Canada’s COVID-19 Fiscal Stimulus Package was Worth the Cost.

Soon after the outbreak of COVID-19, the federal government faced a choice: either provide a targeted stimulus package that bailed out the sectors most affected by public health restrictions or provide a big stimulus package providing cash assistance to all employers and employees who experienced an income loss as a result from the pandemic.

The government chose the latter option.

Canada’s COVID-19 Economic Response Plan provided direct support to Canadians and businesses, invested in key health care systems, and gave financial support to the provinces and territories, all for the cost of $403.3 billion.

At the time, some commentators worried that the size of the stimulus package was too big and risked overheating the economy.

Since then, Canada’s headline inflation rate has surged, hitting 4.7 per cent in last month’s release, reaching the highest headline inflation rate since 2003.

The current situation has left many wondering: were the stimulus programs worth the cost, and if a similar crisis were to happen in the future, should we do it again?

The answer to both questions is a resounding yes.

The large stimulus package should be considered a success for three key reasons.

First, the large stimulus package helps money circulate through the economy, leading to a much quicker economic recovery.

The COVID recession caused a nearly unprecedented fall in spending, a rise in saving rates, and a climate of fear for investors, but by broadly distributing large sums of cash, the federal government made sure that there would not be a dramatic and sustained fall in GDP.

An early assessment of the fiscal policy in response to COVID-19 by Michael Smart found that it only took 5 quarters for Canada’s GDP to climb back to market prices relative to the pre-recession peak, which was a much faster economic recovery compared to previous recessions in the 1980s and 1990s, despite it being a much larger recession.

The recovery in GDP is surely a positive sign for Canada’s economic recovery, but it does not reflect how the recovery was distributed among people working jobs in different sectors with different incomes.

The second reason is that the large stimulus package helped contribute to a quicker employment recovery by keeping employees connected to their employers.

The COVID recession caused unemployment to spike to 13.7% in May 2020 and, according to the Bank of Canada, much of the losses were concentrated among people working lower-income jobs in sectors that were most impacted by lockdowns. The Bank of Canada has also found that the jobs losses were more likely to affect women, young people, visible minorities, and Indigenous Peoples as they are overrepresented in the population of people with lower-income jobs.

Previous recessions including the ones that started in 1981, 1990, and 2008 created sustained declines in employment and it took years for employment to recover back to pre-recession levels. Comparatively, the 2020 recession has had a much faster job recovery largely because of fiscal programs like the Canada Emergency Wage Subsidy (CEWS) that helped workers stay connected to their employers, as many of the job losses were temporary layoffs.

Since losing nearly 3 million jobs in just a few months, Canada’s employment rate has almost fully recovered back to the pre-recession levels, while the Canadian working-age employment rate — the share of people ages 15–64 with a job — reached an all-time high in November.

Despite spending less money (as a percentage of GDP) on their COVID-19 fiscal stimulus package, Canada has had a much faster job recovery than the US.

The third and most important reason that the stimulus package was worth the cost is that many of the stimulus programs that gave workers some cash-assistance to workers provided financial stability to those most in need of help.

Despite the economic crisis and the recent surge in inflation, almost all Canadian families have more money in their pockets and bank accounts now than they did before the pandemic. Since

Since the fourth quarter of 2019, real household income per capita (which is adjusted for inflation) has grown at the cumulative rate of 9.4%, the highest of any OECD country.

Incredibly, the gains in household incomes were the strongest among people in the lowest income quintile.

The chart shows the change in household disposable income and shows that lower-income households experienced the highest gains.

Much of the rise can be attributed to the Canada Emergency Response Benefit (CERB) which gave $500 a week in cash assistance to those who experienced an income loss due to the pandemic. In many cases, the cash benefit exceeded the income losses of the lowest-income households by a wide margin.

After CERB expired near the end of 2020, subsequent programs like the Canda Response Benefit (CRB) gave a smaller amount of money but continued to provide much-needed cash to people impacted by public health lockdowns in later waves of the pandemic.

The rise in household incomes can also be partly to a tightening labour market — a consequence of running the economy hot leading employers to compete with each other to hire or retain workers by providing higher wages, benefits, or improved working conditions.

The high gains in household income for lower-income families are remarkable considering that recessions typically cause declines in household income which is almost always most concentrated among lower-income households and the COVID recession was the largest in Canada since the Great Depression.

The main takeaway from all of these statistics and charts is that the pandemic stimulus package was worth the high fiscal cost because it quickly and broadly distributed large cash benefits to the people and businesses who were most in need of help, stabilizing the economy at large.

The large, broad, and quickly distributed fiscal stimulus package in response to the pandemic proved that the federal government is fully capable of responding to a crisis and was an effective strategy, but the last two years have also made it abundantly clear that we cannot rely on the federal government to implement last-minute responses to crises that we should have been prepared for.

Whether it be the public-health guidelines, lack of emergency PPE, or the government’s failure to respond to extreme weather disasters like in BC, Canada is not immune to events that create crises and has shown to be woefully unprepared in responding to the aftermath of a crisis.

So, Trudeau and the federal government should prepare now for the next crisis by creating “automatic stabilizers” that would automatically increase government transfers to employees and help stabilize the economy when faced with the threat of a recession.

It’s not a radical or controversial idea.

The policy was pioneered by former Federal Reserve economist Claudia Sahm.

In the run-up to the election a few months ago, the Conservatives endorsed the policy of “automatic stabilizers” which would temporarily provide more generous EI benefits when unemployment rises for three months by at least 0.5 percentage points — an indicator that’s become known as the “Sahm Rule.”

The Conservatives proposal would increase EI payments from 75% of salary instead of 55% automatically which help give cash assistance to the people who most need them in a time of economic crisis, effectively putting unemployment relief on autopilot.

If automatic stabilizers were implemented, then we would not need to rely on the capability of the federal government to avoid any infighting and quickly agree to pass legislation to address a recession. The federal government proved that it could do this in the response to COVID, but the public health response to COVID and the immediate response to recent disasters in BC have also proved that we can not be certain the federal government will always be quick to respond to crises in a quick and effective manner.

The large fiscal response to the pandemic passed under Trudeau and the Liberals is good policy for the same reason why the Conservative’s proposal for automatic stabilizers is good policy: they quickly and broadly give cash assistance to those who lost income from work, in a time of economic crises, when they are most in need of help.

MPs of all stripes need to recognize that automatic stabilizers are good policy and pass legislation ensuring that people will have financial support from the federal government before the next crisis happens.