COVID-19: Canada Should Not Follow the USA Relief Model

This article (second of a series) looks at what (I think) will be the most effective “first response” economic policy interventions, in managing this COVID-19 pandemic in Canada. It keeps with Canadian traditions as well. The first article was on COVID 19: Making Risk Management Work https://www.dhirubhai.net/feed/update/urn:li:activity:6648072172600336384/. It covered the potential “first response” health mitigation policy measures.

 COVID-19 is akin to a global “neutron” bomb explosion (kills people, but leaves structures intact). It is causing huge ramifications for each country (deaths, suffering, labour losses, bankruptcies and economic downturns). I am not an Economist, but I see differing models of immediate government interventions. Such measures are founded on economic theories, market mechanisms, and complicated deferments, instead of a common-sense “pain alleviation” prescription.

 April 1st 2020 (week No. 3 in this saga), is actually the first day of people’s economic hardship (missed rent/mortgage/other payments and absent/reduced paychecks). Many countries including Canada and the USA have announced hefty payroll backstops to businesses and other moratoriums on rent/interest payments. While this is welcome, its bears (a) a huge burden on the national exchequer (future IOUs); (b) a notion that trickle-down economics will work here (keeping employers whole to look after its employees); and (c) a “thou” approach, where national pain is not shared by the fortunate sectors. This bourgeoisie-proletariat attitude is written large in the recently announced measures in both Canada and the USA. A few examples are highlighted below:

 1.      Emphasis on corporate payroll backstops, ignores the self-employed sector (trades, professionals, store-owners, contractors) who pay themselves from their net earnings (not payrolls) to feed their families. This is a large segment. Payroll backstops does little prevent job losses. Viability of a business lies in its ability to generate market revenues and maintain a bottom line. For example, despite these measures, over 6.6 million Americans were laid off in first 2 weeks (auto, airlines, hospitality, entertainment). Others have announced pay cuts of 20-50% in addition to layoffs.

 2.      Deferment of payments does little to alleviate added burden of future obligations. The policy measures do not address key questions (a) over what period should this be deferment be paid; (b) Is this extra burden (on top of existing high Canadian debt and low savings rate), too much when staged recovery returns in a year.

 3.      The fortunate large corporations (still in business) and vast government levels (including its public sector) are not sharing this national pain. It is merely advocating solutions. This large/well-paid workforce, has been largely immunized. Pay cuts and program slashings are in order here too.

 The current measures announced, are application-based, front ended with complications, convolutions and lots of criteria (if-then-but). It is not clear if such liquidity relief can be executed even in 6 weeks. Is there is a more direct and better mitigation measure? I think there is.

 The key questions to be assessed are, (a) what are the critical “people-pain” short-term-measures (who, where, how much.); (b) how can this be delivered immediately and directly; (c) what is the best efficient mix i.e. outright grants and others IOUs; and (d) how can bureaucratic hurdles be avoided.

 In doing this, Canada should not follow the USA model (trickle-down economics). Instead it should follow a “Direct Liquidity-National Solidarity” model involving the most efficient, direct delivery channels with least people line-ups. The following is the gist, I propose:

 1.      Direct Liquidity

a.      For Individuals and Families, an immediate cash “push” using (a) CRA tax account base and (b) the bank account base linked to SIN. The following should be adopted for the next 4 months, (a) Family Basic Assistance (FBA) – a non-repayment cash grant of $150/month per individual SIN into bank accounts [$12B] together with a non-repayment cash grant of $350/month in every individual CRA tax base account whose taxable annual earnings are less than 50k$  [$14B]; and (b) a Family Financial Assistance (FFA) by instructing debtor agencies (banks, mortgagors) and landlords to waive monthly payments up to $750 each of rent [$16B] and mortgage [$14B] and receive such aggregated amounts directly from the government through their CRA accounts. This total of about $56B should be held in a “COVID Relief account” for future recovery by government.

 b.      For the 1.2 million Micro/Small and Self-employed businesses (employing less than 99 people, making up 70% of Canadian businesses and 8.2 million people), avoid all application-based approaches and use a cash “push” through CRA tax accounts. A one-time cash infusion of 20% of their 3-year average gross revenues up to a maximum of $50,000 for those who reported gross annual revenues of $5 million or less. This amount of $30B should be treated as a “income tax liabilities” recoverable over a 3-year period beginning 2022.

 c.      Discontinue all current payroll-linked support mechanisms (both families and businesses), as the burden of application, proof, verification is not only arduous/time consuming but offers no employment guarantees.

 2.      National Solidarity

There are a few fortunate segments in the economy that are indeed blessed to survive. These are the Govt. Services and few large corporations (banks, insurance, pharmaceuticals, grocery chains). They must show solidarity with the country and share the national pain. Such measures should include:

 a.      Levy an interim COVID surtax of 5% on these operative large companies [$2B collected]. This surtax shall be credited back as tax credits beginning tax year 2022 onwards.

  b.      Action a pay cut to 3 million govt. payrolls for the 4 months (healthcare and first responders exempted) across all three levels of government (including their agencies and public sector organizations). Institute a 30% cut for those earning $75,000 to 120,000 and a 40% cut for those earning more than $120,000. Such “pain-sharing” approach [$32.5B savings] shall be paid back in lost wages over a 2-year period beginning 2022.    

 The above net outlay $51.5B (56B+30B-2B-32.5B) is far less than the current government announcement (Canada’s COVID 19 Economic Response Plan) of $82B, and is faster, easier, less arduous in process and reaches far more Canadians directly to make an immediate impact in alleviating their financial stress. By such a speedy liquidity infusion, economic recovery will likely spring back easier, enabling a full recoup of the government grant over 3 years. The pain is spread evenly as well. A strategy articulated along such lines will be much appreciated by Canadians, that we are all in this together.