Breaking down the fiscal ‘snapshot’: Employers on deck for post-pandemic economic recovery

Minister of Finance Bill Morneau rises during a meeting of the Special Committee on the COVID-19 Pandemic in the House of Commons on Parliament Hill in Ottawa, on Wednesday, June 17, 2020. THE CANADIAN PRESS/Justin Tang

The federal government says Canada’s economy would have contracted by more than 10 per cent in 2020 if not for its emergency spending to combat the economic fallout from the COVID-19 pandemic—and it’s planning to spend even more money to help employers to kickstart the country’s recovery.

Ottawa has pledged $212 billion in direct support, equivalent to almost 14 per cent of GDP, according to the economic and fiscal “snapshot” Finance Minister Bill Morneau delivered in the House of Commons Wednesday in lieu of a budget for the 2020–2021 fiscal year. It’s “the most comprehensive and substantial peacetime investment in Canada’s history,” he said—and it’s fuelled a near-record deficit. Wednesday’s update suggests Morneau’s hoping employers will drive the economic recovery, and sign up to the federal wage-subsidy program at as-yet unseen levels.

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Talking Point

Finance Minister Bill Morneau’s ‘snapshot’ suggests the federal government has kept the economy afloat through the COVID-19 crisis. But Ottawa is looking to employers to fuel the post-pandemic economic recovery, signalling an expansion to its wage-subsidy program to incentivize hiring as the deficit projection hits $343 billion.

The 10 per cent GDP decline the government claims it staved off is significantly larger than the 6.8 per cent real GDP decline private-sector economists are forecasting on average that we’re likely to see this year. Private-sector economists are predicting “a faster rebound in real GDP than in the past three recessions,” the update notes, estimating growth of 5.5 per cent in 2021. But it warns that a second COVID-19 wave and accompanying lockdown “would severely hamper the economic recovery,” and notes that Canada’s trade-heavy economy makes it vulnerable to supply chain disruptions.

The update also positions Ottawa’s economic response favourably against the governments of other advanced economies, noting that its direct fiscal support measures were worth just over 10 per cent of GDP, against the G7 average of 6.7 per cent. The government is projecting a $343.2-billion deficit in 2020–21, accounting for both its spending and the “severe deterioration in the economic outlook.” That’s up from $34.4 billion last fiscal year.

Ottawa says it’s largely kept workers afloat via measures like the Canada Emergency Response Benefit (CERB). The $2,000-a-month direct payment program has paid out $53.5 billion to 8.16 million applicants so far.  “In aggregate terms, CERB payments made from mid-March to May have largely replaced all the employment income lost by Canadians during the pandemic,” the update states. But that doesn’t mean everyone in need has been helped—in April, the Canadian Centre for Policy Alternatives estimated 1.4 million people didn’t qualify for the program.

In June, Prime Minister Justin Trudeau announced an eight-week extension to the CERB eligibility period, meaning workers who had lost their income at the beginning of the pandemic would continue receiving the payments through the end of August.

Wednesday’s update significantly increases the government’s estimate of how much the Canada Emergency Wage Subsidy (CEWS) will cost. The program currently gives organizations up to $847 per employee per week if they’ve lost significant revenue due to the pandemic. In May, Trudeau announced a 12-week extension, taking  the program through the end of August, as well as plans to amend the income drop requirements to account for the country’s gradual return to business.

Ottawa will “soon” unveil changes designed to help the CEWS “stimulate rehiring, provide support to businesses during reopening and help them adapt to the new normal,” the update states. It pegs the program’s cost at $82.3 billion, up from $45 billion in Finance Canada’s last report to Parliament, delivered in late June.

The new cash suggests Ottawa anticipates higher uptake, after the private sector was initially slow to use the CEWS. “We encourage businesses to take advantage of the program and hire more workers,” Morneau said in the House.

So far, the program has paid out $18 billion to just over a quarter-million employers, paying for the salaries of over two million employees. Small businesses have been its biggest users—employers with 25 or fewer employees filed just under three-quarters of approved applications over the first three claim periods to the end of June, per the update. But it noted that larger employers, who had more cash and credit access in the early stages of the pandemic, may be latecomers to the program.

An uptick in firms with hundreds of workers using the CEWS would help explain why Ottawa expects the program will ultimately pay out more than four times as much as it has to date. Removing revenue-reduction requirements will also contribute. For example, tech executives have noted the criteria excludes high-growth startups as well as software-as-a-service business models, despite tweaks to the program that Morneau said were designed to include them.

The update shows the CEWS has supported some innovation-economy firms. Professional, scientific and technical services companies—which includes computer systems design, outsourced R&D and engineering—were the most frequent recipients by sector, accounting for more than 10 per cent of approved applicants in each of the first three periods.

Morneau also said Ottawa’s measures have helped reduce the pressure on businesses to borrow to stay afloat. “The corporate sector didn’t need to take on nearly as much debt,” he told reporters. The update states that “bankruptcies and arrears remain low” to date, and businesses have been able to free up cash by using support programs as well as deferring financial obligations.

But not everyone agrees with Morneau’s assessment. Apart from the CEWS, Ottawa’s help for the private sector has largely taken the form of credit, not grants, Conservative small-business critic James Cumming told The Logic last month. “We’ve shut businesses down, we’ve limited their ability to create any kind of revenue and we are offering them debt instruments to try and resolve the problem,” he said, expressing concern about those firms’ ability to make deferred and interest payments in the future.

The Bank of Canada has also warned about rising insolvencies due pandemic-related cash-flow problems, coupled with all the new debt firms have taken on to survive it.

The Canada Emergency Business Account has been the most successful federal credit program so far. As of July 3, financial institutions had issued 688,000 firms $27.41 billion in partially forgivable loans of up to $40,000. “Over 65 per cent of the businesses eligible based on the payroll criteria have benefitted from the program,” the update states. That’s a partial picture, however—firms that pay their staff as contractors only became eligible at the end of June.

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Businesses have been much slower to apply to Ottawa’s other debt programs. Under the Business Credit Availability Program (BCAP), financial institutions are giving firms loans of up to $12.5 million funded by the Business Development Bank of Canada and up to $6.25 million underwritten by the Export Development Bank of Canada. They’ve issued just 148 guarantees so far, with the loans worth a combined $303.6 million; the BCAP has a $40-billion budget. “Update of these programs is expected to grow steadily over time,” the update states, citing similar programs launched during the 2008–2009 financial crisis.

The government has received about 10 applications for the Large Employer Emergency Financing Facility, which provides loans of $60 million or more to companies with annual revenues of at least $300 million. The program began accepting applications in mid-May. Its interest rates exceed market prices, so “businesses still have an incentive to seek capital in bond markets,” Trevin Stratton, vice-president of policy and chief economist at the Canadian Chamber of Commerce, told The Logic last month.