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April 3, 2020

On Monday, the federal government announced the framework for a Canada Emergency Wage Subsidy (CEWS) to support employment by topping up payrolls for employers suffering COVID-19-related drops in revenue. More details came out on Wednesday, including the types of employers it will cover, the pay it will supplement, the size and duration of revenue drop that will trigger eligibility, and the estimated cost.

This is an extraordinary measure — something entirely new on the Canadian landscape. Not surprisingly, more details, including the application process and record-keeping requirements, are still to come. Parliament will need to approve it. It is not too early to say, however, that this initiative will turn out to be central in determining how quickly and completely Canada’s economy recovers from the COVID-19 crisis.

While we do not yet know the severity of its impact, COVID-19 has already dealt a massive blow to Canadians’ livelihoods. Many businesses have cut back or closed as customers disappeared, many more as public health-related restrictions came into effect. Demand for Canada’s exports is down and supply chains are stressed.

For people who have lost their jobs, income supports through more generous Employment Insurance or the new Canada Emergency Response Benefit are good. Much better, though, is to forestall layoffs in the first place. Losing a job can be devastating. Breaking the links, and possibly a relationship of trust, between employers and employees is traumatic. Lost incomes will deepen the downturn and permanent closures will slow the recovery. The federal wage subsidy is the right idea.

The widespread coverage of the program is a key virtue. Limiting it to employers below a certain size is politically tempting, but hugely problematic in application. Business structures and employment relationships come in many forms. Specifying a limit — 250 employees, say — creates arbitrary boundaries and perverse results: a large business with franchises might be eligible when a smaller integrated company would not. Making it available to all employers outside the public sector avoids other arbitrary exclusions — not least between businesses and not-for-profits. Moreover, widespread coverage makes the program easier to roll out — and speed is essential in forestalling layoffs.

The generous coverage is also a virtue. Seventy-five per cent up to a per worker threshold of $58,700 annually — a maximum payment of $847 per worker per week — looks like a lot and it is. That earnings threshold is roughly equivalent to average earnings in major Canadian cities. But it needed to be big: many of the businesses and not-for-profits suffering from the crisis are in dire straits. The previously announced 10 per cent wage subsidy, and potentially even a 55 per cent replacement, along EI lines, would make much less difference. The larger amount will help employers retain employees even in low-margin organizations — and many service industries and not-for-profits operate with very low margins.

A third important feature is the requirement to demonstrate a 30 per cent fall in revenue from the same month a year ago. This feature will make the program more effective. Requiring a decline over a longer period would have ruled out many organizations that cannot withstand a revenue decline over a quarter, let alone a year.

With Parliament due to consider the program, what needs attention?

Speed is critical in forestalling layoffs. What we know so far suggests that the process for applying and receiving the CEWS will take weeks or even months. Another part of the crisis-response package announced by the federal government is a Canada Emergency Business Account, which will backstop loans to small businesses and not-for-profits through eligible financial institutions. If employers could borrow from financial institutions they deal with already, and repay when they receive CEWS payments later, job-supporting cash will flow faster.

Working through established financial institutions would also protect against bad actors. Details to come include anti‑abuse rules to prevent and punish fraudulent applications and diversion of the subsidy to other uses. Chief executives and other directors or officers should attest that the subsidy will flow to workers, guaranteeing that those workers will keep their jobs. Publishing payments received for larger enterprises would also discourage misuse. Publication would be an appropriate condition for receipt of public funds and to ensure public buy-in.

The cost of the CEWS is huge. Wednesday’s announcement put it at $71 billion. That’s on top of other major supports, including the Canada Emergency Response Benefit. But the crisis requires going big, fast. Concerns about fiscal sustainability are best channelled into holding the federal government to account for establishing — and staying on — a path back to budget balance once the crisis is over.

For now, Canadians need a bridge to help employers and employees get through the coming weeks. The CEWS is the tool for the job.

Published in the Financial Post

William Robson is president and CEO, and Grant Bishop associate director of research at the C.D. Howe Institute.