Justin Trudeau’s Covid-19 Spending Becomes Key Lifeline for Canada’s Economy – Bloomberg

One big takeaway from Canadian
economic data released this week has been the extent to which housing is driving the nation’s recovery from the pandemic. Another is how the economy remains heavily reliant on government help.

A look at the national economic account shows that transfers by Prime Minister Justin Trudeau’s government to households and companies remain elevated, even as they come off their peak pandemic levels. Direct spending by governments, too, continues to make a major contribution in an economy where business investment remains well below pre-crisis levels.

The following are some of the numbers that underscore the role the state is playing in Canada’s recovery:

Helping Households

Transfers from the state make up a record share of Canadian incomes

Source: Statistics Canada

Transfers to households from all levels of government actually increased in the first three months of 2021 to C$84 billion ($69 billion), from C$76 billion in the final quarter last year. While below the quarterly peak of C$120 billion in the immediate aftermath of the pandemic, that’s still well above pre-pandemic levels. Over the first 12 months of the pandemic, households received C$370 billion in transfers, versus C$238 billion in the year before the crisis.

Much of that is being hoarded, which to many economists represents a potential source of growth down the line even though it raises questions about whether the assistance was too generous. Canadian households have saved more money in the past 12 months — C$242 billion — than they had in the previous seven years combined.

Backing Business

Government subsidies helped Canadian businesses cope with Covid

Source: Statistics Canada

Business subsidies have been declining since the start of the pandemic, but remain elevated. They were C$15 billion in the first three months of 2021 — about half the levels seen earlier in the crisis but seven times the amount of support given to business in the first three months of 2019. It includes the continued handouts from the government’s marquee Canadian Emergency Wage Subsidy program (CEWS), which has so far deployed C$80 billion in aid.

Trudeau has faced criticism for making the subsidy too generous, and those voices have only gotten louder after this week’s data showed profits continue to soar. Profits before taxes hit a record C$339 billion in the first quarter on an annualized basis, a 52% jump from pre-pandemic levels. Those profits now represent 16% of the country’s national income, a record share in data back to 1961.

Protecting Profits

Canadian corporate profits are up more than 50% during pandemic

Source: Statistics Canada

“This is not a good use of public funds,” said Michael Smart, an economics professor at the University of Toronto, said by phone. “Early in the pandemic that was a very desirable policy, but we see the effects now are fundamentally to pad the bottom lines of these businesses.”

Like households, much of it is being set aside. “How these funds are redeployed, or if they are at all, will materially impact the shape of Canada’s economic growth post-crisis,” Dominique Lapointe, an economist at Laurentian Bank of Canada, said by email.

Trudeau’s Covid-19 Spending Was Tilted to High-Earning Households

For many analysts, the record support could lead to challenges as the country starts to wean itself off government aid. With investment still fragile, it’s unclear whether the large subsidies will be redirected into the economy as lockdown restrictions lift and the businesses reopen.

“Beyond the direct cost to the government today, there’s also a question about how smoothly the economy handles an eventual pull back in support”, Brendon Bernard, an economist with job-postings website Indeed Canada, said by email. “All eyes will be watching what happens during the eventual wind-down of CEWS, as well as the emergency household support programs as the summer progresses.”

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Justin Trudeau’s Covid-19 Spending Becomes Key Lifeline for Canada’s Economy – Bloomberg

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