Policy note pans ‘scattershot’ approach, proposes three alternatives to help most at-risk sectors
As the Canadian government implements social distancing and an aggressive travel ban to contain the spread of coronavirus, businesses will need support to counteract the resulting slowdown in economic activity. But because the country’s central bank is almost out of ammunition, it’s time to adopt fiscal measures.
But in a new publication, the Montreal Economic Institute (MEI) asserts that instead of a “scattershot” approach, the federal government should use targeted measures.
“Ottawa should directly target the real threats: job losses and bankruptcies for workers and employers without the financial cushion needed to weather the storm,” MEI Senior Economist Peter St. Onge, who co-authored the paper, said in a statement.
Citing figures from the Department of Finance, St. Onge noted that Canada’s federal government is already running substantial deficits.
“This economic slowdown is atypical since it may hit certain sectors of activity like tourism, restaurants, and nightlife hardest,” added Luc Vallée, COO and chief economist at the MEI and co-author of the publication.
Workers in affected industries often have modest wages, Vallée said, leaving many without sufficient savings to weather the crisis. And out of 119,000 restaurants and commercial accommodations operating in Canada, 98% are reportedly classified as small businesses that can’t last through a weeks- or months-long drop in sales.
“The solutions most often put forward, like infrastructure spending, would simply take too long to produce their effects and to help those most affected,” St. Onge said.
The MEI publication offered three options to provide targeted assistance:
- Offer a tax holiday on payroll taxes including the Canada Pension Plan, Employment Insurance, and provincial plans, which amounts to roughly 15% of salary;
- Give small businesses an exemption from the property tax, which would reduce fixed costs and mitigate the risks associated with lack of liquidity; and
- Announce a tax holiday for federal and provincial sales taxes, which would encourage consumers to spend on goods and services.
“All three of these tax measures share the characteristic that they are prudent even without a crisis,” the authors said. “Furthermore, the stimulative effects of tax relief make it a better choice than lump-sum handouts that are, in practice, overwhelmingly converted into savings.”
