How much is enough?
This Toronto gym owner received $250,000 in pandemic aid. He says he needs more, but others say generous aid is subsidizing businesses that would ultimately have failed
Two weeks ago, Hugo Croft-Levesque was staring down imminent bankruptcy for his once-thriving Toronto kick-boxing gyms.
Even with $250,000 in government subsidies since COVID-19 restrictions began crushing his business, Croft-Levesque was more than $80,000 in debt.
For the first time since the pandemic began, he couldn’t pay rent.
On the verge of collapse, he managed to buy himself more time — his landlords agreed to wait until the next round of subsidies hit his bank account.
Just how much time he’s got, it’s not clear, with federal programs designed to give businesses a fighting chance during waves of lockdowns and restrictions set to phase out in the coming months.
“When I started my business, I had some capital to manage that growth period,” Croft-Levesque said.
“I don’t have the capital anymore, and I’m back to basically square one.”
While from the onset some have called federal supports too generous, others like Croft-Levesque say it hasn’t been enough, and that without continued help, countless businesses are set to fail.
“I could be one,” said Croft-Levesque, adding his mental health has taken a turn for the worse.
Since the start of the pandemic, the number of businesses going bust is down, to 2,786 in 2020 from some 3,700 in 2019, with government aid seemingly doing its job. When that money dries up, many industry experts say to expect a torrent of bankruptcies.
Whether the government should continue some two years later to keep businesses afloat — including those headed for certain failure before COVID-19 struck still hanging on solely by supports — to hold this tsunami at bay is where the division
Governments can help in terms of attempting to disentangle from personal assets, so that they’re not also personally bankrupted even if they do lose their businesses.
DAVID MACDONALD SENIOR ECONOMIST, CANADIAN CENTRE FOR POLICY ALTERNATIVES
lies.
“As part of a healthy economy, there has to be business failure,” said David Macdonald, senior economist with the Canadian Centre for Policy Alternatives.
“I am of the mind that we should start seriously curtailing business supports.”
Pre-pandemic, Croft-Levesque’s kick-boxing venture was booming — he brought in an impressive $55,000 to $60,000 in revenue per month, having put in the hard work for years to make his business profitable.
But unlike Croft-Levesque, not all businesses were doing so well in the months leading up, and would not have managed to keep the books running after the brutal lockdowns of March 2020 without government aid.
These so-called “zombie businesses” were a predictable downside to federal aid, with no way in a time of immediate need to take into account whether they would have been successful without it, said Macdonald.
Government subsidies were meant to “flash freeze the economy” at the height of the crisis, and that’s what they did, said Macdonald. Businesses — regardless of their pre-pandemic success — were able to hang on while waiting for restrictions to ease.
Zombie businesses and their ability to persist aren’t proof government aid was too generous, said Corinne Pohlmann, senior vicepresident of national affairs for the Canadian Federation of Independent Business (CFIB) — it’s not easy to figure out which businesses are doomed to fail, especially in a time of immediate need.
“We can’t make that decision for them,” Pohlmann said. Given continued support, “there’s probably a good chunk of those businesses that could probably get back up and running again,” she said.
Jack Mintz, president’s fellow of the School of Public Policy at the University of Calgary, said zombie businesses are a mild side effect of government support, and argued it’s not necessarily a bad thing that business closures may rise in 2022.
“There may be some businesses that will go out of business because they weren’t strong in the first place,” he said. “Businesses open and close … and that’s a good thing.”
The federal wage subsidy alone has provided more than $99 billion to businesses, while the rent subsidy program has ponied up another $7.5 billion.
The Canada Emergency Business Account (CEBA), a partially nonrepayable loan, has given out almost $50 billion. The Highly Affected Sectors Credit Availability Program (HASCAP), another $2.8 billion in loans.
Looking at those figures, it’s perhaps unsurprising that the expected wave of bankruptcies hasn’t hit — yet.
But insolvencies don’t tell the whole story.
Often smaller businesses don’t bother with the expensive process of filing for bankruptcy, so insolvency filings don’t accurately reflect the reality of business closures.
Many do what Statistics Canada calls an “exit” — when a business has been inactive for six months. As of April 2021, the business exit rate was slightly higher than pre-pandemic levels, at 2 per cent compared to 1.7 per cent, after a peak in April 2020 at 3.7 per cent.
Henry Louis, founder of Insolvency Insider, a digital media company focused on the insolvency and restructuring industry in Canada, said while there has been a slight uptick in business insolvency filings in 2022, he’s not expecting the anticipated avalanche to come anytime soon.
When it does, it won’t be a tsunami so much as a slow trickle, said Louis — insolvency takes time, and lenders right now are being lenient because of the pandemic.
“Companies have borrowed a lot to stay afloat,” he said. “But … they’re not going to go into bankruptcy overnight.”
He expects the eventual fallout — and there will be a fallout — to pick up speed later in 2022, and into 2023.
“Everybody knows it’s coming,” said Louis. “The question is when.”
“It’s just gonna be … a slow cleanup of the mess.”
The zombie scenario begs the question: What role should the government play, if any, in the continued ability of businesses to stay open?
The Canadian Federation of Independent Business’s position continues to be that as long as there are government-imposed restrictions, compensation for struggling businesses should continue, regardless of a business’s pre-pandemic revenues.
Government subsidies have targeted the biggest costs for businesses — rent and staffing — but they’re going into debt over other costs such as equipment, insurance and supplies, at an average of $170,000 per small business, the CFIB’s Pohlmann said.
“I think we have a responsibility to think about how we might help deal with that debt.”
Small businesses in particular need continued help, said Pohlmann, as many owners are draining their life savings to keep their livelihoods afloat, or going into personal debt.
Liyan Yang, a professor of finance at the University of Toronto’s Rotman School of Business, said there’s no right answer when it comes to how much the federal government should spend supporting businesses during the pandemic, or whether it should spend at all.
But he agreed it’s time to start winding down, at least for the majority of businesses, with some targeted sector relief. “The pie can become smaller.”
Alla Drigola Birk, director of parliamentary affairs for the Canadian Chamber of Commerce, said subsidies are a band-aid solution, and it’s time to talk debt relief.
The government did a good job of pivoting and updating programs as the pandemic dragged on, she said, but a new approach is needed, as many businesses are going to have difficulty paying back the debt they owe to the government and other lenders.
Thus far, consumers have been sympathetic to businesses’ plights — at least small, independent businesses — but they’re getting increasingly concerned about what continued government spending means for their own wallets.
Pandemic subsidies were supposed to be temporary, said Franco Terrazzano, national director of the Canadian Taxpayers Federation. Now two years in, it’s time to be more targeted with aid, he said, and prioritize small businesses over corporations — for the sake of taxpayers as much as small businesses.
“We do have to talk about setting a concrete end to the subsidies,” he said. “This isn’t day one anymore.”
The federal government is more than a trillion dollars in debt, said Terrazzano, and “Canadians have a right to be insecure,” with inflation at a 30-year high and possible interest rate hikes on the horizon.
Taxpayers have good reason to be concerned about government spending, said University of Calgary’s Mintz, but it’s not a sure thing that taxes will rise to offset federal debt arising from pandemic aid.
After the 2008-09 recession, there were similar concerns, he noted, but they didn’t come to fruition — by 2015, the tax-to-GDP ratio hadn’t significantly changed.
“What governments did, actually, was to hold the line on spending and just let growth deal with the deficits,” said Mintz. Macdonald isn’t concerned either. “We don’t individually owe the government debt,” he said.
“I think what the pandemic illustrated is … the awesome fiscal power of the federal government to take action when needed.”
He disagrees that continued subsidies are the solution.
The government’s next move should be an “off ramp” for businesses that have been particularly hard-hit by the pandemic but have remained in operation because of how entwined many small businesses are with their owners’ personal assets, he said.
“It often becomes very difficult to close a business because your house is on the line. And so you … keep running up debt, taking government supports, in the hopes that things will turn around.”
“What we don’t want to do is give people false hope.”
Many businesses are in sectors that have been fundamentally changed by COVID-19, said Macdonald, such as food and accommodation, and the government should consider making its easier for business owners in these sectors to walk away.
“Governments can help in terms of attempting to disentangle from personal assets,” said Macdonald, “so that they’re not also personally bankrupted even if they do lose their businesses.
“And I think that that is probably what should be the next phase.”
During the first lockdown, CroftLevesque started driving for Uber to keep up with his own mortgage, while government subsidies kept his business above water.
But once he reopened, he had to work to gain back the numbers he had lost, and continued to operate at a loss in 2021 as his business subsidies drained faster than his revenue grew.
He held out a lot of hope for January 2022, a boom time for gyms as New Year’s resolutions take hold. But then came Omicron.
“If I had been able to open in January, I would have been OK,” he said.
As subsidies subside, he believes the government should do something to soften the blow when it comes to choosing insolvency over month-to-month survival.
“At least help the small business owners get out clean, you know?”