- The Federal government announced today that the 75% wage subsidy announced last week would apply to all businesses, regardless of size and includes for-profit, non-profit and charity organizations. This was the right thing to do. Given the severe recession taking hold and the shutdown of many non-essential businesses, a large spike in unemployment is coming. It is much better to keep workers on the payrolls than have layoffs and expanding benefits for the unemployed. Wages are the biggest expense that firms have. So, providing the 75% wage subsidy to all employers of all size that experience a drop in revenues of 30 percent or more will help address the balance sheet shock to firms. There are a number dimensions to highlight.
- First, this program will be fiscally expensive — but when there are Depression risks, now is not the time to worry about the deficit or debt levels. This can be addressed when the crisis has passed. Canada is also in better fiscal shape than other countries. Given all of the recent announcements, keep track of the size of the stimulus and cost is becoming problematic, but we will tackle that topic in a future E-sight note.
- Second, the wage subsidy is capped at $847 a week, which covers 75 percent of a worker with an annual salary of approximately $58,700. So most workers can benefit, but there will be less subsidy for high paid workers. Progressivity is an element of our fiscal system, so it is not surprising.
- Third, administering this program will be difficult. There was a clear appreciation of this in the Prime Minister’s comment today, as he mentioned that there will be oversight but he is expects employers to abide by the honour system when applying for aid and making sure that the money goes to workers. There is bound to be some firms that inappropriately benefit, but it was important not to let this stand in the way of launching the program. The reputational and brand risk to firms that act inappropriately is significant once we are out of the crisis, so businesses are forewarned.
- Fourth, the wage subsidy is retroactive to March 15 and the government is hoping that employers who laid off workers in recent weeks will rehire those dismissed. Time will tell if this actually happens. I suspect firms that are closed and have no revenues will not do so, but some larger companies might.
- Overall, this broad and impactful policy should preserve jobs, help workers and businesses. From a statistical point of view, many of the jobs lost in March were after the reference week for the Labour Force Survey, meaning that the April employment report won’t show many of the layoffs. Meanwhile, the May employment report will show a higher unemployment, but the wage subsidy should temper how high it jumps.
- Oil prices fell again today. WTI fell towards US$20 a barrel—a 17-year low in nominal terms. More importantly, Western Canada Select fell to an intraday low of $3.82 a barrel. This is a reminder that Canada is not only facing an economic crisis from the pandemic, but is also experiencing an enormous oil shock that adds to the suffering in oil-rich provinces. The depressed oil prices reflect lower global demand, a regrettable decision by OPEC not to cut supply and inventory levels that are now pushing against their capacity limits. While we anticipate that the Canadian economy should start to rebound in Q3, the overhang of excessive crude oil inventories will persist for a considerable time. Although we have had many fiscal announcements in recent weeks, some form of bailout program is needed for the oil patch.
- CMHC has announced plans to expand its Insured Mortgage Purchase Program by purchasing an additional $100bn on top of the $50bn already announced on March 16. A similar measure was deployed during the 2008-09 financial crisis, with $69 billion purchases—about half of the available capacity. This action is aimed at providing additional capacity for banks to continue expanding credit to Canadians and businesses. Moreover, OSFI has indicated that deferred mortgages will still be treated as performing loans for bank capital requirements.
