberals and Conservatives: first, offering more income to low and middle income class voters by tweaking the rate of first income tax bracket, giving additional tax credits, or by raising limit of basic income exempted from tax as well as by raising benefits currently provided under Canada Child Benefit  program; and second, offering help to first time home buyers.

Do the stated ways and means of providing help to families in respect to these two commitments make sense and really help voters or are just  gimmicks to get votes? 

Let’s look closely at each. 

Raising incomes of low/middle income voters and their families

The conservatives’ slogan is to put more money in the pockets of low and middle class families and help them move forward. To do it, the Party is proposing to reduce the first income tax bracket from the current 15% (brought down from 17% by the Liberals after the 2015 election) to 13.5% along with tax credit of $1,000 annually for each child for fitness and sports-related activities, $500 for children’s arts and educational activities, another $500 for parents with children with disabilities. Besides these, the Party is offering a transit credit worth 15% that tax filers spend on buying monthly passes for using public transport including buses, streetcars, subways, or local ferries, designed to cut emissions causing air pollution. Most of these credits are being re-introduced from Mr. Stephen Harper’s era , as these were terminated by the incoming Liberals in 2015.

The Liberals, on the other hand, are proposing to increase the amount of basic income exempted from tax from $12,000 to $15,000 for all tax filers. In addition, the Party is proposing to increase Canada Child Benefits by another 15% for children under one year of age as well as benefits under Old Age Security (OAS) program by 10% for persons aged 75 and over.  The Party recognizes that families need more money at these stages of their life cycles.

Both parties seem to agree to help parents of the newborns while they are receiving Employment Insurance. The Liberals want to make such benefits tax free at the source whereas the Conservatives are offering 15% tax credit at the time of filing tax return.

With all these proposed changes in the first income tax bracket and different tax credits against the changed threshold of basic income exempted from tax, one may ask how much it’s going to cost the government, and how much additional income a low/mid income family is going to get at the end of a year? The best educational guess is that it’s going to cost around $7 billion and taxpayers and their families will gain anywhere between $500 to $1,000 (Mr. Scheer, the Conservatives leader, in a recent English language debate said that a couple would gain $750). Assuming that each eligible family will gain a net income of $1,000 at the year end, which in turn, can be translated to around $3 a day – not enough to buy even an average size bottle of cooking oil. How far families will get ahead with this petty amount? Politicians really need to think before making any meaningful offer to attract low/mid income voters’ favour.

Again, in respect to offering different tax credits to children and transit credit to those using pubic transport, this concept is really not that equitable. What about offering tax credits to single-person families, or those with two or more members without children. Even all those with children and eligible to get credits wouldn’t be tempted to send their kids to such activities simply because petty credits are available. Because it takes more than that for parents to decide whether to send their children to such activities as parents have to take into into account several other factors including costs of accessories, equipment and facilities associate to such activities , besides their own time and resource commitments. The reality is that that only those in the upper and higher income brackets, who could afford to send their kids to such activities, will benefit from these son called “Boutique” credits.

In the same manner, offering transit credit to users of public transport is inequitable too. What’s wrong with those who drive to work, or share carpools, etc.? These people also incur transportation costs and some may even need assistance.

Since a good majority of families are carrying a load of consumer and/or mortgage debt, and living in financially straitened circumstances, receiving, say $1,000 at the end of the year may make them momentarily happy. Nothing else is going to change. Leaders of both Parties maybe happy to keep their words too – “putting more money in the pocket of a low/mid income family” – costing billions of dollars a year to the federal treasury. But for an individual recipient, this negligible financial help is not going to make any dent in his/her pocket.  

So as I see it, it’s just a politicians’ token gesture to win votes.

However, if one looks from a politician’s perspective, his/her objective is to look good in the eyes of the electorate. He/she is doing something not only to re-distribute incomes, but also helping the economy grow by making families spend more. He/she knows that all of this additional money given to low/mid income families will be spent right away, boosting the nation’s economy. Keep in mind that consumer expenditure accounts for close to 60% of our gross domestic product (GDP) – an economic measure of the size of the economy that values all goods and services produced by the nation.

Help to first time home buyers

Again, let’s start with the Conservatives. The Party has proposed two key measures: first, to extend the mortgage amortization period from the current 25 years to 30 years; and second, to drop the current eligibility criteria that a potential first time buyer would be able to retain property if the current mortgage rate increased by another 2% (currently known as 2% test). The former is aimed to facilitate the issue of affordability. 

The Liberals, on the other hand, are going to increase the thresholds of both the family income (to $150,000) and purchase price of home (to $800,000); the latter indeed varies not only by province , but also within urban and rural cores of cities of each province. This increase in the  thresholds is in addition to the already available 10% of home equity to the first time home buyers to give them a head start. This equity is held by the crown corporation Central Mortgage & Housing Corporation (CMHC). Put another way, CMHC will contribute 10% of the purchase price to start with (besides the down payment made by the potential owner). Keep in mind that this chipping in of 10% of loan by CMHC has to be paid back over the years by the owner, or at the time the house is sold. The Liberals are not talking about either the the current 2% test, or the change in amortization period, or the issue of affordability of home. This changing of the threshold of purchase price may result in an increase in the price of home, forcing a buyer to take more mortgage debt. 

Now let’s look at the implication of the Conservatives’ proposal to increase the mortgage amortization period from 25 to 30 years. No doubt any increase in amortization period will bring down the monthly mortgage payment, and that means more cash available for other needs for a financially hard pressed new home owner. The Party thinks it is helping the first time buyer when in fact, it’s making the owner to keep paying debt for another five years, dishing out more interest payments. Any extension of amortization period will indeed financially benefit the lender at the borrower’s expense. That’s not helping the buyer, but putting him/her in a longer financial distress. 

To illustrate this point, let’s consider a buyer with a mortgage of $400,000 at 4% interest. The monthly payment is $2,104 with 25 year amortization and $1,902 with 30 year – a difference of $202 a month. The home owner is happy that he/she has additional $202 in cash available for other needs. Assuming all else constant, and interest rate remains unchanged, that owner would pay (according to the Bank of Nova Scotia’s Mortgage Calculator available on Google) total interest amounting to $284,748.48 over 30 years on $400,000 mortgage loan compared with $231,224.30 over 25 years. In other words, an increase in amortization period from 25 to 30 years will cost the owner $53,524.18 extra in interest alone. Indeed he/she would be able to have extra cash $72,720 (= $202 x 12 x 30) for other needs, but with extra interest of $53,524. That means, for each dollar of extra cash, he/she paid 74 cents in interest. Is that a good deal to offer? Not at all. In my professional opinion, any lengthening of amortization period is the worst disservice one can offer to the first time home buyers.

It’s rather unfortunate that the Conservatives have failed to recall that when their peers were in power with Mr. Stephen Harper at the helm with Mr. Jim Flaherty as Finance Minister, they tried to introduce measures like no down payment and 40 year amortization in order to boost the housing industry and in turn, the economy. There was a huge public outcry that we were putting home owners in a rather miserable situation. Not only that, the longer amortization period would deny them the opportunity to save for their children’s higher education, retirement, etc. as they would be spending their work life paying off the mortgage. Mr. Flaherty listened and he brought back the provisions including 5% down payment with 30 year amortization, and with continuing public dissatisfaction, brought back amortization period to conventional 25 years. 

I don’t know why the current Conservative leader has not paid attention to what happened in his backyard years ago. Extending amortization period is not a good proposal by any sense.

The Conservatives’ second proposal about getting rid of 2% test makes sense as the measure is meaningless to begin with. Since a family income can change due to several factors including the loss of job of the primary or secondary earner in a volatile labour market and shifting economy, their sickness or disability, or family’s dissolution over time, what good is the criteria that qualifies a family on the day it is assessed, but what happens to it or its ability to afford a home after that day is anybody’s guess. Moreover, this test is based on a specific criteria: monthly payment of mortgage plus property taxes plus utilities as a proportion family’s monthly income should be under one-third of income (at current interest rate and at +2% rate). A family may qualify this criteria, but in reality it can be in a real financial hardship as there are umpteen other expenses associated with maintenance and furnishings of a new home, besides other expenses on food, clothing, persona care, and children’s education – to name a few.

In my professional opinion, this criteria of qualifying a family that it can afford a home is totally meaningless. It may cause more pain and financial stress to a potential home owner than helping it to own it.

The Conservatives are rightly proposing to get rid of this 2% test used as a qualifier to own a home.

Conclusion

I would say that the proposed plan as put forth by the leading two contenders about putting more income in pockets of  low/middle class families is just an election plank and would hardly make a dent to their overall well-being. And, the proposal to increase amortization period from 25 to 30 years is a big disservice to the first time home buyers.

Key words: Family income, Middle class, Income tax, Tax rate, Tax credit, Child benefit, Home ownership, Mortgage debt, Amortization, Interest payment.  

 

Are you doing better even if you have been with the same employer for a decade or more?

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Introduction
Probably not, if you have been with the same employer for a long time – 10, 15, 20 years or more – and have not gotten any promotion, or monetary reward, or bonus for your work performance, productivity, or contribution. The only increase in your salary is the union-negotiated, or employer granted periodic increases. Such increases usually fail to keep up with the rising rate of inflation.

Among employees belonging to a union, those in the public sector generally fare much better than their counterparts in the private sector. It’s well documented that a much higher proportion of public sector employees is unionized.

This question if one is better off while working too long with the same employer seeped into my mind while I was writing my second book entitled “A Writer’s Journey Through the Bureaucratic Maze: A True Account (to be out by late May or early June this year). There, in Appendix II, I used the actual salary amounts and number of years spent without any promotion, or rewards, and found out that I, in fact, was losing each year the purchasing power of the salary at hand. In this post, I want to share that example with you, along with some of its implications.

Illustrative example (based on factual data):

I started working at one of the Canadian federal departments in 1970. My starting salary was close to $11,000. By 1978, the salary moved to $32,000. And by the time I retired in March 2012, I was making close to $93,000. The corresponding ‘all items’ Consumer Price Index (CPI) with (2002=100) for 1970, 1978, and 2012 are 20.3, 36.6, and 121.7 respectively.

Let us now look at the components of change in salary between 1970 and 1978 and between 1978 and 2012 – the change due to rising inflation only, and the real change due to promotion/advancement.

The difference in 1978 and 1970 salary: $32,000 – $11,000 = $21,000
Increase in 1978 salary due to the change in CPIs (or inflation alone) = $11,000 x (36.6/20.3) = $19,833
Now the difference of $21,000 can be re-expressed in terms of two components: $21,000 = ($32,000 – $19,833) + ($19,833 – $11,000)
= $12,167 (real change due to promotions) + $8,833 (change due to inflation)
100% = 58% + 42%

So between 1970 and 1978, 58% of the change in my salary was due to promotions and the other 42% to strictly inflation.

Following the same steps, the change in salary between 1978 and 2012 was: ($93,000 – $32,000) = ($93,000 – $106,403) + ($106,403 – $32,000)
where $106,403 is simply the increase in 1978 salary due to inflation (= $32,000 x (121.7/36.6)).

This shows that by the time I retired in 2012, I was making even lesser than the inflation-adjusted 1978 salary – never mind making any real gain due to any promotion (which I didn’t get).

So between 1978 and March 2012 (399 months), I was short of $13,403 in order to simply keep up with the inflation.

Put it another way, I lost about $34 (=$13,403/399) a month, or $408 ($34 x 12) a year in the purchasing power of salary at hand. In the eyes of the world, I was working full-year full-time, but with each passing day/year, I was losing the purchasing power of money. Isn’t it ironic?

That’s why I mentioned at the outset that working too long with the same employer isn’t economically healthy for workers with stagnant, or periodic union-negotiated increases in salary.

Post’s message:
Employees working with the same employer over a long period, with no promotion or advancement, but simply periodic union-negotiated increases in wages and salaries are likely to be losers as they would be losing the purchasing power of their salary at hand. One can say one is fully employed and getting a salary, when in fact, the rising inflation over time would steadily keep chipping away one’s purchasing power. Employees have to make up this loss by looking at other sources of income including moonlighting, use of personal savings, and/or debt.

For paid workers, the only way they can beat the inflationary changes and protect their purchasing power is to keep on making career advances and make real gains in wages and salary. But there eventually comes a point when such workers either come to the end of their road as they lack any further opportunity, skills, connections, personal marketability, etc. From that point on, they are on the way to lose the purchasing power of their salary at hand.

Business people and those self-employed on own account, on the other hand, can always beat inflation by steadily rising prices of goods and services they sell. This group would lose its purchasing power only when their business isn’t doing well, or they have slowed down on account of their poor health, or other volatility in the market. Other than that, self-employed persons pave their own paths to prosperity. They are not limited like their paid counterparts – always vulnerable to the personal biases and whims of their employers.

What does the future hold?
First, on the rising rate of inflation.

In Canada, the rate of inflation (measured in terms of the change in ‘all items’, or’core items’ (as used by the Bank of Canada) CPI was rampant in the seventies and eighties. For example, all of the goods and services that cost me $1.00 in 1970 were costing me $2.17 in 1980, $3.86 in 1990, $4.70 in 2000, $5.74 in 2010, $6.00 in 2012, and $6.33 in 2016. So during my work life (1970 – 2012), I witnessed the cost of living move up six times, and 6.33 times by 2016. The percentage decomposition of the change in ‘all items’ CPIs showed that 42% of the total change occurred in the 1970-80 decade, followed by 31% in the 1980-90, 11% each in the next two decades (see charts).

Post_CPI_Chart 1

The Canadian rate of inflation has been hovering around 2% a year since 1992 (with the exception of the year 2002-03 with a rate of 2.8%, and 2010-11 with the highest rate of 2.9%). With the rate of inflation low and stabilized, employees with long job tenure and stagnant wages and salaries would be losing their purchasing power steadily, but at a much slower pace.

Second, on the rising number of employees with long tenure.

It’s well-known that Canada’s population is aging, living longer, and among those working, a good proportion is opting to work longer. Since the job or occupational mobility decreases with age, it’s likely that those working longer would be extending their employment with the same employer. According to Statistics Canada, 23.8% of all 9.7 million employees in 1976 had worked for the same employer for more than ten years; four decades later, in 2016, their proportion had risen to 31.4% of the total of 18.1 million. The proportion of those working more than twenty years with the same employer had risen from 10.2% to 12.6% (see chart).

Post_CPI_tenure

Of the additional 8.3 million employees between 1976 and 2016, 40.3% were working for ten years or more for the same employer. Evidently, more and more employees are staying put either because of the rapidly changing economy, technology squeezing some old and traditional jobs out and opening, in turn, some new and challenging ones, widening the gulf between those with and without proper marketable skills.

All these changes are likely creating, in turn, a phobia among employees to change employers. They must be living with the premise that a job at hand is better with the current employer than running a risk of losing it with a new employer. For them, the grass on the other side of the fence may not be all that greener after all.

Your suggestions/comments on this or any existing post are always welcome.

Tags:
Employee, job tenure, CPI, rate of inflation, income, salary, wages, savings, debt, purchasing power, decomposition of change.

Our changing economy

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Introduction

The concept of expanding or shrinking economy is not new. You likely read about it regularly in newspapers. The country’s economic output is measured in terms of the total value of goods and services produced, or as economists named it, gross domestic product (GDP). A month-to-month or year-to-year increase in GDP indicates that the economy is expanding whereas a decrease indicates that it is shrinking. The GDP is valued in terms of both current market prices, or in terms of prices of a given base year in order to remove the effect of fluctuating prices or implicit inflation. The GDP adjusted for inflation is called the real GDP – a universally recognized conventional measure of economic growth or recession.

Do you ever wonder about the makeup of GDP in terms of the sub-sectors of the economy or industry groups? After all, the strength of an economy depends not only on its resource base, but also on the type of industrial infra-structure it maintains, providing jobs, investment, and earning opportunities to its population.

This post provides readers a bird’s view of the composition of GDP by industry groups – groups similar to those used by our American and Mexican counterparts, as agreed upon under the North American Free Trade Agreement (NAFTA). To illustrate the changing nature of the economy, I have chosen two time points: the years 1997 and 2015 rather than yearly data to conserve space. Industry groups are classified first into two main sectors: goods-producing, and service-producing. The former consists of five industry groups, and the latter thirteen – thus showing a breakdown of GDP by eighteen industry groups (as listed in Table 1).

While highlighting the makeup of GDP (in chained 2007 dollars, as published by Statistics Canada) by industry groups, I also look at the number of persons employed (full and part-time) by industry groups (Table 2) in order to see if an industry contributing the most to GDP also employs the most. One would usually expect that but that’s not the case.

GDP by industry group

In 1997, goods-producing sector contributed 35% of Canada’s GDP, valued at $1,072 billion (Table 1). By 2015, this sector’s contribution reduced to 29.8% of GDP of $1,649 billion. This shows that between 1997 and 2015, Canada’s goods-producing sector lost ground – mainly the manufacturing industry that has lost its contribution to GDP from 14.7% to 10.6% for several reasons including the outsourcing, lack of investment, technology, and short of skilled manpower. Construction industry is the only one that increased its contribution from 6.0% to 7.2%.

Table 1_GDP by industry group

Over the same period, Canada’s service-producing sector has increased its contribution to GDP from 65.0% to 70.3%. Only five out of thirteen industry groups in the service-producing sector increased their respective contributions: retail and wholesale trade, finance and insurance, real estate (including owner-occupied dwellings) and rental and leasing, and professional, scientific and technical services. The last group, comprising professionals, with a lot of human capital, technical and high skills, has increased its contribution from 5.4% to 6.3%.

It may be noted from Table 1 that of the $577 billion real increase in GDP between 1997 and 2015, 80% is generated by the service-producing sector – one-half of it from four industry groups alone: wholesale and retail trade, real estate and rental and leasing, and professional, scientific and technical services. Among goods-producing industries, construction industry accounted for 9.4% and manufacturing for mere 2.8%.

Employment by industry group

In 1997, there were 13.7 million persons 15 years old and over were employed – 26.1% in goods-producing and 73.9% in service-producing sectors. By 2015, the respective proportions were 21.6% and 78.4% of the 17.9 million employed. The proportion of those employed in manufacturing dropped significantly from 14.7% to 9.5%. Some of these likely found jobs in construction industry, hitching up its proportion from 5.3% to 7.6% (Table 2). Industries that benefited the most in the service-producing sector were professional, scientific and technical services, health care and social assistance.

Table 2_Employment by industry group

Of the additional 4.2 million persons employed between 1997 and 2015, only 7% got employment in goods-producing sector; the remaining 93% found jobs in service-producing industries – mainly in health care and social assistance (21.4%), and professional, scientific and technical services (13.8%), and retail trade (9.4%).

Output contributed per employed

Since industries in goods-producing sector are more likely to be capital-intensive, with state of the art technology, requiring skilled labour force, the output per employed person is likely to be higher for those employed in this sector than that of their counterparts in service-producing industries. For example, the output per employed person is the second highest ($350-$400 K) in the forestry, fishing, mining, quarrying, oil and gas, compared to ($78-$102 K) for manufacturing, and the lowest ($28-$29 K) for those in the accommodation and food services. The highest ($500-$700 K) was found for the real estate and rental and leasing industry but that was because it included owner-occupied dwellings, renting of homes, leasing of autos, etc. – so it really can’t be compared with the output per employed person.

No association between industry’s size of contribution to GDP and its number employed

An industry’s requirement of labour depends on the type of product(s) its manufactures, capital intensity, level of automation or technology, competitiveness, demand for its product(s), and several other considerations. Usually, a capital-intensive and fully automated industry would require lesser number of persons on its payroll. Since mining, quarrying, oil and gas, as well as utilities industries fall into this group, their relative contribution to GDP is way higher than the share of total employed. Data in Tables 1 and 2 support this, showing ratios between 2.19 and 3.34 for these good-producing industries. In the same fashion, wholesale trade, finance and insurance, and real estate and rental and leasing have ratios greater than one among the service-producing industries. On the other extreme, accommodation and food services industry contributed 2% of GDP but has around 7% of the total employed.

Conclusion

The Canadian economy has been steadily changing, leaning more and more on service-producing industries. With the exception of a very few industries like professional, scientific and technical services, health, education, finance and insurance in this sector requiring workers with higher education, technical and specific trade skills, resulting in higher payouts, this increasing reliance on service-producing sector may affect not only earnings levels of Canadians, but also their living standards.

Tags: Economy Industry GDP Employment Goods-producing Service-producing Contribution to GDP