ECONOMISTS CRITICAL OF COVID AID EXCESS
EXTENDING BENEFITS TO 2021 ‘CREDIBILITY RISK’ FOR CANADA
A recent move by the federal government to extend its major COVID-19 assistance program well into 2021 risks turning Canada’s deficit into a structural shortfall, several economists and fiscal experts warn.
Finance Minister Chrystia Freeland announced last week that Ottawa would be extending its Canada Emergency Response Benefit (CERB) by another month, then effectively replacing the CERB with a new program — the Canada Recovery Benefit (CRB) — until September 2021. The new CRB will give $400 a week for 26 weeks to Canadians who are ineligible for employment insurance, compared with $500 per week under the CERB.
The federal government is also tweaking EI rules to make it available to any workers who can demonstrate at least 120 hours of work.
Some economists and fiscal experts say the oneyear extension goes against months of warnings that Ottawa risks turning temporary COVID-19 spending measures into permanent fixtures, as the pandemic enters its sixth month.
Rebekah Young, economist at Scotiabank, said Canada will increasingly face a fiscal “credibility risk” if it continues to extend programs. Rather than spread its financial aid equally across Canadian households, she said, policymakers could instead be looking to stimulate capital spending in the private sector, or offering childcare coverage that will allow mothers to return to the workforce full time.
“We don't necessarily certainly need massive, broad-based stimulus at this stage,” she said. “The more we make these programs feel quasi-permanent, the more there will be a harsher, more critical look at this spending, because it suddenly becomes a structural deficit.”
Young said the government has essentially reduced the CERB by $100 per week, then changed its name to include the word “recovery” as part of a rebranding exercise.
“They've essentially replaced the CERB with a Cerb-like compensation program,” she said.
Some observers have claimed that the CERB has acted as a disincentive to return to work, while others have said the program needed to be more generous to support struggling families. In a statement on Tuesday, Parliamentary Budget Officer Yves Giroux said his office “found a small, but material, disincentive to work” due to CERB, citing a June report on the topic.
In a fiscal update earlier this summer, Finance officials estimated that the middle third of Canadian households have roughly $1,600 in monthly expenses, including mortgages — a figure directly equal to its updated payout under the CRB. Economists are divided over whether Ottawa should have lowered payouts to slightly below $1,600 as a way to incentivize workers, or phase out the program as it nears the end of 2020.
“It's not unreasonable to err on the side of generosity,” said Doug Porter, chief economist at Bank of Montreal. “It's a tough call, I admit. But perhaps it should not have been extended quite that long.”
He repeated other claims by economists and fiscal watchdogs that Canada's towering deficit will be increasingly difficult to grapple with as programs become more and more baked into the system. While observers say that low interest rates today have drastically lowered the cost of debt compared with, for example, the budget crunch of the late 1990s, those costs will eventually rise as the Canadian economy climbs back to health.
“As the prime minister loves to point out, interest rates are historically low and the interest costs on this debt are by no means binding it at this point,” Porter said. “But they could become binding. I don't think we really want to test the limits on that front.”
Ottawa currently estimates a $343-billion deficit in 2021, not including $37 billion in new spending announced last week. Scotiabank economists predict the new CRB program will cost roughly $15 billion.
Kevin Page, founder of the Institute of Fiscal Studies and Democracy and former Parliamentary Budget Officer, said the rising cost of debt was unavoidable given the uncertainty facing policymakers in the early stages of the pandemic.
Global lockdowns forced governments across the world to drastically ramp up financial aid spending, which has so far been largely accepted in debt markets.
“Governments are going to run massive deficits right now that are shocking in historical terms, but there was really no choice,” he said. “Right now, government needs to play the role of shock absorber,” he said.
Dan Kelly, head of the Canadian Federation of Independent Business, was supportive of many of the changes announced last week for CERB and EI. But he also warned that a provision to allow workers to collect EI after demonstrating just 120 hours of work over the past year will create massive disincentives; a worker with just 3.5 weeks of work over an entire year will be eligible for $10,000 worth of benefits under the new rules, Kelly said.