Keeping businesses afloat in the short run merely postpones the stress on our financial system, government finances, and ultimately the recovery itself, writes Philip Cross in the Financial Post. Below is an excerpt of the article, which can be read in full here.
By Philip Cross, July 17, 2020
Justin Trudeau justified Canada’s record $343-billion (and counting) deficit by saying the federal government borrowed for Canadians during the pandemic so they didn’t have to. What he left unsaid was that the income support was almost exclusively directed to households, not businesses. But without a recovery of the business sector there will be no sustainable growth in Canada.
The business sector increasingly struggles to finance itself. Last week’s financial snapshot revealed that the government has done little to help businesses cut their borrowing. Keeping firms afloat in the short run only to see them swamped by too much accumulated debt merely postpones the stress on our financial system, government finances, and ultimately the recovery itself.
The key to recovery for firms is finding a mechanism that addresses their excessive debt loads. Firms in Canada entered the government-mandated shutdown of non-essential services with historically high debts, partly the result of years of tantalizingly low interest rates offered by central banks.
All this borrowing has forestalled a rash of business failures but firms’ high and accelerating indebtedness at a time of declining revenues means many eventually will become insolvent. Delaying rent or tax payments, as many have been able to do, merely means these expenses will come due just as the moratorium ends, with no guarantee revenues will return to the pre-crisis or higher levels needed to pay deferred expenses.