Canada’s virus spending seen as drop in the bucket

$1B plan may not be ‘sizable enough’ if economic hit spreads: Conference Board

TORONTO The federal government’s opening salvo against the new coronavirus is already looking to experts as the first step in what may have to be a more expensive campaign to blunt the economic impact of COVID-19.

Prime Minister Justin Trudeau on Wednesday announced details of Canada’s response to the virus, a $1-billion-plus spending plan that includes $275 million in additional research funding and $500 million in health-care cash for provinces and territories.

The fiscal policy on offer so far is in addition to monetary stimulus the Bank of Canada injected into the mix last week with a half-a-percentage-point cut to its policy rate.

More may be required if the feds want to truly dampen the economic effects of the virus.

The Conference Board of Canada, for instance, has predicted the country’s economy will take a $550-million hit — or about half of the federal spending plan — in the first half of 2020 related just to reduced spending by Chinese tourists.

“I don’t think that this really is sizable enough to have an impact if we do start to see implications for some sectors,” said Pedro Antunes, the Conference Board’s chief economist, of Canada’s plan thus far.

Those implications appear to be on the way. By Wednesday afternoon, COVID -19 had been upgraded to a pandemic and markets were in turmoil again. Oil prices have fallen as well, both because of an outbreak-related drop in demand and because of a global price war in the energy markets.

Recent developments have left Canada’s economic forecast looking considerably grimmer. And the federal government’s plans for virus-related stimulus so far is also just a relative drop in the bucket when compared to Canada’s $2.3-trillion in output.

“It’s really just a first down payment,” said Doug Porter, the Bank of Montreal’s chief economist, of the government’s initial response.

“To seriously adjust the outlook for the economy, I think it would take quite a bit more than this.” So what else could be done?

One suggestion is cutting payroll taxes, something floated in the U.S. by President Donald Trump, who has already signed a Us$8.3-billion emergency spending bill aimed at fighting the outbreak.

Some businesses want Canada to follow suit. The Canadian Federation of Independent Business said Wednesday that the federal government should take the added step of pausing planned increases to Canada Pension Plan premiums.

A call for payroll tax cuts was also made by the Canadian Manufacturers and Exporters.

But different governments have opted for different strategies. China has reportedly set aside almost US$16 billion to fight the virus thus far, while South Korea has announced spending of nearly US$10 billion, as well as a crackdown on the short-selling of stocks. More than 3,000 people have died from the virus in China, while the South Korean toll has passed 60.

In other unique moves: The European Union’s executive arm is setting up a 25 billion euro investment fund (albeit using existing resources); a locked-down Italy is suspending mortgage payments; and France is permitting firms to declare coronavirus-related “force majeure,” a clause in contracts that can let a party off the hook if unforeseen circumstances arise.

The United Kingdom, meanwhile, has a 30-billion-pound stimulus plan that includes a “Hardship Fund,” sick pay for those diagnosed with the virus or in self-isolation and a “Coronavirus Business Interruption Loan Scheme” to ensure lenders keep lending.

Canada’s government has said it will speed up how quickly workers in quarantine or self-isolation receive Employment Insurance sickness benefits and that it will tweak a federal anti-layoff program.

The federal government is also signalling it is prepared to do more.

If the economy were to see “tightening credit conditions,” the government says it would help companies by quickly pumping more cash into federal lending agencies, such as the Business Development Bank of Canada and Export Development Canada.

If the global and North American economies slow even more than what is anticipated, more measures should support consumer spending and business investment in the second half of the year, Porter said, such as through direct transfers like tax rebates. Financial Post