BILL PROPOSES EXTRAORDINARY TAX MEASURES

Bailouts, tax hikes possible to help battered economy

• The Liberal government will table emergency legislation on Tuesday that would equip Finance Minister Bill Morneau with far-reaching powers to raise taxes and bail out companies up until the end of 2021, according to a draft of the bill obtained by the National Post.

If passed, the legislation would allow the minister to raise taxes without parliamentary approval.

The bill, tabled in response to the COVID-19 pandemic, would “have the effect of repealing or imposing a tax, decreasing or increasing a rate or an amount of tax otherwise changing the incidence of tax,” the draft legislation says. It would also give Ottawa authority to “purchase or hold a company’s shares” and would allow the health minister to, in effect, break patents on medical devices that might need to be made urgently.

The draft bill was still in negotiation as of late Monday, and still needs to be passed in the House of Commons. Some policy-makers are returning to Parliament Hill on Tuesday to debate the legislation, which would trigger a range of fiscal measures already announced by Morneau.

The legislation’s call for sweeping new powers is likely to trigger opposition.

In a statement on Monday, Conservative Leader Andrew Scheer said the party “will not give the government unlimited power to raise taxes without a parliamentary vote. We will authorize whatever spending measures are justified to respond to the situation, but we will not sign a blank cheque.”

The emergency legislation comes as the federal deficit, already expected to blow past $100 billion this year, is set for another spike as the Liberal government grapples with soaring unemployment and a Canadian economy that could remain in lockdown for months rather than weeks.

A report from the Conference Board of Canada on Monday estimated that social distancing measures amid the COVID-19 pandemic could remain in place until the end of August, vastly extending earlier estimates that the virus could be contained within weeks.

That would pile on plenty of new federal debt as businesses call for higher subsidies to curb already surging layoffs and as economists call for billions more in fiscal stabilization spending.

Morneau last week announced $27 billion in new spending as part of an effort to cushion the economic fallout from COVID-19, and said more measures would be rolled out in the coming weeks.

That is already expected to bring the 2021 deficit to $70 billion, according to Rebekah Young, director of fiscal economics at Scotiabank. And economists are calling for it to go higher.

As layoffs continue to mount, Ottawa could easily add another $50 billion in new aid that would send that figure to $120 billion, or roughly five per cent of GDP, to provide a bridge to people and businesses.

“Quite frankly, I suspect the federal government was shocked by the EI claims last week, so I think the $100 billion last week is definitely going to be growing,” she said.

The federal Employment Insurance office last week said it had received 500,000 new applications for support in a matter of days, compared to the roughly 1.5 million applications it typically gets in a year — and well above the highest ever monthly reading of 393,180 in January 1991.

Those losses, already expected to climb, could explode if social distancing measures remain in place longer than initially expected. Several provincial governments have already declared states of emergency, shutting down large segments of the services industry and eliminating massive amounts of cash flows for small companies.

“We are in unchartered territory entirely,” Young said. “We’re already seeing layoffs. The private sector is going to need more than loans and loan guarantees. And it’s going to have to come off the fiscal balance sheet.”

Those worries come as some policy-makers prepare to return to Parliament Hill on Tuesday to enact legislation that will trigger new fiscal measures. Opposition members and industry lobby groups are likely to put added pressure on Prime Minister Justin Trudeau to further open the fiscal floodgates.

The ongoing fallout will be sharp and unprecedented in scale, economists say. The sudden surge of EI claims had the effect of lifting the unemployment rate to eight per cent from 5.6 per cent, according to a note from BMO Capital Markets analyst Benjamin Reitzes. With four million Canadians working in the vulnerable retail, wholesale, hotel and restaurant sectors, that initial blow could be just the beginning.

“Let’s be clear, what the global economy including Canada is about to experience is the sharpest economic contraction in modern history,” said Frances Donald, global chief economist for Manulife. “It will be faster and more pronounced than we have ever seen. However, it may also be short.”

The “optimistic case,” Donald said, is that the virus is quickly brought under control and people are rehired as rapidly as they were laid off. The “pessimistic case” would see the economy shut down for many more months, leaving companies unable to rehire at the same pace.

The duration of the downturn is crucial, since the longer people are out of work, the more vulnerable the economy will be to additional shocks, particularly in the housing sector, Donald said. Due to soaring housing prices, Canadians are already the most highly leveraged in the G7, carrying debt of $1.76 for every dollar in disposable income. Deep job losses that drag on could lead to rising mortgage defaults and delinquencies.

“For many years, people have been afraid of the Canadian housing market bubble bursting, but we’ve always said it would require people to lose their jobs so they couldn’t pay their mortgage,” Donald said. “This shock feels almost uniquely tailored to hit the housing market where it will hurt most.”

Indeed, the current crisis is poised to hit the housing sector with a “triple whammy”: job cuts that could prevent people from paying mortgages and debt; supply side shocks that would see construction sites shut down, and demand disruption that would prompt open houses to be cancelled and leave fewer buyers looking at homes, she said.

Staving off rising unemployment will demand much bigger stimulus measures — and fast. Ottawa has already committed to $55 billion in tax deferrals on top of the $27 billion in direct support, including a 10 per cent subsidy to cover the wages paid to employees. Other countries have gone further. National Post, with files from