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The federal government has extended emergency benefits for millions of Canadians, just ahead of a July 5 deadline when many of the unemployed who lost work in the early days of the novel coronavirus crisis would have been cut off from income support.

But Ottawa’s decision to expand the total amount an individual can be paid under the Canada Emergency Response Benefit (CERB) to $12,000 from $8,000 deals only with the immediate issue of that looming cut-off, set down in March, when there were still hopes of an early economic rebound.

“That will buy families some time,” said Tammy Schirle, professor of economics at Wilfrid Laurier University in Waterloo, Ont.

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Left unaddressed are two much trickier questions: how to remove disincentives that discourage employees from returning to the workplace and how to keep a broad swath of the unemployed covered once the CERB eventually winds down.

Currently, the structure of the CERB heavily penalizes a recipient that works more than a handful of hours. Recipients can earn up to $1,000 without losing any of their $2,000 monthly benefit. But if they earn even just one additional dollar, they forgo the entire CERB payment, effectively paying a tax of $2,000 on $1 of income. An unemployed person would need to earn the annual equivalent of more than $36,000 before they would profit from returning to work.

Businesses, including the Canadian Federation of Independent Business, have criticized the structure of the CERB, saying some employees are refusing work and remaining on the benefit.

But analysis by the Parliamentary Budget Officer suggests that while the disincentive effect of the CERB is real, it is not a widespread phenomenon, at least not yet.

In a costing report released on June 10, the PBO said the extension of the CERB would cost $57.9-billion between June and the end of January, including what the parliamentary watchdog called $3.8-billion in “behavioural response” from recipients. (That estimate assumes that recipients are eligible for up to $14,000, slightly more than the changes announced this week.)

Plainly put, the behavioural-response estimate attempts to capture the cost of providing benefits to Canadians who have opted to either limit the hours they work to avoid being cut off from the CERB or to avoid working altogether. The PBO is not publishing its estimates of the size of each group. But the group of Canadians limiting their work is relatively small, the agency said.

The group forgoing work altogether is slightly larger. But even when the two groups are combined, they are still a relatively small part of the overall labour force. In dollar terms, the PBO’s estimates show about 6 per cent of benefits being paid to those who avoid at least some work.

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The projections are based on the PBO’s analysis of March and April employment data, and represent an estimate, not a count.

Peter St. Onge, senior economist with the Montreal Economic Institute, said the surprise uptick in employment growth in May indicates that the disincentive effect of the CERB will soon be a significant issue, unless its structure is changed.

The relatively muted effect of the CERB on discouraging work, at least as estimated by the PBO, means it could end up costing Ottawa more if it changed the program to remove disincentives. The PBO examined a scenario with a relatively generous approach to easing disincentives, with recipients allowed to keep 50 cents of each dollar they earned beyond $1,000 a month (the same clawback rate used for the employment insurance program). The CERB would fall gradually, ending only once a recipient’s monthly income reached $5,000.

Under that scenario, the costs resulting from Canadians forgoing work because of disincentives would fall by $600-million to $3.2-billion, the PBO estimates. But the overall cost of the CERB would actually rise significantly to $64-billion – a $6.1-billion increase, in part because some Canadians who would have returned to work in any case would continue to receive benefits.

A second PBO analysis released this week also indicates that changing the CERB to remove disincentives would prove more costly. In that report, the PBO estimated the cost of instituting the 50-per-cent clawback to be $967-million, with a start date of July 5. That analysis did not include the increases to the eligibility periods announced this week, and assumed that large numbers of Canadians would exhaust their benefits by July 5. As a result, the estimated additional costs were much smaller.

Prof. Schirle said she is not surprised that the CERB is discouraging relatively few unemployed Canadians from returning to work. Many of those whose incomes are low enough to face that disincentive work in sectors that are still largely closed down, she said. But she said the government should act quickly to allow for a gentler phase-out of benefits in order to speed the return to work once those restrictions ease.

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A longer-term challenge awaits when the CERB expires, currently slated for early October. Prof. Schirle said one major advantage of the CERB is its reach; it includes workers who would not have qualified under EI, including the self-employed. She said a quarter of CERB recipients would not receive EI payments. With unemployment at historically high levels – Statistics Canada said five million Canadians were out of work in May – that could leave large numbers of workers without any benefits after early October.

Tax and Spend is a weekly series that examines the intricacies and oddities of taxation and government spending

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