Timing is everything: how Canada got into a pandemic economy and how it might get out

This is the second articlein a series looking at some of the lessons learned from the first months of the COVID-19 pandemic and how Canada moves forward.

The pandemicmay well take millions of lives around the world before it ends. It already has drained trillions of dollars from the world economy.

Where once there was wealth, now there's a mountain of debt an unpaid tab that,in Canada, is growing at a rate of hundreds of millions of dollars a day.

"And the federal government being best placed to carry that debt, a lot of the measures that the feds have brought in [are] effectively them just taking the load off of individuals businesses and sub-national governments," saideconomist Trevor Tombe of the University of Calgary. "And that is a good move."

Keeping that debt on the federal government's books allows businessesto carry on without fear of bankruptcy and keeps consumer spending alive. Andmost economists agree that Canada's federal government should be able to carry its pandemic debt without too much of aneffect on the real economy as long as the current measures don't go on for too long.

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 federal government can turn off theemergency spending tap and what sort of stimulus should replace it.

Read more from the series

One lesson learned so far is that the governments that stepped up quickly with big rescue packages have tended to be the ones keepingthe damage done by job losses to a minimum.

That has been Canada's core economic strategy to fight COVID-19, one it shares withseveral European countries. "It's something that the federal government in the States hasn't done to the same extent," saidTombe.

Faster is better

Washington's epic level ofpolitical dysfunctionslowed its response to the crisis. The consequences of that delay show up in a comparison of unemployment numbers.As 2019 drew to a COVID-oblivious close, Canada's unemployment rate wassignificantly higher than that of the U.S. (5.6 per cent vs. 3.5 per cent). Today, after staggering job losses on both sides of the border, the disparity has all but disappeared both the Canadian and U.S. unemployment ratesare at an awful 13 per cent.

By international standards, the government of Prime Minister Justin Trudeauwas not slow to set up its benefits system. The federal government's smooth and rapid processing of millions of claims was a bureaucratic achievement few other countries were able to pull off.

But Ottawawas responding to an unprecedented economic crisis brought on by an unprecedented global health crisis. Its first priority was to support individuals unable to work due to business shutdowns; by quickly rolling outthe Canada emergency response benefit (CERB), the federal government gave household incomes the bracing they needed to allow the stay-at-home policy to have an effect on the virus's spread.

Only after CERB was in place did the federal governmentturn its attention to the needs of employers. Its critics say it got the timing wrong.

"I want to be fair to government," Dan Kelly, CEO of the Canadian Federation of Independent Business. The CFIBlobbied the government hard in the early weeks of its pandemic responseto deploy a wage subsidy that would preservejobs.

"This was a brand new event of a short-term or medium-term giant disaster for the economy. So a lot of the things that were in the Department of Finance toolkit for the normal recession just didn't work."

Too little, too late?

Kelly and the CFIB argued that while the need to get the CERB program moving in the early weeks of the pandemic was obvious, Ottawa also should have started on a wage subsidy earlier to preserve a "connection between employers and employees" that wouldprevent layoffs andensure a smooth return to normal business once pandemic restrictions lift.

The government made loans available to businesses relatively early in the crisis. But even on favourable terms, few businesses wanted to take on new debt when they scarcely knew where their next dollar was coming from.

Employers "had no choice" but to start laying people off, said Kelly. "As a result,millions of Canadians lost their jobs or are on the CERB benefit, and now in many cases are hesitant to come back."

When the government did introduce a wage subsidy, said Kelly,it was too small to change the math for most business. Over subsequent weeks, the subsidy became larger and conditions were removed. But by then it was too late for some employers.

"The wage subsidy was a good program and is a good program," saidKelly. "Unfortunately, it took about a month for a government to announce its intention to provide a substantive wage subsidy, and then another six weeks after that before any money was delivered

"Months later ... we're seeing that right now with the challenges related to the CERB program. We've had lower take up of the wage subsidy than expected and far higher take up of the CERB program than than was expected."

A manageable deficit so far

Hindsight is 20/20, of course but even the experts can't predict the pandemic'seconomic endgame. Tombe said Canada entered the pandemic with the key advantage ofhealthy public accounts,at least at the federal level.

"The ability of the federal government to borrow and to service that debt is actually quite high," he said."Couple that with the fact that interest rates are pretty low, and it looks like even given the massive borrowing that is going to be taking place this year, the debt service costs the amount of interest payments that the federal government will need to make are not going to be all that much higher than they were last year."

The size of a government's debt matters less than its ability to service it, Tombe said. The federal government can easily shoulder the cost of servicing its pandemic debt and could even start paying it down aggressively in the near future without pursuing a policy of painful austerity.

"We could eliminate the COVID-related debt federally within about 10 years using a revenue increase equivalent to about 1.5 per cent on the GST," he said."Or we could do it on the spending side by lowering the rate of spending growth by about 1 per cent per year or below what it would otherwise have been."

The plight of the provinces

The situation is far less reassuring for the provinces, saidTombe.

"Interest rates for provinces are typically about one percentage point higher than [for] the federal government. So deficits and debt are more expensive for them," he said.

"Provinces are also the front line in terms of health care delivery and managing this current crisis. So ... it looks like collectively [the provinces] are going to have a deficit for this year potentially on the order of about $100 billion.

"Ontario, Quebec, Alberta and B.C. can handle it. Provinces like Newfoundland, though, are legitimately facing a potential crisis where they may not be able to access private credit markets and will have no choice but to borrow through the federal government."

Earlier this month, the Trudeau government offered a $14-billion package to provincial governments to help them safely reopen their economies. OntarioPremier Doug Ford called the sum too small; other premiers criticized the conditions imposed by the federal government on how it must be spent.

The hunt for exit strategies

Tombe said he thinks the provinces risk missing the lesson "that they need to think long-term and ensure they have the capacity to absorb major shocks."

With attention now turning to a pandemic exit strategy, the federal government will facecompeting demands for support and stimulus from different sectors of the economy. Tombe said it's vitally important for Ottawa to start winding down its emergency measures in the current fiscal year because it's running out of road.

"We're looking at a deficit that's potentially well over 10 per cent of GDP that cannot be sustained," he said.

"A one year hit? We can manage it. Two or three or more? That wouldn't be possible. So unwinding these measures in the current fiscal year is going to be quite important."

Canada can still shoulder a "large deficit" next year, he said something on the order of the $60 billion deficit Canada ran when the financial crisis hitin 2009. It'll have to, if it intends to prime the economy's pump with federal money.

Recently, a group of leading figuresinfinance and academia joined experts in sustainable development (and Gerald Butts, Trudeau'sex-chief of staff)in forming the Task Force for a Resilient Recovery. They're issuing polling and reports on how the pandemic recovery can include infrastructure spending to reduce Canada's carbon footprint and prepare it for a post-carbon economy.

Building a 'better' economy

"Rather than just saying we've just got to put things back the way they were, this is actually an opportunity to build back better," said task force member James Meadowcroft of Carleton's School of Public Policy and Administration.

While the group is only halfway through forming its recommendations, saidMeadowcroft, it's already identified one target for infrastructure work: buildings. "It's pretty clear one of the big sectors ...that carbon emissions come from at the present day is buildings ... both houses where people live but also commercial buildings, retail space and so on," he said.

Kelly argues that infrastructure spending is far too slow to have the desired effect. "If we're looking for a quick recovery, infrastructure is not it. Those projects take months and months and months before anything actually happens, before money gets out the door," he said.

"One of the big lessons I think government needs to take away from this is that speed is of critical importance."

Meadowcroft said the kind of infrastructure work his group is recommending is all about putting the unemployed to work quickly.

"It's not about giving money to research scientists to go and figure something out," he said."This would be something that would have to be done anyway as we gradually tackle climate change. But it's also something that would employ a lot of peopleand we already know most of the technology."

Expect to hear more of these arguments over the coming weeks and months. If the pandemic taught Canada and the world nothing else, it demonstrated that shutting down an economy can be a lot easier than starting one up again.