About time

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   By Guest Blogger Ryan Lewenza

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Last year we were hit with the worst global pandemic in a 100 years. As this new coronavirus spread around the world, the global economy was ground to a halt, resulting in unprecedented job losses and economic carnage.

Governments in turn responded by providing financial assistance to companies and individuals hit hard by the economic downturn and lockdowns. Here in Canada, many of these financial programs are set to expire this weekend so many were waiting with bated breath on whether these programs would be extended.

Today I’ll review the announcement from the federal government over changes to these programs and provide my take.

A bit of history first.

When Covid-19 first hit the Federal government responded by introducing the Canada Emergency Response Benefit (CERB), which paid those impacted by Covid-19 and the economic downtown $2,000/month. To be eligible for this benefit you had to be a Canadian resident, must have been employed with employment income of at least $5,000 in the 12 months prior and you had to have lost your job due to reasons related to Covid-19.

About a year ago the Feds changed CERB to the Canadian Recovery Benefit (CRB) and lowered the monthly amount to $1,200/month.

This is set to expire this weekend and on Thursday the federal government announced that it’s replacing the CRB and other programs, like the rent and wage subsidy for businesses, with more targeted programs.

For example, the CRB changes to the Hardest-Hit Business Recovery Program, and the rent and wage subsidy for businesses changes to the Tourism and Hospitality Recovery Program. Both of these new programs will be focused just on the hardest hit sectors like hospitality, so the costs of these programs is coming down significantly. To fiscal hawks like us, we applaud these changes and frankly it’s about time!

Don’t get us wrong, we urgently needed these programs when Covid first hit but now is the time to start winding them down.

First, and most importantly, we’ve recovered 100% of all the job losses from the Covid-19 downturn as a result of the very strong job growth. Since last May the Canadian economy has added 3 million jobs driving the unemployment rate from 13% to 6.9% currently. This alone could be sufficient reason to begin winding down these emergency programs.

Moreover, job vacancies in Canada are at their highest levels in years. Currently, there are 731,000 job vacancies and in speaking with many business owners, they are having a hell of a time filling job openings, which I believe is partly due to these ongoing government programs. It’s real simple. If the government is handing out these funds, then some (not all as many Canadians have been impacted by this terrible event) are going to abuse it and continue to live off it until it’s cut-off.

Canadian Employment is Back at Pre-Covid Levels

Source: Bloomberg, Turner Investments

Second, as a result of this extraordinary financial support provided by the government, we’ve racked up the biggest deficits in history and have nearly doubled the Federal government debt over the last two years (our debt stands at $1.1 trillion, up from $700 billion last February).

So far, the Federal government has spent a jaw-dropping $300 billion on these support programs. This massive increase in government spending has blown a monster hole in our balance sheet. Last year we recorded a deficit of $354 billion (five times larger than the previous high set during the financial crisis), and is projected to be up another $157 billion this year. Oh boy, that’s a lot of red ink that one day will have to be paid back.

Canadian Federal Government Yearly Fiscal Balance

Source: Bloomberg, Turner Investments

Finally, after a slow and disjointed vaccine rollout, the government (feds and provincial) picked up their socks and have delivered pretty good results with 72% of our population fully vaccinated and 82% with one dose for those 12 and older.

As a result (since science works) our numbers are dropping so we’re slowly getting control of the pandemic and returning to normal. Emphasis on slowly. As this happens we see a lot of pent up demand driving the economy higher, which if correct, should result in continued job growth and therefore less of a need for these programs.

In my view the government made the right call to pull back on these emergency programs and now just target the particularly hard-hit sectors like hospitality. It’s time to put on our big boy/girl pants on and ween ourselves off these very expensive programs.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.