Economist, former federal adviser urges Ottawa to ignore business lobby, shut down wage subsidy

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A Canadian economist who has served as a social policy adviser to the federal government says Finance Minister Chrystia Freeland should ignore the business lobby’s advice to the contrary and shut down the federal wage subsidy.

At an estimated total cost of $111-billion, the Canada Emergency Wage Subsidy (CEWS) has been the largest single element of Ottawa’s $286-billion in direct support measures during the COVID-19 pandemic. The subsidy provides money directly to businesses whose income has suffered during the pandemic, to cover portions of their employees’ wages.

The program has been adjusted and extended several times. The latest extension, approved just before the federal election campaign, moved the subsidy’s expiry date to Oct. 23.

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“The Ministry of Finance shouldn’t be extending the Canada Emergency Wage Subsidy. Its time has passed,” said Miles Corak, a professor at the City University of New York’s Department of Economics, who released a paper this week in which he argues CEWS was poorly designed and should not be renewed.

Prof. Corak specializes in analysis of federal labour support programs such as Employment Insurance (E.I.), and he spent time in 2017 as the economist in residence with the federal department of Employment and Social Development.

The paper was reviewed by other academics who have provided economic policy advice to the federal government in recent years, including Kevin Milligan of the University of British Columbia and Jennifer Robson of Carleton University.

Other pandemic support programs that are scheduled to expire on Oct. 23 include a rent subsidy program for businesses, as well as several programs that provide financial aid directly to individuals who are unable to work for reasons related to COVID-19.

Ms. Freeland told reporters last week that she has been consulting with Prime Minister Justin Trudeau, government policy experts and business leaders on whether or not to end the programs.

The minister’s office said in a statement Monday that the government “will announce next steps soon.”

Canadian Labour Congress President Bea Bruske told The Globe and Mail she spoke with Ms. Freeland on Monday about the expiring programs. Ms. Bruske said that while the wage subsidy can be helpful, the CLC’s priority is an extension of the direct supports for individuals.

“I’m guardedly optimistic,” Ms. Bruske said, while adding that the minister did not say definitively whether any of the programs will be extended.

Opposition MPs have argued the question of the extensions is of such importance that Parliament should sit as soon as possible, yet Mr. Trudeau announced last week that the first meeting of the House of Commons since the September election won’t take place until Nov. 22.

Prof. Corak’s paper says that calls by business lobby groups for an extension of CEWS are misguided and that the existing E.I. program can handle the remaining labour hardship in the Canadian economy.

In an interview Monday, Prof. Corak said there was a stronger argument for the wage subsidy at the onset of the pandemic, when the E.I. system was largely overwhelmed and the government was under pressure to come up with an alternative. But he said now that the E.I. program has been enhanced, and now that employment levels have bounced back and the policy shortcomings of CEWS are known, the federal Liberals should resist pressure to announce another extension.

“The biggest failing of the program was its inability to target funds where they were most needed,” he said. “Many, many firms received a great deal of monies that weren’t necessary. It supported firms that weren’t going to shut down and it prevented the shutdown of many firms that would have shut down anyways.”

Prof. Corak’s paper builds on previous criticism of CEWS by other economists, including Michael Smart of the University of Toronto, who has estimated that each person-month of employment supported by CEWS came at a cost to the government of $25,000.

“Income support of this magnitude paid directly to affected workers would likely not be considered politically acceptable among informed citizens, and it is therefore hard to imagine that the program would pass any reasonable cost-benefit analysis,” Prof. Corak says in his paper. He also says that the influence of the small-business lobby “may have shaped a less than optimal response.”

Alla Drigola Birk, director of parliamentary affairs at the Canadian Chamber of Commerce, said that while the design of the wage subsidy may have been too broad at first, the situation was unprecedented and the government had to move quickly.

“Hindsight is always 20-20,” Ms. Drigola Birk said. “The goal of these policies was to prevent a catastrophic collapse of our economy.”

She said an extension of the program just for hard-hit sectors that are still affected by public-health restrictions, such as restaurants and hotels, would be good for the economy and respectful of the government’s fiduciary responsibility.

CEWS has evolved over time. It was originally designed to provide a subsidy of up to 75 per cent of the first $58,700 earned by an employee. The percentage of the benefit was in proportion to the degree of revenue lost by a business. The subsidy’s cap has since been reduced to 20 per cent.

Dan Kelly, president of the Canadian Federation of Independent Business, said that while the first version of the program was overly generous, that became less of an issue in the summer of 2020 when subsidies were put on a sliding scale.

“This stopped any giant subsidies for firms with temporary losses and ensured that all subsidies were proportionate to the revenue loss,” he said.

He said the program was undermined in the beginning by a weeks-long delay in implementation, which meant many firms laid off workers before the subsidy was announced.

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