Breaking Down Canada’s Economic Response to COVID-19

By Nick Thompson

The past week has seen the Government of Canada mobilize an unprecedented response in reaction to COVID-19. This response has been characterized by rarely utilized actions such as a shutdown of the Canada-U.S. border. Some measures, in particular those targeted at public health, are now well understood by most with information about “flattening the curve” and social distancing circulating all over social media. What may be less clear to many is how exactly the Government of Canada’s response to the accompanying economic downturn is going to work. With new measures being announced by the hour, it can be difficult to track exactly how proposed investments and policy changes fit together as well as their implications. This article will attempt to tackle the key components of Canada’s economic response to date and how they can be understood by those who are not economists.

Short-Term Income Support

Beginning with Employment Insurance (EI), the government is relaxing the requirements for EI sickness benefits by removing the one week waiting period and the requirement for a medical certificate. The new Emergency Care Benefit provides similar income support to EI sickness benefits for those who are self-employed and do not qualify for EI. These measures are meant to deal with what economists call “frictional unemployment” – the type of unemployment someone is experiencing when they are transitioning between jobs. These types of benefits are designed to make frictional unemployment more sustainable so that those currently unemployed due to the need to self-isolate do not resort to seeking out new work opportunities when advised to stay home.

Long-Term Income Support

First, the Canada Revenue Agency will be providing an Emergency Support Benefit – income support for those who aren’t sick and don’t qualify for EI but have been left unemployed due to the crisis. Second, the government will introduce an EI Work Sharing Program, providing additional income to workers who are losing work hours as a result of the current situation. These measures are targeted at what economists call “structural unemployment” – unemployment arising when workers’ skills do not match available positions, regional employment trends and other large-scale factors. In this case, the structural unemployment the government is hoping to address is positions or work hours lost due to an inability to work remotely or broader economic downturn.

Banks & Mortgages

First, the government will use the Canada Mortgage and Housing Corporation to purchase up to $50 billion in insured mortgages pools from commercial banks (like RBC, CIBC). This is a modified form of what some economists might call “quantitative easing” – a government purchase of banks’ high risk assets aimed at preventing financial institutions from running into financial trouble. Second, the government has secured an agreement from Canadian commercial banks to allow for up to a 6-month deferral in mortgage payments. This is designed to lower the risk of defaults among Canadian mortgage holders. This is crucial to ensuring that individuals don’t lose their homes and that housing prices in markets like Toronto and Vancouver do not crash.

Bank of Canada

The Bank of Canada is Canada’s central bank and works on behalf of the government to control various facets of the economy such as the amount of money in circulation. Most notable among its recent actions in response to COVID-19 is the Bank’s decision to cut the interest rate to 0.75%. This should make it cheaper to borrow money and encourage those with savings to forgo the reduced interest earnings in favour of spending their money to stimulate the economy.

Businesses

First, Export Development Canada will be increasing the availability of loans to businesses through programs such as the Canada Account and Business Credit Availability Program. Even businesses not required to close for health reasons may be forced to temporarily close due to insufficient revenue. This financial assistance should help them cover costs such as rent and property taxes while closed. Second, the government is proposing a small business wage subsidy of 10%, with up to a maximum of $1,375 per employee and $25,000 per employer. This is aimed at helping reduce the number of layoffs required for businesses facing financial difficulties and reduce reliance on the aforementioned income supports.

Vulnerable Communities

Measures worth noting are a Community Support Fund for Indigenous communities, support funds for victims of homelessness and domestic violence, an interest-free six-month moratorium on student loans and relaxed procedures for certain retirement savings programs. These steps are designed to provide groups at greater risk of income insecurity with the stability they need to weather this crisis.

Taxes

The Canada Revenue Agency is deferring tax deadlines by varying degrees. Although part of any government’s sensible response to a major economic disruption, this has more of a practical effect than an economic one. The main concern here being that individuals unable to file or pay tax bills during the crisis would receive unnecessary financial penalties.

We are only beginning to see Canada’s economic response unfold to this major disruption and only time will tell if the proposed measures have the desired economic effects. It is important to understand the basic theory underlying the government’s economic response so we can remain assured the government is not simply “spending money.” This brief description of key action to date should hopefully clarify some of that theory and provide insight in a time of great uncertainty.

One Comment Add yours

  1. Andrea Colasanti says:

    Great article!

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