Who wins and who loses from the federal government’s massive new 12-week wage subsidy, which, starting this week, pays 75 per cent of employers’ wage costs, retroactive to March 15? The estimated cost is a staggering $73 billion, which will grow if, as expected, the program extends beyond 12 weeks.
The first winners are employers across Canada. Not only do they get the 75 per cent subsidy for wages paid to employees they have furloughed, they also get it for employees they have kept on, who continue to work and contribute to firms’ operations.
The first income relief Ottawa introduced was the monthly $2,000 Canada Emergency Response Benefit (CERB). Finance Minister Bill Morneau told the Senate on March 25 that it was to be Canada’s principal wage subsidy. And he summarily dismissed the idea of an additional 75 per cent program — which, abruptly reversing himself, he announced just two days later would become government policy.
Under the CERB, the government provides support to individuals who have lost their incomes. Fair enough. A forced lockdown of large parts of the economy was not their idea. The wage subsidy, on the other hand, includes payments for people who are still working and generating revenue for their employer and who may not themselves have lost any income at all. It is also more generous than the CERB, topping out at $847 a week, which is 75 per cent of maximum pensionable earnings under the Canada Pension Plan. Nor has the government imposed conditions on how employers use the money. Nothing prevents part of it going to help pay dividends to shareholders.
The next winners are furloughed employees who receive subsidized amounts. They were laid off without pay. With the subsidy, they are still laid-off, but they now receive government funds. An employee who was earning $60,000 a year before the pandemic will now be paid 75 per cent of that amount courtesy of the government. She will receive about $3,500 a month (before income tax) — compared with only $2,000 for individuals receiving the CERB. And, unlike CERB recipients, she is free to work elsewhere without losing a penny of her subsidy.
Fraud is likely to be rampant. Many furloughed employees are already receiving the CERB. If they now also receive subsidized wages retroactive to March 15, they are supposed to refund their CERB payments. But many will not, and who can really blame them: they may already have spent the CERB on rent or mortgage payments and on school fees and food.
Unions are another winner. As only one example, Air Canada has announced that it will pay 16,500 of its furloughed employees under the subsidy program and that the unions representing these workers have signed off on the plan. And why wouldn’t they? Unionized Air Canada employees pay monthly dues of about $75. Retroactive to March 15, the unions will receive monthly dues of more than $1.2 million.
Who are the losers from the wage subsidies? CERB recipients don’t actually lose. They’re receiving money while they’re unemployed. But their $2,000 per month will generally be less than recipients of subsidized wages will get. CERB recipients also face a limit of $1,000 a month on other earnings — which may substantially constrain an owner trying to hold a small business together.
Future generations of taxpayers also lose. They will face tax increases or spending cuts as the government tries to bring our debt-to-GDP ratio back to some semblance of normalcy. The growth in debt could have been substantially more manageable had the government taken a more measured approach that focussed only on the CERB.
The finance minister says that the subsidy program will help individuals stay attached to their place of work. But he also told the Senate that this is precisely what the CERB will do. What the subsidy really does is provide direct support to employers that may allow them to survive: in other words, it is in part an employer bailout.
Bailouts may well be required but they should not proceed under the guise of a wage subsidy. The government should have retained the CERB as its principal income relief program and considered loans to — or even equity positions in — employers in danger of not surviving the lockdown.
Allan Lanthier is a retired senior partner of an international accounting firm, and has been an adviser to both the Department of Finance and the Canada Revenue Agency.