Duelling reports: Finance rebuts grim analysis by another federal department

Finance Canada has issued a rebuttal of a politically embarrassing report on middle-class economic woes that was compiled last fall by experts in another federal department.

OTTAWA — Finance Canada has issued a rebuttal of a politically embarrassing report on middle-class economic woes that was compiled last fall by experts in another federal department.

The duelling analyses highlight an economic issue almost certain to dominate the federal election campaign next year, as political parties cite the same data to make opposite points.

Last October, bureaucrats at Employment and Social Development Canada wrote a scathing internal report on the plight of the middle class, calling the Canadian dream “a myth more than a reality.”

The report, obtained by The Canadian Press under the Access to Information Act, was immediately hailed by opposition parties as proof of the financial straits of Canadian families, but it was dismissed by cabinet ministers as outdated and misleading.

In April this year, Finance Canada economists put together a more detailed rebuttal for the new minister, Joe Oliver, using the same data but interpreting them in a more positive way.

The report for Oliver, for example, concludes that “controlling for the changing composition of families, income of the Canadian middle class has grown strongly since 1976…. All major family types benefited from strong income growth.”

The analysis faults Employment and Social Development Canada for weak methodology, and for delivering a different message from that of the Feb. 11 federal budget.

“Their analysis arrives at conclusions — namely that middle-income families have stagnant wages, are unlikely to move to higher income groups, and are increasingly indebted — which appear to conflict with the general message in Budget 2014 and previous internal briefings,” says an accompanying briefing note for Oliver.

Copies of the rebuttal material, with some significant sections censored, were obtained from Finance Canada under the Access to Information Act.

The new analysis, entitled “Income Equality and the Middle Class: Recent Trends,” also uses data up to 2011, whereas the previous report covered the period only to 2007.

While the latest report paints a rosier picture, it also warns of problems ahead.

For example, the authors play down the claim that the middle class is more indebted than other groups, saying households at all income levels show the same levels of indebtedness.

But they also warn that “high levels of household indebtedness and the fact that a significant portion of middle-income families spend more than they earn do pose risks to the economic outlook.”

The Finance Canada study also acknowledges that the key driver of middle-class prosperity in Canada has been women workers, more of whom have been entering the workforce, upgrading their skills, moving to full-time from part-time, and getting better-paid jobs.

The wages they have added to middle-class households have helped maintain prosperity levels, whereas previous generations typically needed only one major income earner in a household to enjoy a middle-class lifestyle.

“Higher employment rates, especially of females, account for most of the increase in working middle-class family incomes,” says the report. Otherwise, “middle-class families have not received significant hourly wages increases. This is true in absolute terms and relative to other income groups.”

The authors note that the current high employment rates of women means this avenue of income growth for middle-class families will not be available in future.

The 24-page analysis also acknowledges that income inequality has grown in Canada, as elsewhere in the industrialized world, with the wealthiest one per cent collecting 8.6 per cent of all 2011 income, compared with 5.8 per cent of all income in 1982.

Economist Armine Yalnizyan says the duelling reports show that “depending on your unit of analysis, depending on your time frame, you can make two very solid cases….”

“Clearly, Finance wants to stick with the message track that it’s got in the budget…. They’re cherry-picking the data they want to look at.”

But Yalnizyan, of the Canadian Centre for Policy Alternatives, a left-leaning think-tank, notes even Finance Canada acknowledges the party is over when it comes to women workers buoying middle-class households, because their participation rates are already high.

“That has kept the middle class from sagging,” she said in an interview. “But it’s not available as a strategy going forward.”

The Finance Canada report estimates about 70 per cent of the increase in middle-class household incomes since the mid-1990s can be attributed to higher workforce participation rates, primarily by women workers.

“There is no second wave of women, spouses, entering the workforce,” said New Democrat MP Nathan Cullen, the opposition’s finance critic.

Cullen said Conservative government policies are also exacerbating the plight of the middle class, with tax breaks that favour the rich and with no effective measures to replace some 350,000 well-paid manufacturing jobs lost in central Canada.

“It’s overstating and misrepresenting the facts to say ’nothing to worry about here — in fact, much to celebrate,”’ he said in an interview.

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