Federal and provincial governments still need to do much more to fight the pandemic and economic crisis — and they need to do it fast, writes Jack Mintz.
By Jack Mintz, March 26, 2020
The federal and provincial governments need to go BIG with a major, co-ordinated economic package to fight the pandemic and resulting economic crisis. The first federal package has been passed and new rebates have just been announced. But we still need much more and we need it fast.
With the seizing-up of the economy, GDP will tank starting in March and will stay submerged until people can get back to a normal life. Uncertainty over how long social distancing will be needed adds to the difficulty. If it’s relatively short, we can cope. If it goes on for months, the economic problem becomes more serious. Current U.S. forecasts, which are guesses at best, predict a decline in the second quarter ranging from 10 to 20 per cent with a rebound in the fall, helped by global monetary and fiscal stimulus. Canada’s immediate downturn could be even worse, given the double whammy of falling commodity prices on top of COVID-19.
The foremost and immediate issue is liquidity.
Many businesses have seen a virtual collapse in revenues and face potential bankruptcy. Some, like trucking, are critical for delivering household and other essentials. Many laid-off workers will be short of money to cover rents, mortgage payments, utility bills and putting food on the table. Many self-employed persons have seen their business fall off, while providing schooling and childcare at home complicates any work that does remain. Thousands of workers need to be protected from the coronavirus so they can make sure the rest of us have access to medical needs and basic necessities. This includes the complicated supply chain of transport, manufacturers, energy providers and others critical to the availability of supplies. Even worse, if credit problems get severe enough, provincial and local governments and their agencies may find it difficult to place new debt.
All is not lost, though. Retirees and low-income Canadians living on government transfers and defined-benefit pensions have no loss in income. Many public and private workers will remain employed. Some companies — grocery stores, Amazon and Walmart — are even hiring. These people won’t need help.
So far three approaches have been pursued in the wake of this severe economic fallout.
The first is to allow deferral of various payments, including income taxes and loan and mortgage payments. That’s good but it’s not enough. Payroll and property taxes should also be deferred for a period. So should utility bills. Though deferrals will swell government deficits, most of the money will be recovered. The budgetary cost is only interest expense (and interest rates are low) and any unpaid balances. Because eventual payback won’t be easy for Canadians living paycheque to paycheque or for businesses short of cash in a recovering economy, governments will need to allow breathing time for repayment.
The second approach has been income support for workers laid off temporarily. Ottawa is using EI to encourage work-sharing and is providing emergency benefits to workers and parents who don’t qualify for EI. It is also boosting both the GST credit and Canada Child Benefit, which are income-tested. Being temporary, these measures won’t involve recurring expenditures or deficits. But some of this help is too slow and targeted. Laid-off workers who had good incomes in 2019 receive no GST credits or child benefit payments even if they lose all their income in March and beyond.
The third approach has been to support businesses so they don’t go bankrupt but keep paying workers, even those on leave, which lessens demands for EI and other supports for individuals. Measures so far include: deferral of corporate tax payments (but not yet GST/HST or property and payroll taxes); a 10 per cent federal wage subsidy for small businesses; sharply lower interest rates and the opening of Bank of Canada credit facilities to maintain liquidity in markets, with special support for small and medium-sized businesses.
This is all in the right direction but too tentative. We need a major expansion of credit facilities to support businesses with repayable, and in some instances, guaranteed loans, especially for firms hit hard by revenue loss, including many large companies like airlines, hotels and commodity-based producers — subject to the condition that firms receiving such support not increase dividends or buy back shares. Large-scale lending of this sort will help keep many businesses in play for (we all hope) a strong recovery this fall.
The federal government could also consider a major wage relief program on British, Dutch or Danish lines covering 75 to 90 per cent of wages up to a specified maximum. This could be a mixture of repayable or forgivable loans delivered through the banking system. Some sectors with good cash flows — public administration, banks, utilities, grocery chains — would not need the subsidy.
We obviously also need to spend quickly on more capacity in the health-care system to avoid catastrophic economic losses should the pandemic re-surge after this initial crisis. Freezing the economy in place is not something we want to do every few months.
I don’t know the overall cost but four per cent of GDP should be manageable (one per cent of GDP being $23 billion). The federal deficit, budgeted last fall at $28 billion, might reach as high as $120 billion, with higher provincial deficits on top of that. Yes, that’s a worry for the long haul. And, yes, people and governments should have saved more in the past for rainy days like this. Nor, finally, do we want to teach people they never need to take preventive actions because governments will bail them out.
The time for such debates will come soon enough. The immediate necessity is to think BIG to avoid a long, deep recession.
Jack M. Mintz is the President’s Fellow at the University of Calgary’s School of Public Policy and is a Distinguished Fellow at the Macdonald-Laurier Institute.