Canada leans on repayable loans, America favours direct spending and grants

Highlights:

  • Stimulus totals 10.2% of GDP in Canada and 12.7% in the US. In Canada, the mix relies more on repayable loans.
  • Direct payments to households are more limited in Canada, but wage subsidies will bolster household incomes indirectly and keep them with employers.
  • Uptake of business supports has been slower in Canada, with wage subsidy payouts totaling just $3.3 billion over the first two weeks.

Forced into opening the fiscal taps, governments have relied on the financial crisis toolkit and greatly expanded transfers to households to deal with the fallout from COVID-19. With loan support for big business in Canada and an extension of the broad wage subsidy, we think we’re close to the end of new crisis spending.

Total economic support in the wake of COVID-19 sums to about 10.2% of GDP in Canada and 12.7% south of the border. Both rescue packages include direct income support, loans and guarantees, and short-term tax deferrals, but their composition differs notably. The US has leaned more on direct spending and grants, while nearly half of Canada’s programs will need to be repaid in better times.



US business support is more targeted, while Canada spreads funding broadly

The US government has taken a firmer stand in supporting specific industries. Direct spending totals 2.6% of GDP, including health-related spending as well as transfers to public transit, food aid programs, and veterans. Canada’s spending for similar items has totaled 0.3% of GDP, mostly for protective equipment and environmental projects, but has generally eschewed sector-specific grants. Money for airports, emissions reduction in oil & gas, and grants to cultural institutions in Canada totals roughly the same share of GDP as grants to US airlines alone. Direct spending will provide additional lift to supported sectors in the US, but may leave gaps.

The Canadian government has spread support more broadly under the Canada Emergency Wage Subsidy (CEWS), totaling 3.2% of GDP. But until firms reopen, CEWS is an income support for workers, not a business support program. It has also been slow to fund: after about two weeks of applications (and six weeks since announcement) only about 123,000 applications totaling $3.3 billion have been approved. Despite a 12-week extension, it will still do little for firms struggling to manage overhead now, and may yet cost taxpayers a pretty penny. Slow CEWS uptake contrasts with the US PPP, which saw some 2.4 million applications over the same two weeks and to date has provided guarantees for nearly 3.9 million loans (with about 7 times as many firms in the US, uptake was about twice as fast as in Canada).



Support for large firms in both Canada and the US has focused on credit programs with loans coming with significant conditions around executive pay and capital return to shareholders. In Canada environmental and sustainability commitments are also required. This critical support will help insure against the loss of vulnerable firms in both countries, limiting catastrophic economic outcomes. And here, climate-related conditions will help move towards a green recovery, which we view as positive.

In Canada, though, the overall reliance on loans will do less for already debt-laden small firms, which are already seeing tightened credit conditions according to a Statistics Canada survey. Those that use loan support to survive may face prolonged deleveraging that could drag on the recovery.

US support of SMEs is smaller, but more impactful for those who receive them

While waiting for government support to roll out, small firms have burned through their cash buffers. A recent Canadian Federation of Independent Business survey said 32% of firms were unsure if they could reopen. 37% felt the CEWS would not help enough likely because while closed CEWS doesn’t help firms any more than furloughs. Firms may still struggle to cover rent, debt payments, and other overhead. Some may qualify for rent assistance, but only if landlords agree to take a rent haircut and revenues declines are steep. Instead, expansive temporary tax deferrals and other loans are supposed to help firms manage cash flow. But tax deferrals are unlikely to meaningfully change the math for firms as the crisis drags on, since taxes will need to be paid, and loans will drag on future earnings.



In contrast, US PPP loans can be forgiven if they cover mortgage interest and other operating expenses, which will help firms through the shut-down.



Canadian transfers keep employees with firms

To their credit, Canadian income supports have focused on keeping employees with their current employers, which will help employees return to work more swiftly when restrictions abate. CERB allows furloughed employees unlike traditional EI, and CEWS requires firm-employee relationships are maintained. US funding for more generous UI benefits include no such provisions, and is slightly less generous than the Canadian program. The balance of household transfers in the US are direct cheques to taxpayers, which spread funding broadly. Canada has also been quick to disburse these income support payments: total CERB benefits already paid to households total nearly $36 billion. Quick support has undoubtedly assuaged worries for Canadians and is no small feat for governments that normally takes much longer to roll out benefit programs.



Remaining agile and addressing shortcomings can improve recovery

Some program adjustments could help hard-hit, capital intensive, and high-debt industries (e.g., oil & gas, accommodation & food, airlines), which see comparatively less help from existing Canadian programs. To its credit, the government has flexibly addressed shortcomings of their swiftly designed programs. Still, existing programs will only provide meaningful support to the Canadian economy when fully paid out. At current uptake rates, help may not come in time for some firms, and their failures will drag out the recovery unnecessarily.

Businesses in Canada are more indebted than ever, so solutions that help firms without adding to their debt loads will give more lift as we overcome the virus lockdowns. Rather than seek security in loans, the government could look to take equity positions or design grant programs with the potential for upside. Many firms can’t service additional debt payments out of earnings so repayment will need to avoid draining future cash flows, or be linked to future profitability.

Whatever the government does for businesses, it will be critical that funds get disbursed quickly, as businesses are burning through what little cash they have left. Keeping an eye on the recovery means focusing on keeping business from failing.


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Colin Guldimann is an economist at RBC. He works primarily on issues related to housing markets, energy, and climate change. Prior to joining RBC, Colin worked on housing policy and macroeconomic research at the Department of Finance in Ottawa.

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