Prime Minister Justin Trudeau has already announced about $1-billion in emergency funding to fight the spread of the coronavirus, but the federal government is now examining further fiscal measures to support the economy.
Stock markets are tumbling, businesses are slashing capital spending plans and layoffs are looming as the twin blows of the novel coronavirus and plummeting oil prices pummel the Canadian economy. But Ottawa has ample scope for action to intervene.
The Parliamentary Budget Officer says the federal government has $41-billion in “fiscal flexibility,” the amount that could be spent on increasing spending or cutting taxes without imperilling the long-term fiscal health of the country. “Absolutely, there’s a capacity there,” says Kevin Milligan, professor of economics in the Vancouver School of Economics at the University of British Columbia.
Economists say Ottawa could take a wide range of steps, everything from an emergency increase in monthly benefits to seniors and families with children to a temporary holiday on payroll taxes – or even a cut to the Goods and Services Tax to prevent Canadians from freezing their spending.
Another advantage for governments is the cost of borrowing, already low before the Bank of Canada cut interest rates last week. That will reduce the long-term costs of emergency fiscal stimulus, but only if governments are disciplined enough to roll back spending increases or other measures, warns Peter St. Onge, senior economist with the Montreal Economic Institute.
The federal deficit for fiscal 2020-21, pegged at $28.1-billion in December, would likely increase to between $35-billion and $40-billion even without additional spending or tax breaks, says Jack Mintz, president’s fellow at the University of Calgary’s School of Public Policy.
With stimulus measures, the deficit could easily top $60-billion, he said. Mr. Mintz, a fiscal conservative, agrees that Ottawa has the fiscal capacity to ramp up stimulus, but he questions whether there is political willpower to roll back those measures when they are no longer needed. “They have the firepower. The big problem is what you do after.”
That issue is even more pressing for the provinces. Several, including Alberta and Ontario, have much less fiscal flexibility than Ottawa, Parliamentary Budget Officer Yves Giroux says. “They can engage in short-term stimulus, because the costs of borrowing are very low. But the key is, short term. When it comes to government expenditures, it tends to be very difficult to stick to a short-term stimulus."
In a note issued Wednesday, the Bank of Nova Scotia said a stimulus package of 1 per cent of GDP (equivalent to about $23-billion) needs to be rolled out starting in April to avoid the economy contracting in the third quarter. Below is a look at some of the options for Ottawa.
Increases to benefit payments: Ottawa already sends regular payments to senior citizens, families with children and lower-income Canadians through programs such as Old Age Security, the Canada Child Benefit and GST credits. Prof. Milligan says increasing those payments would be a simple way to get money into the hands of Canadians most likely to spend those dollars. Similarly, expediting income-tax returns for lower-income Canadians could provide a simple, and inexpensive, fiscal boost, University of Calgary professor Lindsay Tedds and research associate Gillian Petit said in a report published Wednesday.
Payroll tax holiday: Reductions in payroll taxes such as Canada Pension Plan and Employment Insurance contributions could be an early way to provide economic stimulus since such a move could quickly put extra money into the pockets of businesses and workers. Canadian Manufacturers and Exporters is among those pushing for a reduction in employer contributions, with the industry group saying lowered premiums would allow companies to conserve cash and avoid laying off workers. In the United States, President Donald Trump has floated the notion of a cut in payroll taxes.
GST reduction: If the challenge is to persuade Canadians to spend, a cut in the national sales tax is a logical route, Mr. Mintz says. One obvious advantage: Canadians would not be able to hoard this tax break. But it would be costly; the PBO estimates that a one-percentage-point reduction would cost the federal government $8.3-billion a year.
Infrastructure spending: It’s a favourite of politicians, perhaps because it is so visible to voters. But economists are less enthusiastic, in part because of timing. The full impact of increased spending on infrastructure projects is likely to arrive after the economy has already started to recover, as was the case in the federal stimulus program in the wake of the 2008 financial crisis. Mr. St. Onge also points out that such spending is a blunt instrument for offsetting the economic effects of the coronavirus – if the retail sector is suffering, billions splashed on new roads will be of only indirect assistance. "You’re trying to water a flower with a rainstorm,” he says.
But Mr. Mintz says a creative use of infrastructure spending may be of more use in cushioning the impact of lower oil prices. A program to pay for the rehabilitation of orphan oil wells would give targeted relief to unemployed energy sector workers, he says.
Flow-through shares: Alberta Premier Jason Kenney said earlier this week he will ask Ottawa to broaden the approved uses of flow-through shares, a type of equity financing in which companies transfer their rights to certain tax deductions to investors, to spur investment in oil-well reclamations and green technology. Richard Eisenbraun, partner at Borden Ladner Gervais LLP in Calgary, said such shares could help smaller companies in the current economic environment. However, he said, this month’s sharp decline in equity markets means that fewer high-income individuals would need to find ways to offset capital gains.
Although the federal government has considerable room for fiscal stimulus, the costs of any action will mount quickly. Below are some estimates from the Parliamentary Budget Officer’s online tool for the price tag for several options for bolstering the economy.
Fiscal stimulus by the numbers
$8.3-billion: Reduction in GST rate to 4 per cent from 5 per cent
$4.1-billion: Reduction of lowest income-tax bracket to 14 per cent from 15 per cent
$2.8-billion: Increase of $200 in adult GST credit for a family of four
$1.9-billion: Reduction in corporate income-tax rate to 14 per cent from 15 per cent
$1.5-billion: Increase of $250 in Canada Child Benefit
$890-million: Reduction in small business income-tax rate to 8 per cent from 9 per cent
Source: Parliamentary Budget Officer
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