Precarious Employment to Stable Flexibility: What do Canadian Gig Workers want?
Brave New Work Blog Series
The COVID-19 pandemic and its associated economic crisis have put Canadian governments deep into the red. In its July fiscal update, the federal government projected a $343 billion deficit for 2020–2021, accounting both for lost revenues and added expenditures for economic support programs like the Canada Emergency Response Benefit. The financial outcomes for provincial governments may be even more dire.
During the pandemic, Canadians have undertaken a remarkable exercise in social solidarity by idling much of the economy and changing their personal behaviour to control the spread of the virus. Older Canadians benefit most from these measures because of their vulnerability to COVID, while younger people are most negatively impacted, as pandemic control measures have impoverished or suspended their schooling, and terminated their already insecure jobs.
Once pandemic risk recedes, Canadian governments will need to simultaneously take control of public debt levels and strengthen economic recovery. Any strategy will somehow distribute the fiscal burden between age groups. Canada should prioritise alleviating the long-term disadvantages imposed upon young people by the crisis.
The suspension of economic activity has disproportionately affected younger workers. The figure below shows the employment rate in Canada by age in percentage points relative to February 2020 – just before the pandemic struck. At the peak of the crisis in April, the fall in employment was sharpest for those aged 15 to 29, followed by those in their thirties. Similarly, younger Canadians report greater effects from COVID-19 on their income and ability to meet financial obligations and other essential needs.
At the peak of the pandemic in April, employment declines were sharpest for those aged 15 to 29, followed by those in their thirties.
Source: Statistics Canada, table: 14-10-0017-01 (formerly, CANSIM 282-0001)
These effects would be unfortunate, but more tolerable, if they promised to be short-lived. However, studies have found that the earnings and employment impacts of graduating into a recession take a decade or longer to dissipate. Other persistent outcomes include lower fertility, higher divorce rates, worse behavioural health and higher mortality in middle age.
The long-term impacts on those still in school may be even worse, especially for the youngest children and those of lower socio-economic status. A U.S. estimate suggests that students may be starting fall 2020 with only 70 percent of their learning gains in reading from the 2019–2020 school year and less than half of their gains in math. Other research suggests that interrupted studies can result in a serious decline in adult IQ. While much instruction has shifted online, strong evidence, mostly from higher education, tells us that online learning is typically much less effective at helping students achieve learning outcomes and complete their studies, especially for students with learning deficits. Schools are great levelers in Canadian society. But with their effectiveness reduced during the pandemic, the unequal resources of parents will play a greater role in their children’s lives.
The long-term outlook for Canadian young people will darken even further if debt accumulated during the crisis falls squarely on their shoulders. So far, federal officials and many analysts have played down the significance of recent borrowing. They overemphasize the federal government’s role, while often overlooking the deeper challenges facing provincial governments, and rely on optimistic forecasts for the evolution of the pandemic and economic growth.
Most attention has focused on federal debt levels. This is understandable given that Ottawa has borrowed the most to respond to the crisis, running a deficit equal to 16 percent of GDP as of July 2020. However, Ottawa has greater capacity to carry debt than the provinces. As the highest level of jurisdiction, the federal government has advantages in taxation (basically people and investment are less mobile between countries than sub-national jurisdictions, so tax competition is less fierce), and its limited role in direct service delivery insulates it from cost growth in sectors such as health care.
But this focus on the federal debt misses much of the risk to Canadian living standards, as provinces are responsible for delivering health care and education, the most essential and expensive public services. Even before the pandemic, the total debt of subnational governments was almost equal to the federal debt, and the Parliamentary Budget Officer classified their fiscal path as unsustainable. The Bank of Canada has been helping reduce provinces’ borrowing costs, but some provinces still face the real possibility of default over the longer term. Ottawa would likely intervene to prevent defaults, but such a situation would negatively affect public services, while further increasing federal debt.
Meanwhile, the federal government’s July fiscal update projected only a 6.8 percent real decline in GDP in 2020, based on an assumption that no second wave of the pandemic will force the resumption of social distancing measures in the fall. If the pandemic does worsen, growth will be lower and spending will need to rise further, necessitating even more government borrowing.
Furthermore, there is no guarantee of a smooth economic recovery as the pandemic recedes. Canada entered 2020 with serious structural weaknesses, including among the highest corporate and household debt levels in the world. Government is basically the backstop for a country’s total debt levels.
Canada has overcome enormous debt loads before. Debt from the Second World War did not prove to be a material problem because it shrank relative to GDP as the postwar economy boomed. The Globe and Mail, among others, has suggested that Canada might follow this same path again. But this analysis should not give us much confidence. The postwar economy was the most dynamic in Canadian history, driven by a young and growing population, rising skills and, perhaps most importantly, unprecedented technological progress. As shown in the figure below, per capita economic growth has been much lower in Canada over at least the past two decades, a pattern common to most advanced economies. Authors such as Robert Gordon cogently predict relatively modest growth for the foreseeable future.
Per capita economic growth has been much lower in Canada over at least the past two decades.
Source: Data from St. Louis Fed, supplemented for Canada and France with World Bank data for most recent years, and for Canada with the following for the 1940s: https://worthwhile.typepad.com/worthwhile_canadian_initi/2014/07/canada-one-hundred-and-forty-seven-years-of-economic-growth.html
The strongest argument not to worry about the debt is that interest rates are at historic lows – in fact, they are negative relative to inflation. This reflects the weakness of the economy; investors see little private sector activity worthy of financing and are seeking safety by lending to governments, while central banks are also suppressing interest rates through quantitative easing.
But, as the economy recovers, private sector demand for credit should increase, and central banks will almost certainly look to bring interest rates up. The federal government is focusing its bond-buying on long-term debt to protect itself against rising interest rates, but three-quarters of its bonds are still on terms of less than 10 years. Provinces have greater difficulty selling long-term debt. Bank of Canada bond purchases have increased in importance and are basically equivalent to floating-rate debt, which increases interest rate exposure. We cannot know the future path of interest rates, but there are good reasons to envision them increasing from current levels.
Our governments have been right to borrow what is needed to help Canadians through the effects of the pandemic and social distancing. We should not deny that we will pay a price though, and we will have to make choices about how to do so. There are basically three approaches for governments to reduce their debt: monetary policy, spending adjustments and taxes increases. Each would have different implications across generations.
Low interest rates are helping governments carry their debt more easily. If inflation were to rise while interest rates remained relatively low, our public sector debt burden could be reduced significantly.
Inflation is a pressure valve for public debt, provided you are borrowing in domestic currency. Rising inflation reduces the real value of the borrowed principal and the real interest rate. The problem is that all lenders (i.e. anyone with savings all across the economy) lose out. From a generational perspective, younger people rely less on savings and older people rely more. Moreover, the wealthy implicitly have more savings. However, inflation is a very blunt instrument that would harm millions of middle-class and lower-income pensioners or would-be pensioners. It would be especially destabilising to devalue savings across the board with the huge baby boom cohort either in retirement or approaching it.
Modulating inflation is also proving tricky in practical terms. From the 1970s to the 1990s, Canada and the United States struggled to reduce inflation, eventually raising interest rates to unprecedented levels. This led to fiscal crisis and the famously severe 1995 budget brought forward by Finance Minister Paul Martin. More recently, governments have had the opposite problem, as inflation has been so low that interest rates have been unable to increase, even during economic expansions. As reported by the Economist, 91 percent “of the inflation-targeting world” had lower inflation than intended last autumn, including all of the advanced economies except Iceland. The present risk is deflation due to falling demand, which could have even more negative economic impacts (continuously falling prices disincentivize any form of spending). There is no question that central banks can drive up inflation by printing more money but, in attempting to tinker, they may find inflation rising again beyond their control. Effects on the exchange rate could be especially destructive given Canada’s reliance on international trade and integrated supply chains.
Regarding adjusting expenditures, austerity is the best-understood approach to addressing high debt levels – essentially reducing government expenditures to free up funds. Austerity could take the form of limiting or cutting spending. The inter-generational impacts of austerity depend on how heavily the axe falls, as well as where.
Canadian governments have faced many choices about whether to borrow and spend more during the pandemic. Most, especially the federal government, have invested to protect Canadians’ health and livelihoods. Yet governments have held back in certain areas, particularly at the provincial level. For instance, by one calculation Ontario’s first plan for school reopening allocated only 78 cents per student per day in additional funds to the education budget. This was comparable to the approaches of most other provinces. This strict cost control aggravates the crisis for children and their parents and raises the risk of a second pandemic wave – which would greatly worsen the government’s fiscal position.
Many investments in the past few months have been described as “economic life support” – seeking to prevent the destruction of productive capacity so that the economy can relaunch more smoothly. As we emerge from the pandemic, true stimulus for recovery will almost certainly be required as well. Traditional stimulus has tended to focus largely on physical infrastructure projects that can be completed within a specific period of time. Governments have also backstopped the private debt in firms and households to allow these to resume investing and consuming. Such approaches are subject to growing criticism, however, as failing to support critical sectors of the 21st century economy and structurally discriminating by gender. New approaches to stimulus would focus on enhancing the productive capacity of the economy in other ways, such as through human capital development, and by augmenting consumption for a wider set of Canadians.
In the immediate aftermath of the pandemic, limiting or cutting government spending could slow the recovery – and thereby worsen the government’s fiscal picture. If cuts were to occur post-stimulus, they would likely disadvantage young people specifically. Public spending is currently biased towards older Canadians, as suggested by the rising share allocated to health care, sickness and disability, and old age (35.6 percent in 2018). Yet these expenditures undergird Canada’s social contract. In a 2019 survey, 73 percent of Canadians reported that universal health care was a very important source of personal or collective pride in Canada. If anything, the pandemic has reinforced public support for expenditures on health and elder care. Spending cuts would therefore be likely to focus on other areas of activity that typically would be more relevant to younger Canadians.
In truth, Canada appears to be entering a new era. The Reaganite notion that “government is the problem” is now untenable given the free market’s failure to mitigate global pandemic risk, as well as other challenges such as climate change, precarious employment and slow productivity growth. The public and para-public sectors actually seem likely to expand. Investments during the crisis and the subsequent recovery may focus on green energy generation, energy conservation, public transportation, digitisation, early childhood education and care, elder care and income support.
Austerity does not appear to be in the spirit of the times. Instead, there appears to be momentum for new and better public expenditure to increase prosperity, well-being and sustainability. The implications for government debt-levels are uncertain.
Raising tax revenues is the third way to address debt levels. A tax-based approach can most effectively target those with means to pay, though increases should be carefully designed so as not to harm the recovery. A careful balance is possible: in the crucible of the Second World War, Canada relied on its wealthiest citizens to pay very high progressive income taxes, which did not preclude the unequalled economic prosperity of subsequent decades.
The most strategic tax to increase would be the consumer-focused carbon tax, which most economists favour because it generates revenues while discouraging the consumption of polluting fuels. There is a broad consensus that the current carbon tax level is much too low to sufficiently change consumer behaviour. Adopting a generational perspective, younger Canadians can expect to experience the greatest effects of climate change, while people with higher incomes usually are older and consume more – leading to higher per capita greenhouse gas emissions.
The pandemic crisis presents a relatively less painful moment to shift to a greener economy because oil prices are near rock-bottom and could remain below pre-crisis levels for consumers even following a sizeable tax increase. Meanwhile, many workers whose industries such a tax increase could negatively affect are already being forced to change careers. Lower-income earners and rural residents should continue to benefit from carbon tax reimbursements to avoid compounding difficulties caused by the pandemic, but the government would need to retain a large share of revenue gains to improve its fiscal position.
Bringing taxes on capital gains and dividends closer into line with taxes on employment income would be inter-generationally proactive. Currently, wages are taxed twice as much as capital gains, and one-third more than dividend income. This model greatly favours older Canadians over younger Canadians as the share of capital income in total income rises with age. The exclusion rate left approximately $27 billion in untaxed capital gains in 2015.
The federal government could introduce a new tax on the transfer of large personal fortunes, both before and at death. One estimate is that reintroducing an inheritance tax on estates worth more than $5 million, the same as the tax in the United States, would raise $2 billion. A higher rate or slightly lower exemption (e.g. $2.5 million) would be even more remunerative. The effectiveness of these forms of capital taxes depends, of course, on proper enforcement.
Finally, taxation of capital gains from housing could encourage more productive investments and help to cool the housing market – though it should aim to do the latter only in a measured fashion. Young people again are less likely to earn capital gains from the sale of a home, and also would benefit most from any negative effect of the policy on home prices. Introducing capital gains taxes on sales of primary properties would have generated around $6 billion in revenues for Ottawa in 2019 – with the value increasing further when combined with a reduction in the capital gains tax exemption.
The COVID-19 pandemic has created unprecedented uncertainty for policy-makers. Two things we do know are that the crisis most harms the economic outlook for younger Canadians, and that our rising public debt levels should not be ignored. I have highlighted the implications of three strategies for addressing high public debt levels: monetary policy, expenditure adjustments and tax increases. Governments will likely adopt a mix of these strategies, but smart tax increases are the best option to improve Canada’s fiscal position and allow younger Canadians to emerge from the crisis into better circumstances.
Consulting Partner: Deloitte
Federal Government Partner: Government of Canada
Provincial Government Partners:
Foundation Partners: Metcalf Foundation
PPF would like to acknowledge that the views and opinions expressed in this article are those of the author(s) and do not necessarily reflect those of the project’s partners.