Canada: Government steps in to protect economy from Covid-19 pandemic
March 27, 2020
In recent weeks, the government has announced fiscal stimulus measures worth roughly CAD 227 billion (USD 162 billion) to support the economy as it reels from the fallout of Covid-19. The package is mainly comprised of wage subsidies, state-backed loans, tax deferrals and direct support measures, and amounts to approximately 10% of GDP as of 27 March. The package, in coordination with steps being taken by the Bank of Canada (BoC) and the Office of the Superintendent of Financial Institutions (OSFI), should help cushion the inevitable and significant decline in economic activity in the short-term and should also aid the economy in the longer-term. Notably, the wage subsidy should support the labor market’s recovery and help avoid mass job losses, thus ensuring a smoother transition back to work once the storm settles.
The wage subsidy is set at 75% for three months for qualifying businesses, which could cost around CAD 25 billion. The government also introduced the Canada Emergency Response Benefit (CERB), which will replace household income temporarily lost due to Covid-19 up to CAD 2,000 per month for a maximum of 16 weeks. Moreover, a number of tax payments including the harmonized sales tax and the goods and services tax will be deferred until June—which is expected to free up roughly CAD 30 billion in liquidity for businesses. In addition, the government will provide state-backed loans for small businesses worth CAD 25 billion. Overall, with the measures outlined in the government’s fiscal package, combined with initiatives taken by the BoC, the OSFI, the Canada Mortgage and Housing Corporation and commercial lenders, up to CAD 500 billion in credit and liquidity has been pledged for businesses and households if necessary.
Commenting on the government’s measures to date, Brian DePratto, a senior economist at TD, noted:
“Between today’s measures and the Canada Emergency Response Benefit (CERB) announced earlier this week, there is now a decent level of support both for firms to keep employees on, and for those employees who are let go should the math still not make sense for their employers. Today's subsidy should help mitigate some of the upside risk on the unemployment rate, and the CERB will help blunt the income shock for those who are laid off.”
Author: Steven Burke, Economist