In 2008, the global economy was shocked into a recession by a meltdown in global financial markets. G-20 leaders reacted quickly to the deteriorating economic situation with a coordinated fiscal policy response. The International Monetary Fund encouraged those countries that had the fiscal flexibility to implement fiscal measures amounting to 2% of the their economies. The resulting fiscal stimulus went a long way to mitigate the impacts of the global recession.
Today, the global economy has again been shocked into another recession by a rapidly spreading deadly virus. The global economy was already fragile and growth was slowing, but it was the spreading virus that set the recession in motion. Unlike 12 years ago, there was initially no sense of urgency to act to contain the virus. There was no coordinated policy response and the U.S., the leader of the G-20, simply denied that a problem even existed. Now weeks later, the U.S. still doesn’t have the means to contain the virus.
In 2008, the Harper Government initially denied the likelihood of a recession. All that changed a few months later, and after the G-20 meeting in Washington, the Conservative Government introduced a major stimulus budget (2% of GDP) in January 2009.
In 2020, the Prime Minister seems uncertain as to what the federal government should do. On Monday of last week, the Government announced $1 billion of new measures. Of this amount, $500 million is to go to the provinces and territories to assist in containing the virus and $250 million to research into finding a vaccine.
On Friday, the Finance Minister announced the establishment of a $10 billion Business Credit Sustainability Program to support the private sector through the Business Development Bank of Canada and Export Development Canada. The Bank of Canada cut the overnight interest rate by 50 basis points to 0.75%. In addition, the Office of the Superintendent of Financial Institutions lowered the Domestic Stability Buffer requirement for banks from 2.25% to 1%. These measures will only marginally affect the deficit, as they are largely off-budget measures.
This was a good start but it didn’t go nearly far enough. Compare this to what the Harper Government announced in the 2009 Budget in response to the global recession. To increase access to financing, an additional $50 billion was provided to the Insured Mortgage Purchase Program, $13 billion in additional funding to the three large financial Crown corporations, increasing the maximum eligible loan amount for small business, creating a $12 billion Canadian Secured Credit Facility, among others. In total, these measures amounted to over $75 billion, increasing total financing under these programs to $200 billion. Most of these measures were off-budget, thereby having little impact on the deficit.
In addition, the 2009 Budget also proposed measures of $18 billion, which directly affected the deficit. These included $5.9 billion to help Canadians through changes to the employment insurance program and stimulate spending, $3.9 billion for housing construction, $5.7 billion to build infrastructure and $2.7 billion to support communities.
The Finance Minister has promised to provide a “major stimulus program” this week. However, given the nature of the current crisis and its accompanying uncertainty, he should announce bold fiscal steps not small steps. The consequences of being too timid are too serious.
The “virus recession” will not end until the growth of the virus is contained. The primary focus of this week’s announcement must recognize this fundamental objective.
The nature of the stimulus package must be different from that introduced by the Harper Government in 2009 although its size should be as large if not larger. There are expenditures in in the framework, which could be advanced. Tax reductions are not required as the focus should be on those without earnings. Certainly, more funding to the provinces and territories to assist front line public health workers and new testing facilities will be essential. Hospitals are already overcrowded, leading to corridor medicine. Employment Insurance regulations will need to be changed to assist those who do not have health leave provisions. Support should also be provided to ensure that Canadians can pay their rents and mortgage payments. In addition, there will need to be measures to assist the energy sector due to a price war that is not their making.
Let’s be clear, regardless of the new funding that is provided, the most important counter-cyclical policy that could be implemented is securing public and private support from Canadians for changes in their day-to-day lives that they never expected to confront.
C. Scott Clark held a number of senior positions in the Canadian Government, including Deputy Minister of Finance from 1998-2001. He has a PhD in Economics from the University of California at Berkeley and is currently President of C. S. Clark Consulting.
From 1990 to 2005, Peter C. DeVries served as Director, Fiscal Policy Division, at the Department of Finance. In that capacity he was responsible for overall preparation of the federal budget. He is currently a consultant in fiscal policy and public management issues.
Their Blog is 3dpolicy.ca