This is the second article in a series looking at some of the lessons learned from the first months of the COVID-19 pandemic and how Canada moves forward.
The pandemic may 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,” said economist Trevor Tombe of the University of Calgary. “And that is a good move.”
Keeping that debt on the federal government’s books allows businesses to carry on without fear of bankruptcy and keeps consumer spending alive. And most economists agree that Canada’s federal government should be able to carry its pandemic debt without too much of an effect 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 the emergency spending tap — and what sort of stimulus should replace it.
One lesson learned so far is that the governments that stepped up quickly with big rescue packages have tended to be the ones keeping the damage done by job losses to a minimum.
That has been Canada’s core economic strategy to fight COVID-19, one it shares with several European countries. “It’s something that the federal government in the States hasn’t done to the same extent,” said Tombe.
Faster is better
Washington’s epic level of political dysfunction slowed 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 was significantly 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 rates are at an awful 13 per cent.
A lone person walks the empty streets in Toronto’s Kensington Market in April. The pandemic shutdown drove the unemployment rate above 13 per cent in Canada, preliminary figures show. (Nathan Denette/The Canadian Press)
By international standards, the government of Prime Minister Justin Trudeau was 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 Ottawa was 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 out the 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 government turn 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 CFIB lobbied the government hard in the early weeks of its pandemic response to deploy a wage subsidy that would preserve jobs.
“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 would prevent layoffs and ensure 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.”
A worker boards up a closed clothing store in Vancouver. The federal government moved quickly to get individual financial supports out the door, but was criticized for being slow to help businesses retain workers and manage rent payments. (The Canadian Press)
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,” said Kelly. “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’s economic endgame. Tombe said Canada entered the pandemic with the key advantage of healthy 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, said Tombe.
“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.”
Ontario Premier Doug Ford, left, has criticized the federal government’s proposed pandemic aid program for provinces. He is seen with Prime Minister Justin Trudeau in December, 2018. (Paul Chiasson/The Canadian Press)
Earlier this month, the Trudeau government offered a $14-billion package to provincial governments to help them safely reopen their economies. Ontario Premier 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 face competing 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 hit in 2009. It’ll have to, if it intends to prime the economy’s pump with federal money.
Recently, a group of leading figures in finance and academia joined experts in sustainable development (and Gerald Butts, Trudeau’s ex-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, said Meadowcroft, 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 people and 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.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
