“The best economic policy is a strong health policy.”
That phrase, which appears early in Finance Minister Chrystia Freeland’s fiscal update, ought to have been repeated on every one of the document’s 223 pages, as an aide memoire for the Trudeau government. It neatly sums up the underlying cause of, and inescapable solution to, the current economic situation. Governments deliberately locked down parts of the economy because of a health emergency. It’s not a normal recession. It’s a pandemic-cession.
As long as COVID-19 is on the march, the economy will be bedridden. Containing the virus will end the economy’s illness. Thereafter, while rehabilitation therapy may be needed, the patient will be out of danger and out of hospital.
So once the pandemic is history, by how much can Ottawa scale back emergency spending, and how quickly?
And what about talk of “building back better,” and permanently increasing government spending in some areas?
Let’s start with what Ottawa did and what it’s doing.
The Trudeau government has so far budgeted for $168.5-billion in tax deferrals and credit support, plus a whopping $332.3-billion in “direct measures to fight COVID-19 and support people.” Most of that has gone to supporting unemployed people – not to fighting COVID-19 and thereby preventing so many people from being unemployed.
A greater focus on stemming the pandemic through massive investments in such things as testing and tracing might have reduced the need for the blunt instrument of business shutdowns. But that debate is history: Canada largely chose the route of hunkering down and waiting for vaccines, while financially backstopping Canadians.
As such, Ottawa had no choice but to spend massively to help the unemployed, the underemployed and struggling businesses. It was good policy and good economics. Because every person’s spending is someone else’s income, giving cash to the cash-poor prevented a vicious circle of pandemic job losses leading to an economy-wide drop in spending, triggering further job losses in industries that weren’t shut down. By September, Canadian manufacturing shipments were at 97 per cent of their prerecession peak and retail sales were at 104 per cent. Those dollars pumped into the economy worked.
But in the course of necessary spending, did Ottawa overspend? Yes, somewhat. A fire hose of money was called for and it hit more than a few things that weren’t on fire.
The fiscal update says the pandemic-cession temporarily knocked Canada’s GDP down by nearly 15 per cent, while, thanks to cheques from Ottawa, real disposable income rose nearly 15 per cent. Canadians’ savings jumped by nearly 25 per cent in the second quarter of 2020, the most of among our peer countries.
The lesson here is that Ottawa could already be doing a better job of targeting money – it’s all borrowed – at those needing help.
For example, Ms. Freeland is proposing to give families receiving the Canada Child Benefit with incomes of less than $120,000 a one-time payment of $1,200 for each child under the age of 6. Families with incomes over $120,000 would receive $600 for each child. It will cost $2.4-billion and there’s no mention of needing to show income or job loss.
At the same time, temporary changes to Employment Insurance, and the related CERB and CRB programs, may be distorting the labour market by paying some part-time workers more to stay home than to work. That should be fixed – while recognizing that for workers in shut-down sectors, their main barrier to employment is not poor targeting of Ottawa’s anti-recession spending, but the pandemic-cession taking away their jobs.
All of which suggests that, once the pandemic is behind us, Ottawa will have a lot of room to scale back emergency spending. And that appears to be Ms. Freeland’s plan. Sort of.
The fiscal update says a final hit of stimulus over the next three years – depending on how long the pandemic lasts, and how deep a hole the economy has to climb out of – will be in the range of $70- to $100-billion. What that is to be spent on is undetermined, or at least unsaid.
It should be spent, as much as possible, on investments raising Canada’s long-term productivity and quality of life, rather than on simply sending cheques to Canadians. More on this tomorrow.
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