Coronavirus: Is Ottawa doing enough to save the economy?

Click to play video: 'Coronavirus outbreak: Trudeau says ‘enough is enough’ to those not complying with social distancing'
Coronavirus outbreak: Trudeau says ‘enough is enough’ to those not complying with social distancing
WATCH: Prime Minister Justin Trudeau says there is no tolerance for those flouting orders to socially distance from others in an effort to limit the spread of the novel coronavirus. – Mar 23, 2020

Forget the word recession. As the coronavirus health emergency shuts down part of Canada’s economy, experts are dusting off a word that’s been relinquished to the history books for nearly a century: depression.

“This isn’t business as usual, even for a recession,” starts a recent report from CIBC’s economics team, for example.

The paper predicts Canada’s GDP could contract by an annualized 15 to 20 per cent in the April-to-June period in inflation-adjusted terms. The unemployment rate, meanwhile, could shoot up to nine per cent, up from a reading of 5.6 per cent in February.

That isn’t the stuff of your run-of-the-mill recession, the report notes. But “it’s not the start of a lengthy Great Depression” either, the CIBC team reassures readers.

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That’s because the collapse in business activity comes from government-mandated requirements of social distancing rather than endemic weakness in the economy.

As steep as the initial plunge may be, if it is also short-lived, Canada will be able to, “with some pains,” ride out the crisis, the report predicts.

But whether the economy will indeed be able to quickly bounce back from the abyss hinges, in large part, on what the government does to help blunt the impact of the pandemic.

And while Ottawa has already announced a slew of extraordinary measures, including $27 billion in direct financial aid to households and businesses, many say Canada needs to do more — much more.

Click to play video: 'Coronavirus outbreak: Trudeau addresses efforts being made to help renters'
Coronavirus outbreak: Trudeau addresses efforts being made to help renters

Paying Canadians more to stay at home

Business advocates and economists alike are urging Ottawa to dramatically ramp up the amount it pays Canadians who’ve been forced off work amid the crisis.

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They are drawing on the concept of “freezing the economy,” with policymakers stepping in to keep businesses afloat and households solvent until the worst is over. If you can keep business closures and layoffs temporary, goes the argument, the economic recovery will be that much faster.

Experts, however, disagree on how to get there.

Some business groups are urging Ottawa to pay a significant share of employee wages to stave off mass layoffs, as other countries have done.

Denmark, for example, has said it would pay 75 per cent of employees’ salaries for up $4,700 a month. The U.K. unveiled plans to cover for 80 per cent of pay, capped at around $4,200.

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Canada, by contrast, has so far unveiled a wage subsidy of just 10 per cent. Companies would receive a maximum of $1,375 per employee for a total of up to $25,000 per employer for up to three months.

Dan Kelly, president of the Canadian Federation for Independent Business (CFIB), says that’s not enough.

As Kelly sees it, there a gaping hole in the government’s current array of emergency measures to boost unemployment benefits.

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The focus, he says, should be onhelping employers prevent unemployment as opposed to making it easier for people to get EI [employment insurance] when they are unemployed.” 

Laying off people and re-hiring them is a costly and uncertain process for businesses, Kelly says.

Employers may face severance costs and the risk of litigation, as some non-union employees on temporary layoff may be entitled to wrongful dismissal damages of up to 24 months of pay, according to employment lawyer Howard Levitt.

Click to play video: 'Coronavirus outbreak: Trudeau addresses efforts being made to help renters'
Coronavirus outbreak: Trudeau addresses efforts being made to help renters

Then there’s the question of being able to re-hire the old staff. At Habaneros Mexican Grill in Leduc, Alta., Jim Hamilton worries about what could happen if he had to bring on a new cook should the restaurant be forced to shut down for a few weeks.

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“We often see it’ll take a good month after hiring a new worker before they’re really able to execute everything,” he says.

That extra month could be the difference between being able to ramp up business fast enough to pay the bills and not, according to Hamilton.

But does Canada need a massive wage-subsidy program to help Hamilton and other employers facing a similar dilemma?

Asked about whether he is prepared to embrace Denmark-like measures to avoid mass layoffs, Prime Minister Justin Trudeau said his government has not “ruled out anything.”

Others, however, believe there’s no need for Canada to follow Europe’s example quite so closely.

A wage subsidy on steroids would be equivalent to running a generous unemployment insurance benefit through companies’ payroll systems, Corak says. And there’s no need to do that, argues University of Ottawa economist Miles Corak.

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Coronavirus outbreak: Trudeau announces Canada to spend $192M on developing COVID-19 vaccine

Instead, Ottawa should work with the social safety nets it already has, according to Corak.

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The creation of a new Emergency Support Benefit for those who don’t qualify for EI is an important step in the right direction, Corak wrote in a recent open letter to Prime Minister Justin Trudeau. As of 2018, only about 64 per cent of the unemployed were potentially eligible for EI, Corak noted.

But the federal government should also considerably increase how much it pays Canadians through unemployment insurance, Corak argues.

“In normal times, when jobs are to be had, the program’s design certainly does need to keep work incentive effects in mind,” he wrote. That’s why EI covers only 55 per cent of insurance earnings and there’s a waiting period before the first government cheque arrives.

But these are not normal times, Corak continued.

“In some sense we want Canadians to work less while giving them timely and generous income support.”

Corak suggests Ottawa boost unemployment insurance benefits to cover 75 per cent or more of workers’ pay up to at least $75,000, compared to the current cap of around $54,000.

The government should also further re-jig its EI Work Sharing program, which allows workers who agree to reduce their normal working hours to access EI benefits.

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In times when the priority is to slow down contagion rather than encourage economic activity, Ottawa could drastically cut down the number of shared hours of work required to participate in the program, Corak said.

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Coronavirus outbreak: Trudeau not ready to use the Emergencies Act yet

Businesses like Habaneros, which may be forced to shut down completely, wouldn’t be eligible for Work Sharing but could still benefit from much more generous unemployment benefits for their employees.

In normal times, a laid-off restaurant cook may quickly find a new job at another diner. But, as Corak likes to repeat, these are not normal times: with whole industries forced into temporary shutdown, companies would likely be able to re-hire their own employees without too much trouble, he argues.

And the advantage of working through already established programs is that cheques would start reaching workers quickly, Corak says.

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“With a stroke of the pen, the minister finance or the prime minister can change those [unemployment insurance] parameters.”

Canada’s own ‘bazooka’ for the economy

The federal government isn’t the only one that needs to supercharge its arsenal of weapons against COVID-19, according to some economists.

On Monday, the Federal Reserve unveiled what’s been described as a “bazooka” aimed against the economic effects of the virus.

The U.S. central bank said it will lend against student loans, credit card loans, and U.S. government backed-loans to small businesses, and buy bonds of larger employers and make loans to them in what amounts to four years of bridge financing.

A new “Main Street Business Lending Program” that will extend credit to small- and-medium sized businesses will also be announced “soon,” the Fed said.

While the move couldn’t stem a further sell-off on Wall Street, many economists greeted the move as a crucial step in ensuring credit remains available to businesses and households.

“Given the steps taken today, it is only a matter of time until we see something ‘similar’ announced in Canada,” CIBC’s Ian Pollick predicted.

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— With files from Reuters

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