Canada’s Failing Middle Class
The average middle class household in Canada is now in the poorest financial position since 2000. According to data from the OECD, following years of growth since 2015, take home pay for an average Canadian household has fallen. This financial reality exists in addition to inflationary pressures stressing household budgets, plus the growth of household debt which was explored in a recent memo. These compounding challenges arising in a growingly cautious economy should provide pause for policy-makers.
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The most recent tax data, after accounting for a suite of income supplement programming like the Canada Child Benefit and the Canada Workers Benefit which help negate the bite of income taxes, found that the average Canadian worker faced a net effective tax rate of 25.1 percent in 2021; compared against the lower OECD average of 24.6 percent. In other words, the average Canadian has a take-home pay of 74.9 percent of their gross wage, meaning they are poorer when compared to the OECD average of 75.4 percent.
Now looking at Canadian households. Using a proxy measurement of the average married worker with two children, the net tax rate was 13 percent in 2021. This means the average household with children had a take-home pay of 87 percent of their gross wage. But, in the prior year, this middle class household kept 99.3 percent of their gross income, and during the years of 2016-20 this rate was 98.48 percent. At face value, Canada’s middle class has returned financially to the millennium.
Why the decline? Is it that income supplement programs are not keeping up with inflationary pressures facing Canadian households? Even if indexed to inflation, there can be real and unintentional inflation-peg challenges. In a previous memo we even discussed the political nature of inflation measurement. Or is the issue structural on a program basis? Given the fundamental changes in the economy since the pandemic, these programs may now be ill-designed, failing to match affordability stresses facing the middle class in the current era.
Today, inflation is being felt acutely in key areas, mainly: transport, food, and housing, collectively accounting for roughly half of price growth over the last year in Canada. But these pressures are not being felt evenly by all segments of society. Private sector forecasts find that middle class households, who hold a higher share of spending on food and transportation relative to other income groups, have experienced inflation with greater impact. Here these households do not adjust their food consumption patterns - they are price-takers. Today, households are left spending more on basic necessities, where prices for eggs have increased 15.8 percent, bread at 13.6 percent, and supply-managed dairy has increased twice this year.
Inflation and a cautious economy leave middle class households in a financially vulnerable position. When core income support programs fail to support households, it can leave citizens questioning the purpose of these supports in the first place, and the elites who tout programming benefits. Given the whirlwind of economic changes since 2020, a structural stock-take of income-support programming is needed to ensure that the middle class is indeed being supported - adequately. Politically, a new middle class mandate needs to be clearly articulated in Canada.
Why? If we are to drill down further into who this matters for the most, within these households there is an acute risk at play. Children in lone-parent families, in-majority led by single mothers, are more than five times as vulnerable to a life of poverty, given uncertain household budgets, per Statistics Canada reporting. A failure to revise, ensures that important programming fails to hold a meaningful level of support, and uphold its intended purpose for households. Because fundamentally, there are average people, and children, behind these statistics.
Taxing Wages - Canada, OECD
“In Canada, the tax wedge for the average single worker decreased by 2.6 percentage points from 34.1% to 31.5% between 2000 and 2021. During the same period, the average tax wedge across the OECD decreased by 1.6 percentage points from 36.2% to 34.6%.”
More Young, Middle-class Americans Flock to Dollar Stores, Seeking a Refuge From Inflation, MarketWatch
“Turning their attention to dollar stores in an effort to cut back on their spending as record-high inflation continues to put pressure on their wallets. But these customers are also younger, and hungry for a bargain…Most of this new influx of customers are making $50,000 to $75,000 a year, and some make up to $100,000 a year, he told investors. The core Dollar General customer typically has an annual household income of $40,000..told investors last week that new customers were coming into both Dollar Tree and Family Dollar over the last year, and the majority belonged to households making $80,000 a year or higher. ”
Inflation’s Toll on Canadian Families: The Fire is Hottest in the Middle, TD Economics
“Inflation finally receded in July as gasoline prices eased, but an elevated reading of 7.6% leaves Canadian households still feeling the burn of higher prices. Middle-income households’ spending on transportation and food puts them closest to the line of fire. Their inflation rate averaged 8.1% year-on-year (y/y) over the three months ending in July 2022, higher than the corresponding headline rate of 7.8% y/y over those months. Rising costs will push families to alter spending, but this is easier for households with a larger share of discretionary spending.”