Economic analysis

How to save the economy

Top Canadian economists explain what Ottawa should do next
Construction continues on condos as Canada takes precautions to slow the spread of COVID-19 in April (Steve Russell/Toronto Star/Getty Images)
Construction continues on Queens Quay condos as the province and the city take precautions to slow the spread of COVID-19 in Toronto. April 21, 2020. (Steve Russell/Toronto Star/Getty Images)

Since March, governments have released a blizzard of new programs and policies to stabilize the economy. But what comes next? We asked economists for their big ideas about what Ottawa and the provinces should do now.

Clarity creates confidence

Pedro Antunes, chief economist, Conference Board of Canada (Colin Rowe Photography)
(Colin Rowe Photography)

Pedro Antunes, chief economist,
Conference Board of Canada

While social distancing and the halt to non-essential activity were necessary to halt the spread of COVID-19 and avoid straining our health-care system, they carry a large economic cost. Consumer and business confidence has been shattered and governments have responded with a host of programs to cushion the economic fallout. Unquestionably, these policies and programs were required, but the fact that they have not been applied consistently across the country contributed to an already uncertain operating landscape. Restrictions on activity vary from province to province while the information about support programs put in place by federal, provincial, and municipal governments (even some Crown corporations offered relief) is overwhelming and difficult to navigate.

The key to emerging from this recession will be restoring business and consumer confidence so that, as restrictions are eased, they are ready to hire and spend. Governments can support confidence by being transparent with respect to when and how restrictions will be phased out, what health and security requirements specific businesses will need to adhere to, and what they will do in the event of a resurgence of COVID-19 cases. While companies are used to dealing with our multitude of interprovincial barriers and regulations, alignment between Canada’s federal and provincial leaders on the plan to phase out restrictions would reduce uncertainty at a time when we simply have too much of it.

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A summer of instant infrastructure

Michael Veall, professor of economics, McMaster University (Georgia Kirkos)
(Photo by Georgia Kirkos)

Michael Veall, professor of economics,
McMaster University

While policy adjustments continue, the main bases appear to have been covered for income support. The focus should shift to safe job creation. Normally I am cautious about boutique programs, but it is not the time to be squeamish.

Dust off that old standby, a temporary home renovation tax credit, but with quick payouts and social distancing provisions. Extend that program to small business. Take a bow for the orphan wells cleanup program and look for other ways to create jobs while solving known problems that will have to be dealt with sooner or later. Make it sooner. Encourage provincial governments to do what they can to re-ignite construction and resource industries. Besides the ongoing push on medical supply manufacture, introduce a sharp and short subsidy of immediate internet and telecommunications investment. Use subsidies to ramp up childcare as soon as operationally safe. Ship money to municipalities for anything shovel-ready, including environmental projects, tree-planting being the cliché.

Make it the summer of instant infrastructure. Avoid delays by letting starting-times depend on local conditions. The unifying principle is rapid employment and output creation. Everything should be a limited-time offer: an incentive for action now, not months from now. Finally, while Canada had a reasonable safety net, it wasn’t designed for this kind of crisis. Plan a new one.

The kids aren’t alright

Tammy Schirle, professor of economics, Wilfrid Laurier University (Tomasz Adamski)
(Photo by Tomasz Adamski)

Tammy Schirle, professor of economics,
Wilfrid Laurier University

What are two things that matter most for landing that first great job after graduation? A graduate’s social networks and the state of the economy will largely define their career trajectory. Moving into the labour market in the middle of this pandemic will be devastating. Studies have shown that entering the workforce during a typical recession is associated with a large loss in earnings for new graduates, compared to their potential, and the negative effect takes up to 10 years to fade. We’re looking at graduates with few options to work in the coming months, and the opportunities for those from less advantaged socioeconomic backgrounds are even worse. We will need support for programs that find innovative ways to bring new entrants into the labour market, perhaps with work-from-home internships, targeting those lacking networks, as well as broader income support for those unable to land that first great job.

EI should be kicked to the CERB

David Macdonald, senior economist, Canadian Centre for Policy Alternatives (Courtesy of David Macdonald)
(Courtesy of David Macdonald)

David Macdonald, senior economist,
Canadian Centre for Policy Alternatives

Let’s formally replace our creaking EI system with a modern equivalent based on the Canada Emergency Response Benefit (CERB). Just like the 1970s computers that run it, EI was built for another era of work with regular hours, a formal workplace and decent pay. This crisis has exposed its flaws: it’s bureaucratic, unresponsive to workers’ needs, incredibly slow, and incredibly complicated. Our dated EI system was built out of the crisis of the Great Depression in 1940, and a modern EI system through CERB is being rebuilt to meet a modern-day crisis. We need a system built for and more adapted to our economy, to our times, to our reality, to our fast-paced lives and smartphones.

The COVID-19 crisis finally forced us to throw the antiquated EI system into the trash and build a new one on the spot. Despite being done quickly, the design benefits of the CERB are substantial: it’s built for speed, it covers gig workers, it provides a floor on benefits for low-wage workers, it’s dramatically simpler to administer, and it’s easy to understand what you’ll get. Hopefully these features will be the foundation for a new modern EI system following this crisis, and we can leave our post-war EI system where it belongs: in the bin.

Good government needs fair tax systems

Frances Woolley, professor of economics, Carleton University (Courtesy of Frances Woolley)
(Courtesy of Frances Woolley)

Frances Woolley, professor of economics, Carleton University

A government is, in essence, an insurance company with an army. It can insure against the kinds of risks that private insurance companies cannot, or will not, take on. In Canada, Employment Insurance, the Canada Emergency Response Benefit, and other programs are insuring workers against income and job losses caused by this coronavirus. Canadian firms and investors are being insured through wage subsidies, loans and the Bank of Canada’s actions to provide stability in financial markets. Provincial health insurance systems provide every Canadian with health-care coverage.

Yet for government insurance to be effective in protecting both the economy and the people and businesses who make up the economy, everyone has to opt in and pay insurance premiums. In recent decades, however, many have tried to opt out. For example, firms avoid paying Employment Insurance premiums and other payroll taxes by reclassifying employees as self-employed, independent contractors. There is widespread lobbying for lower tax rates or special tax breaks.

The COVID-19 pandemic is reminding Canadians that governments play a vital role in ensuring economic stability and prosperity. They can play that role most effectively when they are supported by a strong, fair, and efficient tax system. What I hope to see coming out of this crisis is a serious effort to strengthen the revenue foundations of good government. This means regularizing gig economy work, levelling the tax playing field between digital and bricks-and-mortar firms, preventing the tax base erosion, and reducing tax avoidance.

A sales tax holiday for consumers

(Courtesy of CFIB)

Ted Mallett, chief economist, Canadian Federation of Independent Business

The unknowns about COVID-19 with respect to public health are complicating Canada’s efforts to manage the economic policy aspect of the crisis. Short-term measures on incomes, payrolls, credit and rent in a shutdown environment are eventually going to have to transition to support for restart and recovery. For small businesses, that path will be uneven and bumpy. Even if permitted to reopen, businesses will be faced with higher operating expenses before any meaningful revenues return. Credit and wage subsidy measures, therefore, will have to stay in place as that process begins. Consumers too will be shy to reestablish old habits, so they may need nudges from demand-inducing measures like sales tax holidays to help get money circulating again. Boosted infrastructure spending may help a little, but past experience shows its value doesn’t always measure up to its costs.

Longer term, Ottawa and the provinces will need to focus on the fiscal hangover. Attention should be on incentivizing participation in the work force—because we need to earn our way out of this. Education, immigration, childcare and mobility-directed measures to bring in and to keep people working are widely supported by the general public, as are removing barriers to business creation. For other necessary measures, like delaying retirements, some may need more persuasion. There will be difficult choices ahead and limited funds, so we can look forward to a completely new policy-making environment.

This article appears in print in the June 2020 issue of Maclean’s magazine with the headline, “How to save the economy.” Subscribe to the monthly print magazine here.