MONTREAL – As COVID-19 continues to spread across Canada, a rising chorus is calling for expensive fiscal stimulus to fight its economic fallout. A Montreal Economic Institute (MEI) publication launched today asserts that given already low interest rates, fiscal measures are the textbook response.
“Instead of a scattershot approach, spreading public money around while it is already running substantial deficits, Ottawa should directly target the real threats: job losses and bankruptcies for workers and employers without the financial cushion needed to weather the storm,” says Peter St. Onge, senior economist at the MEI and co-author of the publication.
“This economic slowdown is atypical since it may hit certain sectors of activity like tourism, restaurants, and nightlife hardest. And because wages are often more modest in these sectors, many workers will not have the savings needed to navigate this crisis,” adds Luc Vallée, COO and chief economist at the MEI and co-author of the publication.
This will likely also be true for the businesses that employ them. Of the 119,000 restaurants and commercial accommodations in Canada – 98 percent of which are classified as small businesses – many simply don’t have the means to ride out a drop in sales lasting weeks or months.
Three targeted solutions
“The solutions most often put forward, like infrastructure spending, would simply take too long to produce their effects and to help those most affected,” notes Peter St. Onge. He therefore proposes three targeted measures, adapted to the current context:
- A tax holiday for payroll taxes (Canada Pension Plan, provincial plans, Employment Insurance, etc.): These taxes represent 15 percent of the salary of an employee, who pays around half with the employer paying the rest. A tax holiday would put money back in workers’ pockets and, by reducing the cost of labour, make it easier for companies to keep workers on amid falling sales.
- An exemption from the property tax for small businesses: This would on the one hand reduce fixed costs, and on the other hand help mitigate the lack of liquidity that could make certain companies vulnerable.
- A tax holiday for federal and provincial sales taxes: Stimulating consumption would be beneficial for especially local businesses. And, contrary to direct payments to taxpayers, which tend to be converted into savings, this measure would encourage customers to spend on goods and services.
“Each of these measures target the workers and businesses most at risk, while encouraging future growth that mitigates future deficits. This economic slowdown is different from previous slowdowns, and the response deserves to be specifically tailored to this unique situation,” concludes Luc Vallée.
