Kevin Page is the president and CEO of the Institute of Fiscal Studies and Democracy at University of Ottawa. Kyra Carmichael and Nicholas Liban Dahir are economics students at the University of Ottawa.
Federal Finance Minister Bill Morneau is scheduled to release a fiscal stimulus package Wednesday to address the global COVID-19 outbreak as well as the large decline in oil prices. Aristotle said “the aim of the wise is not to secure pleasure, but to avoid pain.” Make no mistake, the fiscal stimulus needed to buffer the economic downturn is pain management.
Global health consequences from the pandemic are expected to be large. Relative to other epidemics, the novel coronavirus is proving to be highly transmissible. According to epidemiologists, it is plausible that 40 per cent to 70 per cent of the world’s population could become infected, although most cases are expected to be mild. Mortality rates are expected to be well below other coronaviruses (such as SARS and MERS), but much higher than common flu.
The economic pain is deep and pervasive because the world’s largest economies, including the Group of Seven and China, are being hardest hit. The COVID-19 economic shock includes demand, supply and confidence dimensions. While not a global financial crisis like 2008-09, it has the potential to be as painful for Canadians and complicated for policy makers.
Like epidemiologists who estimate curves to assess disease spread, economists have outlined phases to assess economic contagion across various transmission channels. These economic phases include the China shock; sectoral disruptions; high disruption (economic shutdowns owing to social distancing); and recovery. The oil price shock adds an extra dimension to sectoral disruption.
Canada is moving into phase three – high economic disruption caused by efforts to contain the spread of the disease. Declines in equity markets have taken a big bite out of financial wealth. Social distancing will shrink the economy. Layoffs are coming. It is a crisis. We need our public sector and political leaders to rise to the challenges.
Canada’s financial authorities have responded quickly with rate reductions and liquidity support that should help to strengthen demand and confidence. The Bank of Canada has reduced its policy rate by one percentage point over the past few weeks. Lower interest rates will give households and businesses some breathing room to manage debt. The Office of the Superintendent of Financial Institutions made changes to required capital buffers to generate an estimated $300-billion of additional lending capacity.
The Government of Canada has made a few early policy steps. This includes a $1-billion support package with monies for provinces and territories, a public-health response, research, employment programs and international organizations. There will also be a $10-billion credit facility set up to support businesses under stress because of the pandemic. In retrospect, the announced federal monies are too small but signal the wide scope of continuing response.
Olivier Blanchard, a former chief economist at the International Monetary Fund, said “it is all about fiscal policy now”. With interest rates stuck at low levels since the 2008-09 financial crisis, there is both a limit on the possible support available from the Bank of Canada and an opportunity for the Government of Canada to spend significantly.
We should expect the federal government to outline a timely – temporary – targeted fiscal stimulus package in the range of $25-billion to $50-billion (one to two percentage points of gross domestic product). With lower projected revenues coming from the recession, this will push the federal deficit from the range of $20-billion to $25-billion for 2020-21 to the $75-billion to $100-billion range. Relative to the size of the economy, this federal deficit would be smaller than the federal deficits of the 1980s and comparable to the size of deficit in 2008-09.
A temporary fiscal stimulus of this magnitude would not affect the sustainability of federal finances, in part because of the low interest rates. Given the fact that many provinces are not fiscally sustainable, the federal government must lead with a co-ordinated stimulus package.
Consensus is building across experts in Canada and international organizations on the structure of the stimulus package.
Spend big on health – testing, beds, ventilators, vaccine research and more. The quickest route to economic stability is to contain the pandemic.
Spend big on households and businesses hit by supply disruptions and a decline in demand – targeted cash transfers, wage subsidies, tax relief.
Adjust existing legislative instruments to the full extent possible – provincial transfers, Employment Insurance – and invent new mechanisms to get cash to people without benefits (e.g., the self-employed, many service workers).
In a few months, much of the public-health crisis could be behind us. The lesson learned from the 2008 financial crisis is that global economic shocks have persistent consequences.
We think the government should consider a major public investment program. Pull forward planned infrastructure spending under a new infrastructure policy based on a national needs assessment and performance framework. Federal spending is required to help oil-producing provinces adjust to a greener energy environment with science-based targets for oil-producing companies.
Risks for both the world and Canada are high. In this environment, the risk-adjusted cost of doing too much is less than the cost of doing too little. Canada has the fiscal space. We need our political leaders to work together.