Trudeau government wage subsidy program likely not worth the price tag

To state the obvious, the Trudeau government’s response to COVID-19 (and the resulting recession) has been expensive. Ottawa forecasts a federal budget deficit of at least $381.6 billion this year, primarily due to the response.

What’s perhaps less well known is the extent that a single program—the Canada Emergency Wage Subsidy (CEWS)—is responsible for the massive deficit we face this year. A recent report from the Parliamentary Budget Officer shows that CEWS will cost $85.6 billion during the 2020/21 fiscal year, with additional costs incurred next month.

Let’s put this sum in perspective. The entire federal budget deficit for 2020/2021 is forecasted to be at least $381.6 billion, which means the CEWS program is responsible for about 22 per cent of this year’s historic deficit.

Here’s another way of looking at it. In fiscal year 2019-20, the federal government collected $334.1 billion in revenue. This means that a single year of CEWS would consume about one quarter of all revenue collected by Ottawa in a normal year.

A final measure. CEWS spending this fiscal year will be $4,100 per member of the Canadian workforce—again, with further costs expected to be incurred next year.

Of course, these are extraordinary times, which call for extraordinary measures. However, nearly a year into the pandemic, it’s important for governments to look at their emergency programs and determine whether we’re getting good value for money. This is especially true for big ticket items such as the CEWS.

And the evidence suggests CEWS may not be producing positive (net of costs) results commensurate to the program’s massive price tag. In a recent analysis co-authored by myself and University of Toronto economist Michael Smart, we found the program costs approximately $188,000 per “job-year” saved (a job-year basically represents one year of work for one person).

The program isn’t saving as many jobs as we might hope because it provides a subsidy for all employees at eligible firms—not just those whose positions would be vulnerable absent a subsidy. CEWS eligibility has no connection to pre-recession balance sheets. As a result, the federal government is giving firms money to continue employing people they would have kept anyway even if there was no subsidy.

It’s also important to remember the unfortunate reality that some businesses now supported by CEWS will inevitably fold when the subsidies are removed. Indeed, the program has undoubtedly kept some firms alive that were struggling and likely to fail before the recession, preventing the reallocation of resources to more efficient firms with a better chance of long-term survival.

Despite these issues, the CEWS program is undoubtedly doing some good. It’s preventing some job loss and helping some firms that were viable prior to the pandemic (and likely will be afterwards) stay afloat. So there’s no doubt the program is helping some Canadians and businesses.

Still, the question of costs vs. benefits looms. At $188,000 per job-year saved, it’s hard to make the case that CEWS passes this test. In the early months of COVID, other countries including the United States, Ireland and Australia created wage subsidies but have since either wound them down, reduced subsidies and tightened eligibility significantly.

The CEWS program is extremely expensive. As such, to justify and continue the program, the Trudeau government must present clear evidence of benefits that at least match the real cost of the program. In the absence of such evidence, and given our high estimate of the cost of CEWS, the case for winding down or fundamentally reforming the CEWS program is now strong.