OTTAWA — Federal spending on financial supports during the height of the global pandemic in Canada greatly outpaced that of other developed countries, enough to actually raise household incomes at a time when the economy was in free fall.
A new report by the Organization for Economic Co-Operation and Development (OECD) shows that household incomes in Canada increased by 11 per cent in the second quarter of 2020, while incomes in other developed nations including the U.K., France and Germany decreased. The boost came despite a more than 10 per cent contraction in the Canadian economy over the same period, shortly after strict lockdowns were introduced across the country.
The figures underscore the immense scale of the Liberal government’s emergency aid spending, prompting economists to contemplate what level of fiscal response is necessary to cushion the Canadian public against economic fallout.
“It raises a very serious question about whether we overdid it,” said Jack Mintz, economist at the University of Calgary’s School of Public Policy. “It’s one thing to help people bridge the pandemic because they lost income. But it’s another thing to actually make them richer.”
The report by the OECD comes weeks after another report by the International Monetary Fund (IMF) projected that Canada’s deficit as a percentage of GDP will be the single-largest of any country in 2021, at 19.9 per cent. The U.S. (18.7 per cent) and U.K. (16.5 per cent) are expected to run the next-largest shortfalls.
Experts are widely in agreement that some level of fiscal support was needed in order to keep businesses afloat and replace the lost income of unemployed people. But Mintz and others have long suggested that federal support programs could have already been trimmed back as a way to incentivize workers and not avoid overspending.
“In terms of lost income, the appropriate thing is probably to be flat,” he said. “But certainly not increasing.”
The Liberal government introduced a number of emergency programs early in the pandemic, widely supported by businesses and the general public. The Canada Emergency Response Benefit (CERB) gave unemployed people $2,000 per month, while the Canada Emergency Wage Subsidy (CEWS) paid up to 75 per cent of wages for businesses as a way to keep people employed.
Combined, the two projects will cost over $150 billion by the end of December, according to government estimates. The federal deficit is projected to reach $350 billion in 2021, then decline sharply in the following years.
“Canada was more generous than most other countries in providing quick stimulus,” said Avery Shenfeld, chief economist at CIBC.
Economists are broadly in agreement that current spending measures will need to be wound down sooner rather than later, or risk slowing an eventual recovery. Ottawa in late summer made moves to reduce payments under the CERB from $2,000 to $1,600 per month, but ultimately abandoned those plans after facing pressure from the NDP.
It has since transitioned to the new $2,000-per-month Canada Recovery Benefit (CRB), which Shenfeld said includes some provisions that should better incentivize return to work.
“As the economy improves, ideally, we want to gradually make unemployment benefits less available and less tempting, and build in more incentive to accept to work,” he said.
Finance Minister Chrystia Freeland has offered few details about how she will sketch out a return to pre-pandemic budgets, and has declined to provide an updated fiscal anchor in her upcoming budget update.
In her first major speech as finance minister in late October, Freeland did hint that spending would eventually be wound down.
“Our fiscally expansive approach to fighting the coronavirus cannot and will not be infinite,” she said.
The OECD report also had the United States posting a rise in household incomes in the second quarter at 10 per cent, largely due to the emergency CARES Act passed by Donald Trump in April. However, the OECD said the bump is likely to be “temporary” as new fiscal spending plans remain stuck in Congress.
Other countries posting higher incomes included Ireland (3.6 per cent), Australia (2.7 per cent) and Finland (1.1 per cent). Italy saw a seven per cent drop, while household incomes in the U.K. dropped 3.5 per cent.
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