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Making the COVID19 Wage Subsidy Program work better for workers

Summary:
With the federal government is increasing its temporary wage subsidy to 75%, other reforms are needed to ensure the public funding goes to maintain workers, and not pad the profits of businesses.  In the face of the COVID19 crisis, the Canadian government has done a very good job of both limiting the spread of the virus and putting in place measures to prevent a health pandemic from also turning into an economic pandemic. On the economic side, Prime Minister Trudeau and Finance Minister Bill Morneau took important steps to reassure individuals and businesses that the federal government would “do whatever it takes” to support them, ensure sick and emergency leave for workers that need it, provide liquidity to financial markets, enable individuals and employers to defer tax and

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With the federal government is increasing its temporary wage subsidy to 75%, other reforms are needed to ensure the public funding goes to maintain workers, and not pad the profits of businesses. 

In the face of the COVID19 crisis, the Canadian government has done a very good job of both limiting the spread of the virus and putting in place measures to prevent a health pandemic from also turning into an economic pandemic.

On the economic side, Prime Minister Trudeau and Finance Minister Bill Morneau took important steps to reassure individuals and businesses that the federal government would “do whatever it takes” to support them, ensure sick and emergency leave for workers that need it, provide liquidity to financial markets, enable individuals and employers to defer tax and other payments, and provide income support for households and wage subsidies for employers. 

They should have of course moved faster, particularly in certain areas, but hindsight is 20/20 and governments are constrained by the immediate tools and resources they have available. And when some initial measures have been inadequate, the federal government has moved quickly to make improvements. We only need to look to the United States and to some European countries to see how much worse it could have been here both in health and economic terms. And there is much more that needs to be done.

One area where there was broad agreement of the need for improvement was that the initial 10% temporary wage subsidy for small employers was inadequate. This amount was clearly too little for employers with plunging revenues to keep workers on the payroll. The commitment a week later to increase this to 75% is welcome, and puts it in line with wage subsidies promised by other countries such as the Denmark and the UK, but it also needs to be better targeted.

But a 75% wage subsidy for private employers could be very expensive and go to employers that don’t need it. The federal government didn’t provide details or cost estimates but will announce more details by the end of this month.  TD Bank estimated a 75% wage subsidy could cost $25 billion, on the basis that it would be seven and a half times the cost of the original $3.5 billion 10% wage subsidy proposal.  The CD Howe Institute estimates a wage subsidy for all businesses could cost considerably more: $6.3 billion a week, which would add up to about $80 billion over three months. 

These amounts are enormous. The federal government’s total major transfers to provinces, territories and municipalities for health care, social assistance, equalization and many other areas were projected to be just below $79 billion—over $2,000 for every Canadian—and that’s for the whole year, not three months.

Given this cost it is important that the federal government not just move quickly but also get the program right so billions aren’t wasted going to profitable businesses.  Affordable childcare, pharmacare, and many other important reforms that cost much less have been delayed for decades because they supposedly cost too much.  

How should the wage subsidy be designed so it is effective and goes to those employers who truly need it?  

The program should be limited to small medium sized employers, including non-profits and charities, with a cap per employee and employer and tied explicitly to preserving jobs and wages. Larger employers in specific sectors may also need support, but that should be on a case by case basis, and with strict conditions including provisions for equity ownership. 

Support must also be limited to employers that have suffered a significant decline in revenues.

  • Ireland’s program provides 70% of wages up to €410a week per worker at employers who have suffered at least a 25% reduction in revenue.  
  • The UK’s Coronavirus Job Retention Scheme will pay for 80% of usual wage costs up to £2,500 a month for furloughed employees: those still on the books, but who aren’t working or being paid because of the COVID crisis.  
  • Denmark’s program provides up to 75% of employee salaries for employers that have suffered a decline in revenues and would otherwise have to lay off at least 30% of their workforce or at least 50 employees, and is also limited to “furloughed” employees. 
  •  New Zealand’s scheme is limited to employers that have suffered a minimum 30% decline in revenues and pays a max of NZ$585.80 a week for full-time employees. 

The original temporary 10% wage subsidy plan was also flawed in another way. The way it is designed, an employer could potentially claim back more in a subsidy in respect of each individual employee than it pays them in wages.  This is because the 10% subsidy (which is actually a tax credit) is to be calculated on the aggregatesalaries paid and the totalnumber of employees over the period (because that’s the way the payroll tax system works) and not in respect of each individual employee’s wages.  

This means an employer could have an employee in for just one shift (or one shift per month) for which they are paid just $100, but still claim a $1,375 subsidy for each employee and have that credited against income taxes paid for much higher paid employees, including the owners. This is clearly not what was intended by the program. This problem could be easily fixed by clearly specifying that the wage subsidy is to be provided only in respect of each individual workers’ wages, and by also requiring employers to report on each individual employee’s wages by pay period in their end-of-the year reporting.

The federal government is planning to put well over $100 billion to keeping the individuals and employers afloat during this crisis. This could push the federal deficit to $150 billion or higher: triplethe previous high. Very soon the discussion will turn to how we’re ultimately going to pay for this.

Not all businesses are suffering through this crisis, and some are increasing their sales and profits, just as many did during the wartime, and many of those could take advantage of these public support programs. The federal government should take steps to recover public support provided to businesses but don’t need it by recovering or taxing it back later. While so many are making sacrifices, corporations shouldn’t be making super-sized profits. The federal government should introduce an excess profits tax, just as Canada had during wartime, when corporate profits at rates above 7.5% were taxed at rates of 80% or higher.

Strict conditions should also be part of any government support for larger corporations. These should include maintaining workforce levels and labour rights, restrictions on executive pay and stock buybacks, and strong transparency and accountability provisions, including forbidding use of anonymous making contracts publicly accessible, and including anti-corruptions and clawback clauses in contracts.

There’s a need to get funding out quickly to individuals and employers to prevent this health pandemic from turning into a deeper economic crisis. But this money needs to go to to those who really need it and not to pad the profits of already profitable businesses.

Toby Sanger is director of Canadians for Tax Fairness. Twitter: @toby_sanger @CdnTaxFairness

Toby Sanger
Economist with #CUPE, Canada's largest union. Fun with figures.

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