Some business owners are calling on the government to consider changing up one of the primary tools it’s chosen to deliver money to Canadians facing hardship because of the COVID-19 pandemic.
They say the best way to inject money into the economy would be through a wage subsidy paid to employers so that they can keep staff employed — rather than an EI-based scheme that only helps individuals after they’re out of work.
Dan Kelly of the Canadian Federation of Independent Business said the outlook for small- and medium-sized enterprises in Canada right now is bleak. Some CFIB members were in tears on a conference call yesterday — and the results of a new survey of business owners show why.
“A third of small business owners said that if sales dropped significantly they would be able to hang on for less than a month before the business is permanently closed,” said Kelly, adding that CFIB defines a “significant” drop as less than 50 per cent.
“A third of small businesses have said that their income has dropped by 75 per cent or more, with a fairly large number saying that their business income has dropped to zero. And that was before Ontario and Quebec took additional steps to close another swath of the business community.”
A drop in the bucket
The government of Canada has offered businesses a 10 per cent wage subsidy, up to a maximum of $25,000 per company, to help them retain their employees.
Kelly calls that sum “a drop in the bucket of what is absolutely necessary right now, and certainly a fraction of what is happening in Western Europe.”
“That wage subsidy doesn’t even really cover the cost of the payroll taxes of Employment Insurance and CPP at this time,” he added. “Similar programs in England, Denmark and elsewhere in Western Europe subsidize employers that are able to keep their staff on to 75 per cent, 80 per cent, even 90 per cent of their wages. That’s the kind of approach Canada desperately needs.”
Carolyn Fairbairn, head of the Confederation of British Industry, welcomed the move as “the start of the U.K’.s economic fightback — an unparalleled joint effort by enterprise and government to help our country emerge from this crisis with the minimum possible damage.”
Ireland today also announced a wage subsidy of up to 70 per cent. Kelly says Canada should follow the European example.
“One of the reasons we like the wage subsidy approach that’s being used in Europe is that the employee doesn’t lose their job,” he said. “Their pay also will come to them an awful lot more quickly.
“Employees need these dollars today. If we keep the employer-employee relationship intact, the employer can then keep the money funnelled to the employee, and the employee won’t have the stress of losing their job.”
Not all businesses can get the subsidy
Many Canadian business owners find the 10 per cent subsidy insufficient — while some have been dismayed to learn that they’re barred from receiving it.
The published guidelines say only companies that are incorporated can apply to have their payrolls subsidized. Toronto tax advisor Gerry Campbell says of the roughly 500 small businesses he has as clients, only about 50 are corporations.
The same is true of his own business, which is a sole proprietorship.
“Most small businesses in this country are not incorporated. When announced by [Canada Revenue Agency], I was willing to support our staff to continue to receive their wages — we are working in two groups each doing 14 days on and 14 days off — during this COVID-19 epidemic.
“Today, as a result of no subsidy, I am looking to lay 11 of my 13 employees off, effective end of next week, if there is no financial help for sole proprietorships.”
I learned two things today. 1. My law firm is deemed an essential service. 2. My business does not qualify for the government’s 10% wage subsidy because I am not a corporation. With all due respect, that is bullshit. People > Corporations <a href=”https://t.co/Wa50OCWZhD”>pic.twitter.com/Wa50OCWZhD</a>
On Tuesday, Prime Minister Justin Trudeau acknowledged the desperate situation some businesses now find themselves in. “Small businesses are temporarily closing up shop,” he said. “Hotels and restaurants can no longer accept guests. Some people are not getting paid. Others are worried about their job.”
When asked why he chose to put payments through the EI system, or through the parallel Emergency Support Program, Trudeau said his government felt impelled to act quickly to forestall an economic implosion.
“When you’re trying to help get money out to people, speed is of the essence, especially in an unprecedented situation like this one,” he said.
But the union that represents Service Canada workers is warning of lengthy backlogs in processing nearly 930,000 new claims that entered the EI system in one unprecedented week.
And economists question whether using the EI system actually would be as fast as, or faster than, simply helping employers to make payroll.
Pedro Antunes, chief economist of the Conference Board of Canada, said he hopes the government will make changes to the system in its next wave of pandemic measures.
“The government has talked about phase one in terms of this first set of measures at the federal level. We may have another phase where we see more of an approach where we try to get away from it being the government that transfers the money, to motivating employers to keep their staff and keep paying them through their own payroll,” he said.
“We’ll see how that evolves, but I think we’re probably going to see more before this is over.”
Trust is an issue
One problem small businesses face in making their case is that big businesses have already squandered a lot of public trust by misdirecting public subsidies in the past.
The 2008-2009 financial crisis produced many stories of big corporations using taxpayer bailouts not to preserve jobs, but to buy back stock or line the pockets of executives and shareholders.
“Here’s a company that basically went begging to the province and the federal government for money, saying that if you don’t give us all this money, we’re going to lay off all these workers,” David Baskin, president of Bay Street investment firm Baskin Wealth Management, told CBC News.
The executives’ behaviour embarrassed the very politicians who had signed off on the bailouts. Quebec Finance Minister Carlos Leitao declared himself “shocked.” Bombardier’s top brass ended up having to defer the bonuses to 2020.
A risk of fraud
In order to avoid that kind of situation, some European economists have argued that wage subsidy plans there will need tight controls to prove that the money is actually going to payroll. There is a risk of fraud — of small business owners creating “ghost” employees, or simply pocketing the money and laying people off anyway.
But the government of Canada has made it clear that it is not overly concerned about fraud in EI claims at the moment, and most economists agree that speed is more important than tight accounting controls right now.
“That’s the kind of approach Canada desperately needs,” said Kelly.
“I think if the government does that as a temporary measure, it will in fact be temporary. What worries me is that the only option that employers right now have is to lay off staff, and once those employees are put on Employment Insurance, a good chunk of those employees are not going to come back or are going to come back to employers really slowly, as we try to put the puzzle back together.”
LONDON — U.S. and Canadian officials are discussing the imposition of tariffs on Saudi Arabian and Russian oil imports if the two members of the OPEC+ group do not quickly reach a deal to end their price war.
Jason Kenney, the premier of Alberta, told the Financial Times he had held discussions with Washington about tariffs, as a global deal to reduce production appeared to be hanging by a thread.
U.S. President Donald Trump has called on rival oil producers to cut production by as much as 15 million barrels a day, but said on Friday that tariffs “are one tool in the tool box” if Saudi Arabia and Russia do not quickly reduce supplies, threatening a deepening schism with Washington’s key Middle East ally.
Kenney said “prospective import tariffs on oil coming into North America” were under discussion with Washington, even as he signalled Alberta would be open to participating with OPEC in cuts to oil supplies.
Sonya Savage, Alberta’s energy minister, would dial into the online OPEC+ meeting this coming week, he said.
“OPEC+ started this fire and they have to put it out. We’re not going to surrender our industry and we’re prepared to go the distance here,” he said.
Canadian provinces have autonomy over oil production policy, but joint tariffs with the U.S. would require federal approval from Ottawa.
U.S. officials confirmed the Department of Energy was studying whether tariffs would be a viable way to force Saudi Arabia and Russia’s hand, though the discussions are preliminary and among several other options.
The White House declined to comment.
“The U.S. seems more likely to show up to next week’s OPEC+ virtual meeting with credible threats of reprisals than commitments to reduce production,” said Clearview Energy Partners, a Washington consultancy.
Trump has pushed Saudi Arabia and Russia to get a deal to remove as much as 15 per cent of global oil supplies, but the two countries remain at loggerheads, with an online OPEC+ meeting now pushed back from Monday until later in the week after the two sides traded barbs.
Russian President Vladimir Putin said on Friday that a cut to global oil production of 10 million barrels a day was possible, but only if all major producers including the U.S. joined in. But he jeopardized the potential for a deal when he accused Saudi Arabia of launching the price war to hurt U.S. shale producers, in an apparent attempt to drive a wedge between Riyadh and Washington.
Saudi Arabia’s energy minister Prince Abdulaziz bin Salman and foreign minister Prince Faisal bin Farhan both attacked the statement on Saturday, with the latter saying they were “fully devoid of truth” and accusing Russia of “falsifying facts”.
The prospect of a deal drove oil prices up around 40 percent over Thursday and Friday, recovering from an 18-year low below $25 a barrel to above $30 a barrel. They remain down by more than half since the beginning of the year.
The price slump has threatened the future of U.S. and Canadian oil producers who generally require higher prices to turn a profit.
Global demand for oil has plunged almost 40 percent, Trump noted on Friday, the biggest drop in history as measures to slow the spread of coronavirus hit economic activity.
Independent U.S. oil producers have pushed the White House to force Saudi Arabia and Russia to end the price war that has deepened the slump, including proposing tighter sanctions on Russian energy, bans on foreign oil imports, and targeting the Saudi-owned Motiva refinery in Texas.
Trump on Friday alluded to a suspension of U.S. military aid to Saudi Arabia, when he said “we provide military assistance to countries for pretty much free . . . and they don’t even like us”.
Additional reporting by Demetri Sevastopulo in Washington
I have been warning since January that the long-term ramifications of the ongoing coronavirus (COVID-19) outbreak on the oil industry could be significant and long-lasting.In March we saw significant impacts on price and demand. What we don’t know is how long this crisis will last.
But, I believe we are in the midst of an existential crisis for the oil industry as we know it. This will not be the same industry after this dark period ends. Only the strongest companies are going to survive the financial pain that lies ahead.
There are many variables in this equation, and they are constantly changing. Demand is plummeting, production and prices are following, and Saudi Arabia and Russia are jockeying to hold onto market share.
Vitol, the world’s largest independent oil trading company, has said that oil demand could slump as much as 20 million barrels per day (BPD) over the next few weeks, which would lead to an annual decline of 5 million BPD. Vitol CEO Russell Hardy said “It’s pretty huge in terms of anything we’ve had to deal with before.”
Goldman Sachs said it expected March demand to be down 10.5 million BPD, followed by a further decline to 18.7 million BPD in April. The company noted that this deep plunge would be beyond the ability of OPEC to counteract: “A demand shock of this magnitude will overwhelm any supply response including any potential core-Organization of the Petroleum Exporting Countries output freeze or cut.”
Meanwhile, benchmark prices have temporarily settled in the lower $20s, but local prices have dropped even further. In a story that warned of the largest idling of oil wells in the past 35 years, Oilprice.com reported that last week some crude prices were trading in the $1 per barrel range.
The oil and gas sector has been crushed, and there will be a great deal of collateral damage. It’s hard to see when the sector will emerge from this crisis, or what the supply situation will be when we do. But it’s inevitable that there will be fewer players in the sector when this crisis ends.
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