As the coronavirus continues to spread, calls are rising for aggressive stimulus to fight the economic fallout. Because interest rates are already very low, the textbook response is now fiscal policy: either tax relief or new spending.
However, given Ottawa’s failure to set aside money during the good times, Canada can ill afford a scattershot approach. Rather, aid needs to target the specific threat: job losses and bankruptcies among vulnerable workers and at-risk employers. And aid needs to move fast — not years-long highway construction. The storm is already here.
What distinguishes coronavirus from a standard slowdown is its speed and its specificity: the virus is likely to devastate industries where customers are staying home to minimize contagion. That means restaurants, nightlife, tourism, transport and local retail stores.
These sectors are characterized by both small businesses and vulnerable workers. They employ over 4 million Canadians, one in four private-sector jobs. Because pay in these industries is typically low, many of these workers will have little or no financial cushion if they lose their jobs.
Meanwhile, of the 119,000 restaurants and commercial accommodations in Canada, 98% are classified as small businesses. Given the fixed costs of running a business — rent, utilities, property taxes, licence fees — many simply don’t have the resources to ride out a catastrophic drop in customers lasting weeks or months.
What are our options? First, keep in mind that Canada already has a purpose-built mechanism for such “black swan” events: Employment Insurance (EI). Further help can be given by making EI effective earlier, by raising payments, or by extending the period of benefits.
Still, this might not be enough. The best way to help both vulnerable workers and small business is tax relief. It’s fast, stimulative, and can be easily targeted. A tax holiday on payroll taxes quickly puts roughly 7.5% of salary in the pockets of workers, while saving employers another 7.5% of salary if they keep workers on the job. Compared to income tax relief, payroll relief is better targeted to lower-income workers and to the small businesses that hire those workers.
A second fast and targeted stimulus comes from tax holidays for small businesses. These are mostly at the local level, including especially the commercial property tax. The restaurant, nightlife, and retail industries are exactly the businesses that pay this tax, at punitive rates up to three to four times the residential tax rate. Forgiving these taxes, or at least deferring them, can quickly help small businesses impacted by social distancing.
If things deteriorate, the heavy ammunition is a tax holiday on the GST and provincial sales taxes. Last year, GST receipts alone totalled over $3 billion per month. Suspending it offers a large stimulus that can be quickly distributed. By encouraging customers to spend, sales tax relief precisely addresses the root cause of the economic crisis.
All three of these tax measures share the benefit that they actually grow the economy, rather than simply running up debt. Studies have found that every dollar of tax reduction is associated with two to three times more economic growth. This makes tax relief a better choice than lump-sum handouts that are, in practice, overwhelmingly saved.
Last year, nearly $70 billion per month flowed into federal, provincial, and local governments. With 50% drops in demand on the horizon in some industries, it’s time for the tax collectors to do their part. If a recessionary cascade is to be headed off, aid must be fast, it must be tailored to the vulnerable, and it must prudently keep our economic powder dry in case the crisis endures.
Peter St. Onge est économiste senior à l’IEDM, Luc Vallée est chef des opérations et économiste en chef à l’IEDM. Ils sont les auteurs de « Pour un stimulus fédéral ciblé contre le coronavirus » et signent ce texte à titre personnel.