We can’t afford another shutdown, says report

OTTAWA • Canada cannot afford to completely shut down the economy in the event of a second wave of the coronavirus, says a group of academics and executives headed by a former Bank of Canada governor.

A report by the C.D. Howe Institute warns the Liberal government against “turning

one-off deficits into structural deficits” as Canada comes out of the first COVID-19 wave, and urges Ottawa to “restore fiscal manoeuvring room” quickly. Ottawa must reign in spending to address its deficit and create new revenue sources such as possibly taxing international tech giants like Google, Facebook and Netflix.

“If there’s a second wave, then we just don’t have the fiscal capacity to shut down the same way we did,” Jeremy Kronick, of the C.D. Howe Institute, said in an interview. “It’s just not going to be feasible to do again.”

The report says Canada is not capable of implementing another comprehensive shutdown of the economy if new cases of COVID-19 begin to climb, as the provinces, the federal government, and Canadian households assume massive amounts of new debt.

David Dodge, former governor of the Bank of Canada, and Mark Zelmer, former deputy superintendent at the Office of the Superintendent of Financial Institutions (OSFI), are co-chairs of the C.D. Howe group that wrote the report, published on Monday.

The recommendations play into a broader debate in Canada over how long the country should remain in lockdown and whether viral outbreaks in the future should be addressed through more targeted or limited economic shutdowns.

“Placing the economy in a partial coma made sense during the first wave of the pandemic, but if there is a second wave, a second economy wide shutdown should be avoided in favour of more targeted approaches that are effective and avoid further erosion of public finances and the risk of hitting debt walls and loss of borrowing capacity,” the report said.

The group said the financial measures put in place by Prime Minister Justin Trudeau were ultimately the right decision in the face of the pandemic, providing necessary relief to businesses and the unemployed. But it also says Ottawa needs to begin mapping out a road to fiscal recovery.

Finance Minister Bill Morneau has already delayed his annual budget, usually delivered around March, and has declined to provide an updated fiscal outlook, saying the state of the federal balance sheet is “very fluid” and therefore too volatile to predict.

Increased spending during the pandemic has already blown away the federal government’s net debt as portion of GDP, a key fiscal anchor often touted by the Trudeau Liberals. The C.D. Howe group said Ottawa should re-establish that fiscal anchor as soon as possible, or risk running structural deficits that could cost taxpayers down the road.

Economists are widely in agreement that Canada’s federal debt service costs are currently sustainable, particularly during the last decade of low interest rates. But that could begin to shift as the economy gets back to full capacity, and as elevated levels of borrowing around the world raise the cost of debt.

“It’s not a free lunch,” Kronick said. “Interest rates are low, and that’s an important point. But they don’t always have to stay low.”

Ottawa may also need to seek out new streams of revenue to cover the fiscal gap, the report said. Notably, it says the “tax base needs to broaden out” to include international tech giants like U.S.-based Google, Facebook and Netflix, which pay relatively little taxes in Canada compared to the massive revenues they reap in the country.

“Every jurisdiction has been looking at this issue of digital taxation, because what’s happening at the moment is companies are selling services and really not being taxed on those services,” said Kronick.

Private industry representatives on Monday echoed concerns raised by the C.D. Howe, arguing that successive shutdowns would permanently hamper supply chains and scramble corporate workforces.

“If we shut it down again, we probably will not reemerge for months, and you’re going to have unbelievable damage,” Donald Walker, chief executive of Magna International, told a parliamentary committee on Monday. The company is among the largest auto parts manufacturers in Canada.

The report comes at a time of unprecedented federal spending in response to the pandemic.

Federal spending per Canadian is 50 per cent higher than it was during the 200809 financial crisis, according to a report by the Fraser Institute published on Tuesday. .