Abhay Venkitaraman
Over the past decade, Canadian governments on both sides of the aisle have implemented reforms to the country’s child benefit regime. These efforts have significantly increased the generosity of welfare provision for households with children. What impact did these policies have – and with child poverty rates on the up in the aftermath of the pandemic, what more needs to be done?
Across advanced economies, child poverty rates in the OECD generally exceed those for the general public. Child poverty has a detrimental impact on children subject to it. Alongside facing reduced life chances, children in poverty are disproportionately at risk of social isolation, reduced cognition, and psychological distress, alongside a wide range of other negative effects. Moreover, people impoverished in childhood tend to have worse labour market outcomes later in life. This increases their reliance on transfer payments, impacting society at large.
One country that has taken steps to reduce child poverty is Canada. Over the past decade, the country has taken significant steps to improve the generosity of transfer payments targeted towards households with children. This analysis will focus on two in particular: the expansion of the Universal Child Care Benefit (UCCB) in 2015, and the implementation of the Canada Child Benefit (CCB) the year after; both these reforms have succeeded at reducing child poverty rates. However, their effectiveness at doing so has waned, highlighting the need for policy reforms.
What are the UCCB and CCB?
The Universal Child Care Benefit (UCCB) was introduced in 2006 by Stephen Harper’s newly elected Conservative government. Payments were universal, meaning households were not excluded from receiving the UCCB based on their income. Moreover, they were taxable, meaning they were classified as income and therefore subject to income tax.
Initially, only households with children below the age of 6 were eligible for the UCCB. However, in 2015, the government expanded the UCCB. Eligibility was increased, with all households with children below the age of 18 being able to claim the benefit. This was accompanied by more generous payments for children aged 0-5.
That same year, the Liberals, led by Justin Trudeau, won Canada’s general election, sweeping back into power with a majority of seats. Trudeau’s government proceeded to implement a radical overhaul of the country’s child benefit regime. In 2016, three welfare benefits – the UCCB, the Canada Child Tax Benefit (CCTB), and the National Child Benefit (NCB) – were replaced by the Canada Child Benefit (CCB).
Unlike the UCCB, the CCB is means-tested and is not subject to income tax. Currently, households can claim $7,787 per year (roughly £4,400) for each child under the age of 6 and $6,570 (roughly £3,700) for every child between the ages of 6 and 17. However, once a household’s adjusted family net income (AFNI) exceeds $36,502 (roughly £25,700), the amount of benefit a household receives falls as the household’s income increases. The rate at which benefit payments taper off depends on how many children a household has.
The CCB represented a “significant increase” in benefits compared to the programmes it replaced. It put Canada in a position where its child benefit regime was “especially generous”, particularly for low-income households, compared to the rest of the OECD. This increase in generosity was augmented by the indexation of the CCB to inflation in 2018, which ensures the value of CCB payments keeps up with living costs.
However, due to the fact the CCB represented the replacement of a universal benefit with a means-tested one, some high-income families faced “reductions in benefits” due to the policy.
The impact of the UCCB expansion and CCB on child poverty
Between 2015 and 2019, the share of children in low-income families fell from 20.9% to 17.7%. Families are classified as ‘low-income’ if their adjusted after-tax income is less than half of that of the median household. (Baker et al., 2021) finds that both the UCCB expansion and the CCB reduced child poverty, although the latter was more effective at doing so.
Other measures of living standards highlight the positive impact of the CCB. Men (Men et al., 2023) notes that the more generous payments the CCB provides for children under the age of 6 have reduced food insecurity within households with younger children.
Placing Canada in a global context, the success of the policies is clear. Between 2008 and 2018, the country experienced one of the largest declines in child poverty rates within the OECD.
Canada saw a dramatic reduction in child poverty between 2019 and 2020. The share of children in low-income families fell from 17.7% to 13.5%, largely due to temporary pandemic-related welfare programmes.
However, the figure rose to 15.6% the year after and increased an additional 2.5% between 2021 and 2022. Importantly, anti-child poverty non-profit group Campaign 2000 has found that the CCB’s effectiveness at reducing child poverty has waned. Whilst, on average, the benefit has reduced the share of children in low-income households by 8.8%, it only did so by 7.8% in 2022.
The impact of the CCB on labour supply
A common concern surrounding means-tested benefits like the CCB is that they reduce work incentives. With means-testing, households gradually lose welfare benefits as they earn more. This reduces the opportunity cost of exiting the workplace and thus acts to reduce labour supply. Not only does this reduce economic growth, but the loss of labour income this disincentive generates undermines the ability of benefits to reduce poverty.
Evidence regarding the CCB’s impact on labour supply is mixed. (Baker et al., 2021) finds that the implementation of the CCB had no significant impact on the labour participation of women. However, another study finds that secondary earners in households claiming the CCB’s benefits tapered off the more they earned “[significantly] decreased” their working hours in response. The authors note that almost all of this reduction in labour supply was attributable to women.
Policy Recommendations
Make children of non-citizen parents eligible for the CCB
UNICEF Canada has noted that a household’s eligibility for the CCB is tied to the immigration status of the parents. This means that even children born and residing in Canada may be unable to access the benefit if their parents are not Canadian citizens or permanent residents. This is especially unfair, given that those parents likely pay taxes to finance benefits they cannot claim.
Allowing these households to claim the benefit would broaden the range of households eligible for the benefit, enhancing its ability to reduce poverty. This is especially the case given that immigrant households in Canada are disproportionately likely to be impoverished. That being said, implementing this policy is likely to be challenging politically, given the country’s current anti-immigrant backlash.
Universalise the CCB
As aforementioned, means-tested benefits like the CCB distort work incentives because benefits taper off the more claimants earn. Furthermore, there is some empirical evidence that suggests the CCB does this, although other studies do not concur. Given the potential reduction in labour supply stemming from the means-testing of the CCB, it may make sense for the benefit to be universalised, such that a household’s income levels do not influence how much benefit they receive. This could limit the negative impact of the CCB on labour supply – particularly if universalisation is financed through economically efficient taxes.
Alongside positive effects relating to labour supply, universal benefits are typically less complex to administer and are less prone to error and fraud than means-tested ones.
Concluding Remarks
Whilst the Canadian child benefit reforms of the past decade have left child poverty rates significantly lower than they otherwise would have been, it is clear that the country has a long way to go. The most recently available data suggests that over a million children are subject to the indignity of poverty and that the problem is only getting worse.
The aforementioned policy recommendations would likely further efforts to address child poverty in a manner that minimises trade-offs. That being said, it is unlikely they will be implemented in the near future, given a Conservative government with hardline positions on both immigration and government spending lies on the horizon.
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