Think of the Canadian economy like a car rolling down a highway. The road begins far over one horizon, and it extends far beyond the other. The blacktop is mostly in excellent condition, and the driving is usually comfortable.
However, the car’s progress is sometimes slowed by unexpected dips in the road. Sometimes, it has to stop for a flat tire; sometimes a section of road gets washed out by a flash flood. After a delay, the journey is always restarted. The driver can see from the map that this highway rolls on and on, into sunny uplands.
But in between here and there, a chasm has opened up, and it’s the size of the Grand Canyon. As a result of the coronavirus, and measures to fight it, a record of almost one million Canadians sought Employment Insurance between March 16 to 22. The true number of those who are jobless or working reduced hours is likely much higher.
The answer to this chasm in the road is a bridge. Canada’s economy was strong before the pandemic, and that strength – its workers, companies, and factories – will be there after. We just need to get them across that yawning gap in the road.
Work to build the bridge started two weeks ago, led by the federal government. Ottawa’s first package was $82-billion for people and businesses. The support last week was increased to $107-billion – equivalent to roughly a third of Canada’s budget in the past year.
Then came last Friday morning. The Bank of Canada slashed interest rates again and outlined billions of new dollars to back businesses and gird the financial system. Soon after Ottawa said it would temporarily pay three-quarters of workers’ wages at small businesses – far more than its previous plan. Ottawa also put up another $95-billion in tax deferrals and loans.
In the long run, the best way to get out of a COVID-19 recession is to beat the virus, so that large parts of the economy no longer need to be shutdown. The good news is that there are already hopeful signs that Canada is making progress on bending the curve of new infections.
However, large sections of the economy will remain shutdown for weeks, and possibly longer. The bridge between the full-employment economy that was and the full-employment economy that will be is a massive but temporary income-support program.
Can we afford it? The answer is we can’t afford not to. On Friday, a group of experts assembled by the C.D. Howe Institute concluded: “The risks and consequences of not supporting employers and individuals enough is significantly higher than offering too much.” They are correct.
The numbers may sound otherworldly. Ottawa’s biggest deficit during the financial crisis was $56-billion. The Parliamentary Budget Officer on Friday outlined a scenario where the deficit will hit $113-billion.
However, the cost of borrowing is at a record low. The yield on 10-year federal bonds is below 1 per cent. At no time since humans invented lending at interest has borrowing been so cheap. As University of British Columbia economist Kevin Milligan recently pointed out, at a one per cent interest rate, Canada could service $1-trillion in new debt for $10-billion a year – or about what Ottawa takes in from just one percentage point of GST.
Depending on how much progress Canada makes on the health front, and how soon, the final costs of the economic bailout could be lower than announced. Much of the federal aid is in tax deferrals and interest-free bridge loans. If the economy restarts, that money will eventually find its way back to the federal treasury.
Ottawa had been criticized for not doing enough and Friday marked a turn. The federal program contains many smart elements, from directing money through existing programs such as Employment Insurance and the Canada Child Benefit, to subsidizing small businesses to hang on to employees, rather than laying them off.
On Friday, Deputy Prime Minister Chrystia Freeland said the goal is for the economy to come “roaring back when the health crisis has abated.”
That roar will be most pronounced, with no turbo lag, if companies remain solvent and staffed up.
The bottom line is that, in the coming weeks, our economic path will be determined by the fight against the virus. The sooner we beat it, the sooner we can get back on the road.