Focus on Fundamentals: A Road Map to Recoveryby Janice MacKinnon
Canada has experienced fiscal crises and recessions; however nothing compares to the current pandemic during which governments have shut down major parts of the economy and spent billions to support beleaguered individuals and businesses.
With no clear roadmap to follow, governments face the challenge of promoting economic growth and investment, getting people back to work, protecting the vulnerable and addressing ballooning deficits and debt. As well as dealing with these different challenges at the same time, governments need to ensure that addressing one priority does not adversely affect another.
Tackling mounting deficits must not produce measures that discourage economic growth and investment. Similarly, protecting the vulnerable must not produce programs that are so generous that they disincentivize returning to work, which is fundamental to kickstarting the economy. As well as balancing key priorities, governments should focus in laser-like fashion on the economic and fiscal challenges and be courageous enough to delay other less urgent priorities. The magnitude of the economic and fiscal problems underlines the necessity of the intense focus.
The partial shut-down of the economy caused gross domestic product (GDP) to plunge, initially resulting in 30 per cent of the workforce suffering unemployment or significantly reduced hours of work. Government revenues plunged at the same time as spending increased dramatically, which resulted in the federal deficit ballooning to more than $350 billion. Canada’s debt, meanwhile, is projected to reach more than $1 trillion. Thus, Canada is at a critical point in its history: Government spending has soared, economic activity and government revenue have declined dramatically and the pandemic raises the spectre of an uncertain and potentially more challenging future.
At this critical juncture, the highest priority should be promoting economic growth to get people back to work and to restore government revenues. Strategic infrastructure investments (i.e. transportation infrastructure to support trade) that create jobs in the short-term and enhance productivity in the long term should be pursued. Premiers can seize the moment by moving quickly and decisively to remove inter-provincial trade barriers. Governments should also focus on easy wins — established or emerging sectors in which Canada has a strategic advantage — and devise strategies to promote investment and remove barriers to growth. Some of Canada’s main engines of economic activity and government revenue — energy, tourism and air travel — have been hit especially hard by the pandemic and it is essential that the federal government provide bridge support so these sectors remain competitive with their counterparts in other jurisdictions.
Relative to comparable countries, Canada’s economic competitiveness and investment have been declining and the Canadian government needs to address some obvious underlying causes. Canada has a hodgepodge of business taxes, with some built-in counterproductive incentives such as low small business taxes, which discourage small business growth. Now is the time for Canada to reform its business tax regime to focus on promoting investment and enhancing government revenue. Similarly, businesses have cited excessive regulatory burdens as a barrier to expansion and investment. The federal government should follow the example of provinces such as British Columbia, which reduced unnecessary regulations as a key strategy to promote growth and investment.
The government should also invest in initiatives that help businesses adjust to the new pandemic and post-pandemic economy. For instance, small businesses, which are major engines of economic growth and employment, have been hit especially hard by the shutdown of the economy and new pandemic requirements like physical distancing. Governments could help small businesses by supporting their adoption of digital tools and by expanding internet access to all regions of Canada.
Kickstarting the economy will also depend on government balancing its support programs between protecting the vulnerable and encouraging a return to work. The pandemic and economic shutdown necessitated immediate and significant financial support for the unemployed and the underemployed as well as other vulnerable populations. However, data show that the benefit levels of the new programs were so high that rather than merely replacing lost income, the programs were providing cash transfers. If people can earn more by staying home safely, why would they return to work?
A similar issue is the ease with which programs can be accessed. For instance, do changes to employment insurance that allow people to access benefits after working a mere 120 hours (about three-and-a-half weeks) over the previous year act as a disincentive for people to remain in the workplace? People displaced by the pandemic and shutdown should not be incentivized to sit on the sidelines while others go back to work and governments struggle to restart the economy.
To date, most programs have focused on providing financial assistance to those not working; it is time to focus more on encouraging and supporting those who can return to work. The federal government could enhance the Canada workers benefit that tops up employment income for low-income earners and increases as workers earn more. The program provides financial support for unemployed low-income individuals to enter and remain in the workforce and it can encourage moving from part-time to full-time employment since the value of the benefit increases with income. It would be especially useful to those who worked in struggling sectors and need to find jobs elsewhere.
To help workers transition from declining to growing sectors of the economy, more training and reskilling is essential. The Canada training benefit could be revamped since it currently only provides funds for existing workers to upgrade their skills, and builds, and only accumulates at a barely noticeable $250 a year toward its lifetime $5,000 maximum. Since training offered by governments and educational institutions can be slow to respond to changing labour markets, governments should develop employer-government partnerships whereby businesses and other employers and governments help fund training workers for jobs that exist in growing sectors.
Labour mobility is also essential. Thus, provinces should work together (and follow the example of western provinces) and remove barriers preventing skilled workers and professionals from having their credentials recognized in other jurisdictions.
Kickstarting the economy and getting people back to work will help the beleaguered revenue side of government budgets, but the spending side also needs to be addressed. Ballooning deficits are not sustainable indefinitely. The argument that relative to other OECD countries Canada’s debt load is manageable does not consider provincial debt, which is among the highest of comparable sub-national governments. As well, interest rates are at historic lows and debt loads that may be manageable today may not be so if interest rates rise. Moreover, there is the issue of inter-generational equity: Running deficits and accumulating debt means that future generations will bear the burden of the excessively high carrying costs.
In the short term, there is a case for increasing government spending, but the main question is what kind of spending. To date, most federal money has gone to programs supporting people adversely affected by the pandemic and economic slowdown. While that kind of support needs to continue until the economy has recovered, it should not be so generous that it more than replaces lost income. Also, if more money is spent on current consumption, such as enhancing transfers to individuals by establishing the equivalent of a guaranteed annual income, then governments will be incurring future costs that will either produce more debt or tax increases.
If, on the other hand, money is spent on investments that help promote the growth of sectors of the economy or small businesses, then more people will return to work, and government tax revenue will increase to help reduce deficits and debt and sustain programs. Thus, governments need to shift the balance in spending from current consumption to future investment. That is, the focus needs to shift from redistributing the fiscal pie to promoting growth that creates new revenue and expands the fiscal pie.
The federal government also needs to establish a new fiscal anchor to replace the pre-pandemic commitment that federal debt would decline relative to GDP. The fiscal anchor could consist of establishing a new debt-to-GDP ratio or limiting program spending, which governments can easily control, to growth in GDP. But what is essential is that there is some new, easily identifiable fiscal anchor. Credit-rating agencies, whose ratings can determine the cost and ease of borrowing money, will require that governments have a plan, including a fiscal anchor, to address growing deficits and debt. Fiscal anchors also put parameters around spending and impose some fiscal discipline. For example, the current federal government decided to provide additional pandemic support to needy seniors. A fiscally disciplined government would have found the most cost-effective way to help needy seniors by increasing payments to those receiving the guaranteed income supplement, a program for low-income seniors. Instead, Ottawa spent millions more by giving money to all seniors on old age security, which caused some seniors to question why they were receiving money they did not need.
Governments should also begin the initial, difficult process of reining in spending. The task requires a laser not a sledgehammer. Across the board cuts are not realistic during the pandemic and a message of austerity could dampen spending and investment. However, the choice is not between austerity and continued, unrestrained spending. Strategic measures to restrain spending can be adopted without adverse economic impacts. For instance, the size and compensation of the public sector, particularly at the federal level, should be reviewed. Are defined benefit pensions affordable and realistic into the future? The federal public service has grown dramatically; are there ways to streamline programs and reduce costs? At the provincial level, Alberta is restructuring program-delivery in health care and other areas to deliver services more efficiently. The fiscal challenge is massive, and the sooner governments begin to act, the easier future challenges will be.
The pandemic also revealed the inadequacies of current federal-provincial fiscal relations. For years, provinces have argued there is a fiscal imbalance between the federal government with significant revenue, and the provinces with the burden of funding education, social services and particularly health care. Currently, health-care spending consumes at least 40 percent of provincial program spending, and, with an aging population, that spending will only increase.
The pandemic laid bare the fiscal imbalance issue, but the solutions were only ad hoc and piecemeal — agreements for the federal government to transfer one-time funds to provinces to top up strained provincial health-care budgets and to put some funds to support education. It is time for a long-term solution to a long-term and worsening problem. The fairest and most transparent way to address the fiscal imbalance is for the federal government to commit to a permanent increase in health transfers to the provinces.
Another major challenge in federal-provincial fiscal relations is the limitations on the fiscal stabilization program, which was meant to be a “form of insurance for provinces whose economies experience shocks.” The current program contains a very low cap and an outdated formula. Revising the program to lift the current cap and update the formula is essential to ensure there is a meaningful “insurance program” for provinces experiencing dramatic declines in revenue.
The pandemic has presented governments with unprecedented challenges that will require balancing competing priorities and focusing on what is most essential: kickstarting the economy, getting people back to work, protecting the vulnerable while not discouraging work and shifting the focus to new spending that aligns with the need to promote economic growth. This must all happen at the same time as spending is reduced in areas where cutting costs would not impede economic growth.
It’s a broad swath of questions, and it’s time to start hearing some policy answers.
- Finance Canada. July 8, 2020. Economic and Fiscal Snapshot. ↑
- Fraser Forum. May 2020. As the Economy Re-opens, Canada must address its competitiveness problem. ↑
- C.D. Howe. Aug. 20, 2020. Support Digitization of Small Businesses and Boost Interprovincial Trade: Crisis Working Group on Business Continuity and Trade. ↑
- David Parkinson. Globe and Mail. Sept. 2, 2020. Surprising household income spending numbers show there’s room for Ottawa to dial back emergency aid. ↑
- Kevin Lynch, Serge Dupont. Globe and Mail. Aug. 20, 2020. Canadians risk becoming addicted to pandemic aid. ↑
- Bev Dahlby. June 2019. University of Calgary School of Public Policy. SPP Briefing Paper, Vol. 12:18. Reforming the Federal Fiscal Stabilization Program. ↑
Consulting Partner: Deloitte
Federal Government Partner: Government of Canada
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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.