The federal government this week announced
its fiscal response to the growing economic downturn caused by
the risks and responses to COVID-19. In total, Ottawa will directly spend up to
$27 billion to support individual Canadians and businesses. Many of these
measures announced will effectively stabilize income for Canadians and
businesses, which is the key to mitigating
the economic downturn.
It’s first important to recognize that the
federal initiatives do not include the automatic
measures already underway through programs
like employment insurance (EI), which automatically collects less revenues
through the EI payroll tax as unemployment increases while simultaneously
spending more on EI benefits. These programs are already stabilizing income for
affected workers.
Additional changes announced by the
government, including quicker eligibility for EI, providing income support to
workers and Canadians not covered by EI ($5.0 billion), and extending benefits
to workers whose normal work hours are reduced, are all positive measures that
will stabilize household incomes. In addition, these income-support measures
seem to piggy-back on existing programs, making it easier for Canadians to gain
access and receive the support needed quickly.
Other measures including delaying tax
payments, introducing flexibility on mortgage repayments (for six months), and
reducing the level of mandatory withdrawals from RRIFs to avoid financial
losses will also provide some financial relief to Canadian households adversely
affected by the economic downturn.
In evaluating these changes, it’s important
to remember that the economic disruption caused by COVID-19 and the response to
it, including shutting down major sectors of our economy, is very different
from previous recessions.
Many of the measures announced to support
businesses also appear quite positive, though details are not yet available.
For instance, providing liquidity and financial support to affected businesses,
if designed and administered properly, could provide certainty in an incredibly
uncertain time, which will help stabilize the economy and eventual recovery.
However, the details and actual administration of these programs will be
critical in their ultimate success.
For instance, the plan to support businesses
and prevent layoffs by providing a subsidy of up to 10 per cent of payroll (up
to a maximum of $1,375 per worker and $25,000 per company), which will be
financed by allowing companies to reduce their remittances of income taxes,
could be an administrative nightmare for both the government and firms alike.
In addition, it’s not clear what this initiative achieves that could not have
been more easily achieved through the existing EI program and other measures
announced by the government such as the Emergency Support Benefit.
Thankfully, the government wisely ignored the
calls for accelerated infrastructure
spending. While most economists agree that better infrastructure improves
the economy, infrastructure spending remains a poor response to recession,
because it takes significant time to plan and execute so by the time the
spending actually occurs, the recession is usually over.
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| Canada's Finance Minister Bill Morneau |
Finance Minister Morneau hinted that
additional measures were in the works to stimulate the economy once this
immediate crisis has stabilized. Hopefully he recognizes the reality of
infrastructure spending as a response to recessions and indeed his own
government’s poor record on using infrastructure to improve the economy.
Finally, economists at several of Canada’s largest banks were
calling for large-scale stimulus to improve the economy including enhancing the
Canada Child Benefit (CCB). The government announced several measures along
these lines that will likely be less-effective and more expensive than the
other initiatives announced.
The government, for instance, announced temporary
increases to the GST credit (estimated cost of $5.5 billion) and the Canada
Child Benefit (estimated cost of $2.0 billion), which are less effective ways
at targeting income support than measures linked with EI and changes to worker
employment.
Moreover, these measures will likely have
little, if any, stimulative effect on the economy. The experience with such
temporary income transfers in Canada,
the United States and elsewhere is fairly clear — they don’t
“stimulate” people into spending more. People generally understand these
transfers are temporary and subsequently, most people use the extra one-time
(or temporary) money from government to pay down debt or save, which improves
their household balance sheet but does little to “stimulate” the economy.
Overall, though, the government’s response to
the economic downturn from COVID-19 seems to be measured and well-targeted at
income stabilization, which is key to mitigating the current economic downturn
and establishing the foundation for recovery.
AUTHORS:
Niels
Veldhuis (President, Fraser Institute)
Jason
Clemens (Executive Vice President, Fraser Institute)
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