Shutting down an economy can be a lot easier than starting one up again.
There are two ways of looking at the COVID-19 crisis: the pandemic may well take millions of lives around the world before it ends. Yet it has also drained trillions of dollars from the world economy. In both cases, those who are left behind to carry on with their lives will be affected.
One lesson learned so far from the pandemic is that governments that came forward swiftly with big rescue packages have tended to be the ones keeping the damage done by job losses to a minimum. It has been Canada’s core economic strategy to fight the crisis, one it shares with several European countries, and it has largely worked.
By way of comparison, political dysfunction in the U.S. slowed its response to the crisis. The consequences of that delay show up in a simple comparison of unemployment numbers. As 2019 drew to a close, Canada’s unemployment rate was significantly higher than that of the U.S. (5.6 per cent vs. 3.5 per cent). Today, after a huge amount of job losses on both sides of the border, both the Canadian and U.S. unemployment rates are at an awful 13 per cent.
From one angle, the pandemic is a real-time laboratory for testing the economic and political limits of government deficit spending in a crisis. The experiment isn’t over yet, and attention is now turning to how quickly the Canadian government can turn off the emergency spending tap — and what sort of stimulus package should replace it.
For example, one measure that the federal government has brought in is effectively carrying the debt burden for individual businesses and sub-national governments, which would seem the right thing to do, enabling businesses to exist without fear of bankruptcy and keep consumer spending alive. Everything should be okay, as long as the measures don’t go on for too long.
Elsewhere, Ottawa sought to support individuals unable to work due to business closures by quickly rolling out the Canada emergency response benefit (CERB). Yet only after CERB was in place did the federal government turn its attention to the needs of employers—something its critics accuse it of having got wrong.
Dan Kelly, CEO of the Canadian Federation of Independent Business, has argued that while the urgency of the CERB program was justified, Ottawa should also have subsidized wages to preserve a “connection between employers and employees” that would deincentivize layoffs and ensure a smooth return to normal business once the lockdown was lifted. Instead, while the government made loans available to businesses early on in the crisis, few wanted to take on new debt. When the government did introduce a wage subsidy, Kelly has said, it was too small to change the math for most business.
Hindsight is 20/20, of course — and nobody then, or even now, can predict the economic endgame of COVID-19. On the plus side, Canada entered the pandemic with healthy public accounts, at least at the federal level. Most believe the Canadian federal government can easily shoulder the cost of servicing its pandemic debt — and could even start paying it down aggressively without pursuing a policy of painful austerity. The size of a government’s debt matters less than its ability to service it. Unfortunately, the situation is far less reassuring for the provinces.
Interest rates for provinces are typically about one percentage point higher than for the federal government, meaning deficits and debt are more expensive for them. Provinces have also been the front line in terms of health care delivery amid the pandemic. The likes of Ontario, Quebec, Alberta, and B.C. should be able to manage pretty well. Provinces like Newfoundland, though, are already facing a potential crisis where they may have no choice but to borrow through the federal government.
In June, the Trudeau government offered a $14-billion package to provincial governments to help them safely reopen their economies. Ontario Premier Doug Ford said the sum was too small; others criticized the conditions imposed by Ottawa on how the money should be spent.
Without a doubt, as the exit strategy continues the federal government will face competing demands for support and stimulus from different sectors of the economy.
There will be other demands on the federal government as well. The recently formed Task Force for a Resilient Recovery is issuing polling and reports on how the pandemic recovery in Canada can include infrastructure spending to reduce the country’s carbon footprint and prepare it for a post-carbon economy.
Such arguments will only increase in the coming weeks and months and continue for as long as the bigger picture remains hazy. If the pandemic has taught us nothing else, it is that shutting down an economy can be a lot easier than starting one up again.
