One Very, Very Big Deficit

The fiscal snapshot yesterday confirmed the severity of the fiscal and economic impact of the pandemic on federal finances.  GDP is expected to shrink by 6.8 percent in 2020-21, government revenues are dropping 21 percent and spending is up 63 percent.  Believe it or not, the numbers say something about the elasticity of expenditures and revenues to a pandemic generated drop in GDP.  Based, on these percentages, it seems that a 1 percent drop in real GDP growth is associated with about a 3 percent drop in federal revenues while the same 1 percent drop in real GDP spurs a 9 percent increase in spending. Spending is definitely more elastic than revenue.

Revenues are dropping from 341 billion dollars in 2019-20 to a projected 268.8 billion in 2020-21 while spending is going from 375.3 billion dollars to 612.1 billion dollars.  As a result, the deficit is going from the original projected 34.4 billion dollars to 343.3 billion dollars bringing the federal debt to over one trillion dollars and the federal debt to GDP ratio to 49 percent.  In nominal dollars, this is indeed the biggest deficit in Canadian history but as a share of GDP it comes in at 15.9 percent putting it behind the 20 percent plus ratios incurred during World War II.  The accompanying figure gives a nice visual snapshot of the changes in the nominal values of some of the key variables.

The impact is serious but the economy and the federal finances should be able to absorb this as a one-time shock.  Moreover, much of this new debt is being financed at very low long-term interest rates and debt service charges will not change significantly.   However, if this happens twice then federal finances will head into a state where consequences will be more severe.  In the end, we are a small open economy and if everyone around the world starts to borrow at such rates, the increase in demand will eventually raise interest rates.  The "small borrowers" will feel the pain first.  

Canadians have been truly blessed by having their federal finances in relatively good shape heading into this crisis as it enabled their government to assist them.  However, the economy needs to restart and pick up steam and much of this new spending wound down over the next 6 months to a year if we are to avoid more serious restraint as well as large tax increases one to two years down the road. 

Pandemic's Economic Impact: Building Permits

Statistics Canada released the May building permit numbers today and they document the impact of COVID-19 on residential, business, industrial and institutional capital investment quite nicely.   The good news is that the total value of building permits issued by Canadian municipalities in May grew  20.2% to $7.4 billion.  This was a nice rebound following declines of 13.4% in March and 15.4% in April. Indeed, on a monthly basis, this was the largest percentage increase since March 2009, and according to the report it coincided with the relaxing of COVID-19 construction restrictions in Ontario, Quebec and Prince Edward Island. However, the May level is still 20.4% below the last peak observed in January 2020 and when the year-over-year statistics are looked at, we are down 10 percent.





The year-over-year percentage changes are important to look at in that they provide a better long-term comparison and they reveal that some Canadian CMAs are actually rebounding nicely.  Brantford and Barrie on a year-over-year basis saw increases of over 200 percent.  Peterborough and Thunder Bay were next with annualized increases of 51 and 44 percent respectively.  Indeed, 13 of Canada's 34 CMAs saw increases year-over-year including even Toronto at 11 percent and Windsor at 10 percent.  Both cities were exceptionally hard hit by COVid-19.  The worst hit cities in terms of annualized declines in building permit values were Kingston, Moncton, Gatineau (Part of Ottawa-Gatineau)  and Saskatoon.

For some of the smaller cities, the rebound is a bit of a small number's game. Thunder Bay, for example reported 9.5 million dollars in permits in May of 2019 and 13.7 million in May 2020.  I did notice a new mini-mall having land cleared in the River Terrace area so if that was issued in May, it would have helped the numbers.  A new mini-mall would obviously not have the same impact on numbers in the GTA. As for Peterborough, over the same period, the numbers go from 12.2 million dollars to 18.5 million.  Winnipeg, on the other hand went from 254 million dollars to 151.7 - in terms of scale, a much more impactful drop. As for Toronto, it goes from 1.6 to 1.8 billion dollars and Hamilton from 187 billion  to 255 billion dollars.

Interesting stuff.

A New Plateau for Ontario?

Well, as of tomorrow, pretty much all of Ontario moves into Stage 2 of the post-COVID lockdown reopening and this has been fueled by the continued decline in daily cases in Ontario.  As the accompany figure below shows, after the mid May plateau around 400 cases, decline appears to have resumed and yesterday June 22nd was one of the lowest case days since late March coming at 161 new cases. However, I would venture that the decline is about to slow again again and we are about to have a second plateau at around 200 cases per day.  Indeed, today's numbers show a rebound to 216 and if you look carefully at the LOWESS curve, it has slightly flattened out about the same way as I noted before the last plateau in a post in mid-May.



If this turns out to be the case, then Ontario's daily COVID profile will soon come to resemble a series of downward steps rather than a steady decline. If we plateaued at 400 in mid May and then at half the numbers in mid to late June, by the end of July if we half yet again we will still be getting 100 cases daily. Ideally, the goal is to enter a "plateau"  where the daily case growth is actually 0, but that is unlikely given that so many people have really already relaxed their attitudes.  Baring zero new cases as a goal,  Ontario needs to see daily case growth of 0.1 percent or lower by the end of July. If that were the case today and the growth rate of cases was 1/10 of one percent, then there would be only about 34 new cases today.  We have a ways to go.

Canada's Long Summer Break

As Canada begins to make significant inroads in driving down the daily new cases of COVID-19 and the number of recoveries rises further, the path forward is two-fold.  First, we  need to make sure that we continue to monitor the infection rate and take steps to ensure that there is not a re-ignition of the pandemic and a second wave.  Second, after three months of lockdown and reduced economic activity, we need to get the economy moving again – albeit carefully, with new rules and procedures for reopening to comply with the first step above.  Nevertheless, the challenge is daunting given a national unemployment rate that has soared to over 13 percent with 3 million unemployed and nearly as many underemployed with fewer hours of work.

We cannot afford a second wave given the economic damage that has already been done to the economy.  Many businesses may indeed never reopen and of those that remain, if they do not reopen this summer, there will be even more attrition going into the fall.  Part of the issue is the fall in demand but part of the issue is also the ability to find workers to start doing things again given the incentive effects that rapidly designed assistance packages appear to have created.  There is anecdotal evidence and public commentary that the CERB is paying many people to stay at home and that some people getting the CERB may not be entitled to it.   Naturally, the numbers alone raise eyebrows given that up to 6 million Canadians are either unemployed or working fewer hours but over 8 million are apparently receiving CERB benefits.  The stories range from PEI to Ontario and have prompted proposals of a crackdown. 

This makes today’s announcement about the two-month extension to the CERB particularly concerning.  While the government tried to place conditions on receiving the extension – such as "actively looking" for work though how that could even be monitored is a good question – these apparently did not pass so we are stuck with two more months of  a program that may cause some disincentive effects when it comes to re-starting the economy this summer.  Now it stands to reason that support like the CERB was needed to deal with the onset of the pandemic and making sure that people did stay home during the lockdown.  However, the numbers suggest that many more are collecting the CERB than the employment impact numbers suggest have been impacted.

For the upwards of two million Canadians collecting the CERB that appears in excess of the sum of those unemployed or with reduced employment, the last three months have seen the start of an early summer.  With today's extension of 8 weeks, Canada has now embarked on providing a relatively generous  long summer to several million people rivaling all that time off of school for the kids.  There may indeed be some very nice social benefits to all of this as people have more time to enjoy their families and do the things they have always wanted but ultimately the CERB is costing about $17 billon a month which means by early September it will have cost nearly $90 billion.  And, if more businesses shut down during the summer because they cannot restart due to labour shortages, then there will be even fewer businesses open to hire people come September and we end up with a self-reinforcing circle and a call to extend the CERB yet again.

Without a vaccine or effective treatment to COVID-19, there may indeed be many arguing its not safe to ask people to go back and that the CERB be extended.  At the same time, given the traffic I have seen in Thunder Bay this last week, I imagine the fear of COVID-19 may apply to returning to work, but little else.  If the CERB is to be re-extended, then perhaps a declining benefit designed to ease people off the support and back into the labour market makes sense. If the first three months are $2000 per month, perhaps the extension should come in at perhaps $1500 if only to set a precedent when the inevitable calls come in August to extend the benefit yet again.  Canada’s support to those hit by COVID-19 has been considerate and appropriate but it needs to have a long-term purpose.  It needs to help facilitate a transition back to economic re-engagement and not become a permanent fixture given the haste with which it was cobbled together.  If this is the start of a basic income program, it needs to be better designed. On the other hand, maybe this all just a lead up to calling a fall federal election.
 

Ontario’s Slightly Firmer Swedish Squirrel Approach to COVID-19

After over two months of “lockdown” in Ontario, our progress with respect to COVID-19 appears to have reached what can only be termed a plateau.  We have avoided worst case scenarios like Spain and Italy and not overwhelmed our hospitals but we are not seeing our numbers of new cases consistently go down as in some other provinces across the country such as Manitoba or B.C.  To be fair, Ontario does have some of the most densely populated parts of the country – namely the GTA – and the combination of dense populations and an international airport are factors which made the COVID-19 situation worse.  Ontario is not PEI or Manitoba. 

At the same time, our response to the onset of COVID-19 could have been quicker – here Ontario was not alone given the federal response – and the resulting “lockdown” was not really a lockdown in the sense of some of the European countries such as Italy or Spain.  While those countries were hit harder, they were at the front end of the pandemic and responded more firmly with their lockdowns.  In Italy, the “lockdown” was a complete shutdown where you could not go out unless it was to the grocery store or pharmacy and if stopped while out you needed to justify where you were going to police.  As a result, despite a more severe outbreak and having four times Ontario’s population, Italy is now registering fewer daily new cases than Ontario.

Ontario’s approach to COVID-19 in the end is a sort of Swedish approach with a fuller shutdown, less public compliance and a bigger economic cost in terms of shutdown.  Sweden’s population at just over 10 million people is close to Ontario’s 14 million.  Its approach in the end has been less successful in that it currently has a total of about 41,000 cases and 4,542 deaths compared to Ontario’s 29,047 cases and 2,312 deaths.  The Swedish approach has been less damaging to its economy - even schools and restaurants remained open – but its daily case numbers have not gone down settling into an equilibrium between 500 and 1000 new cases a day. The problem with the Swedish approach is not only the higher death rate but of course the greater risk of the pandemic re-igniting given the larger number of embers.

Ontario’s approach in the end has parallels to the family of five squirrels nesting in my rear yard’s pine tree.  Obviously, they are sensitive to COVID-19 given that they are sticking to gatherings of five.  However, they are a bit of a nuisance.   Despite my obvious attempts to discourage them, they do pretty much as they please as they gallivant from tree to tree.  However, they are very skittish and if I play hawk calls from my phone, they scamper away and lay low.  That seems to be the case in Ontario where despite a pandemic emergency and rules on social gatherings, people still pretty much go about their daily business including gathering in public parks and even participating in demonstrations in large densely populated cities.  And, the relaxed approach and lack of attention to details is even in some of those institutions that we were all most afraid of being overwhelmed – our hospitals. And then, as soon as something goes wrong, we act. Its not a consistent strategy.

This story on Thunder Bay’s CBC web site regarding a commuting physician with COVID-19 symptoms working at Thunder Bay Regional for days is an unfortunate case in point.  While I am certain that this is a complex story with many dimensions, the essence to me is that the hospital was not consistently following its own protocols – whatever they happen to be – and once a problem emerged, the response was the squirrel thing – a rapid shutdown again of all its “non-essential” surgical and outpatient procedures.  I suspect that in the end, the mortality rate is going to rise in the coming year in Ontario but more of the rise will be attributable to delayed diagnostics and medical procedures than from COVID-19 itself. 

In the case of Thunder Bay Regional, the interesting part of the story is that there will now be an investigation but that “the full report may be kept under wraps.”  Really? Are we implementing Chinese Communist Party management principles in Ontario health care?  I would be interested in knowing why during a pandemic an incoming commuting physician was not tested for COVID-19 as a matter of course especially given that the physician was exhibiting symptoms. True, they could be seasonal allergies, but given the difficulty of separating COVID symptoms from allergies, should not the medical staff worker have been tested as a precaution?  Is there not a supervisor this physician reports to who could have compelled testing on first mention of “allergy symptoms” to remove doubt? As an aside, was this physician flying back and forth to their other abode or driving?  

 

In the end, what do I really know?  I am a simple country economist observing the world from my home – be it presidents and prime ministers trying to make decisions affecting the welfare of their populations, hospital administrations and public health units dealing with health care, or squirrels foraging about their daily business.  To date, the motivation and behaviour of the squirrels has been the easiest to understand.