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Costing the recovery

David Macdonald's presentation to the Standing Committee on Finance on March 18, 2021 regarding Bill C-14 and COVID-19 spending.

March 19, 2021

3-minute read

The economic response to COVID-19 from government has been unprecedented in Canadian history. We’d need to look back to the World Wars to see government expenditures on this scale. Although we’d have to look back almost a century to the 1930s to see unemployment at that scale.

My recent report, Picking up the Tab, compiled a comprehensive dataset of all 850 direct federal and provincial COVID-19 measures through December 31, 2020, including the fall fiscal update. The overall conclusion of this compilation is that when it comes to measures to combat COVID-19, those measures have been paid for almost entirely by the federal government. In fact, 92% of every dollar to combat the impact from the coronavirus on everything from PPE to business and individual supports have come from the federal government. Even in areas of provincial jurisdiction like health care, 88% of the cost was born by the federal government.

The largest expenditures including both federal and provincial programs have been to support businesses, accounting for $4,100 a person. Supporting individuals comes in second at $3,900 per capita and health care support is in a distant third place amounting to $1,200 a person. In each of the categories examined, except one, the federal support was larger than provincial support. The one area where the provinces have been spending more is on physical infrastructure to stimulate growth, this is being driven by the western provinces. The federal governments major infrastructure program at this point is the new resilience stream of the Canada Infrastructure Program, although this only re-allocated existing funds.

Without immediate interventions, child care closures and the loss of staff may make a rapid economic recovery impossible as parents will be unable to find spaces for their children as they return to work.

It’s worth pointing out as the federal government embarks on a new round of spending in the upcoming spring budget that many provinces didn’t properly match federal money in support of municipal deficits and many provinces didn’t access all the money available to them. In the next phase of the recovery, the federal government should keep a close eye on matching dollars and fund utilization to ensure the maximum impact for its efforts.

This bring me to next stage of federal COVID-19 spending at a promised $70 to $100 billion in the spring budget. As I mentioned before, infrastructure spending is already budgeted in several western provinces. This is an area where the federal government can back provincial efforts, like they did for earlier provincial efforts with the “safe restart agreements.” New infrastructure spending that reduces the country’s carbon footprint can be an important opportunity to build back better and further encourage the central and Atlantic provinces to devote more of their COVID-19 dollars to infrastructure.

I’d also like to take a moment to call members’ attention to our annual child care fee study published just this morning providing a detailed look at child care fees and COVID-19 impact in 37 Canadian cities. This year’s survey shows a very concerning decline in enrolment in childcare due to the COVID-19 at the same time as fees remain high across the country. This decline is worse in cities with high fees to begin with and cities with high unemployment. Without immediate interventions, child care closures and the loss of staff may make a rapid economic recovery impossible as parents will be unable to find spaces for their children as they return to work.

One of the other ongoing lessons from this survey, that may be instructive for future federal efforts, is that the lowest child care fees are always found in cities where providers receive provincial operational grants and charge a low set fee. Just last year Newfoundland became the fourth province to join Quebec, Manitoba and PEI in this approach and it looks like the Yukon will soon follow suit.

A deficit is neither good nor bad on its own... To evaluate the utility of a deficit in a particular sector, say in the federal government sector, we have to track where the surplus was created.

More broadly, I am encouraged that the federal government is committed to rebuilding the economy rather than being overly preoccupied with federal deficits. Large federal deficits were necessary to avoid much worse deficits in other sectors. Had the federal government not covered expenses, those deficits would have much worse for the provinces as they covered health care costs, for individuals as they lost jobs and weren’t covered by EI and for businesses as public health closures wiped out incomes.

A deficit is neither good nor bad on its own. It is merely one side of an accounting relationship with an equally large surplus created in another sector. Every dollar comes from somewhere and goes to somewhere else. To evaluate the utility of a deficit in a particular sector, say in the federal government sector, we have to track where the surplus was created. For the past four quarters, the federal deficit was $220 billion but the surplus this created was shared ¾ to the household sector and ¼ to the business sector. Thankfully, little of the surplus escaped Canada in the form of financial flows to non-residents.

The federal government isn’t constrained by deficits or debt-to-GDP ratios, it is constrained by the country’s productive capacity. As long as we have people who can’t find jobs, empty stores and restaurants, we aren’t at our productive capacity. Inflation is the constraint the federal government faces. We have to remember that going into this crisis we managed historically low unemployment, rock bottom interest rates and still weren’t seeing sustained inflation. When we’ve got 800,000 low wage workers still out of a job compared to February last year, we are nowhere near full capacity and inflation will remain subdued for a long time to come.

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