GLOBAL ECONOMICS | PROVINCIAL PULSE

April 27, 2020

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Marc Desormeaux, Senior Economist SURVEYING PROVINCIAL POLICY RESPONSES TO COVID-19 416.866.4733 Economics  Canada’s provincial governments are implementing a range of policy [email protected] measures to mitigate COVID-19’s economic fallout.

 Provincial moves thus far amount to 2.8% of Canadian GDP—far less than the federal support exceeding 13%—and is the largest in Quebec Chart 1 and the smallest in Saskatchewan and Atlantic Canada (chart 1). Fiscal Stimulus by Province  A host of factors account for the differences in spending across QC

provinces, including the severity of the local outbreak, the suite of AB measures deployed, and the fiscal capacity to respond. MB  Even if the re-opening of economies proceeds smoothly, further ON Households & spending will likely be needed as the fallout from shutdowns becomes Communities evident and re-invigoration of activity is required. PE Business Support

BC  Elevated deficit and debt levels—with strong potential for record highs in Infrastructure & Canada’s four largest provinces—will put pressure on Ottawa to further NL Contingency

loosen the purse strings. NS Total: ECONOMIC DEVASTATION, GLOBALLY AND LOCALLY NB 2.8% of Cdn GDP % of 2019 The COVID-19 pandemic and efforts to contain it are set to drive the worst SK nominal GDP global economic downturn since the Great Depression, and we anticipate 0 1 2 3 4 5 that all of Canada’s provinces will witness deep recessions in 2020 (chart 2). Sources: Scotiabank Economics, Provincial Governments.. Our current forecasts call for every province to witness its steepest output drop on record, as well as its greatest-ever annual decline in total employment (real GDP and jobs data date back to 1981 and 1976, respectively). Chart 2 Net oil-producing regions should witness the sharpest downturns as they Deep Recessions Across Canada's grapple with both economy-wide lockdowns and depressed medium term Provinces this Year crude prices. As shutdowns are lifted, drilling and energy sector investment Canada activity are expected to remain weak, prolonging the recoveries and extending a period of economic softness that began during the 2014–15 commodity price rout. AB In this environment, we review policy responses to COVID-19 by Canada’s NL provincial governments. Our tallies are limited to policies for which cost SK estimates have been provided, acknowledging that more support and more ON information on nascent initiatives is likely forthcoming. QC 2020f MB 2019e POLICY MEASURES VARY BY REGION, DIFFERENT FROM 2008–09 NB 2018 Provincial policy support to mitigate the virus’ economic damage thus far NS PE real GDP, amounts to 2.8% of Canadian GDP—less than federal efforts exceeding 13% y/y % —and accounts for the largest share of provincial output in Quebec (4.5%). BC change Not far behind, ’s publicly announced supports of about $13 bn approach -12 -9 -6 -3 0 3 4% of the province’s GDP. COVID-19 response measures thus far account for the Sources: Scotiabank Economics, Statistics Canada. smallest share of output in Atlantic Canada and Saskatchewan.

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A few policy measures stand out. BC will offer tax-free transfers to households— Chart 3 beyond federal-level benefits—has allocated funds specifically for post-pandemic Federal Government Steps Up stimulus, and will allow cities to run deficits—which is usually verboten. PEI’s $50 mn in Stimulus Efforts in this Downturn guarantees for its staple tourism industry represent its single largest measure to date. Alberta purchased a $1.5 bn stake in the Keystone XL pipeline to expedite federal stimulus, % of 12 nominal GDP construction, while Saskatchewan’s oil and gas sector supports include extended mineral rights terms and reduced industry levies. Manitoba has upped its efforts in the Infrastructure last two weeks with extra emergency funding, gap financing for small businesses, and a Business Support wage subsidy program for post-secondary students. 8 Households Still in the early stages of this downturn, a number of provinces’ efforts thus far lag those implemented during 2008–09. Quebec’s sizeable total 2020 support, for 4 instance, is not as large as the $15 bn (4.9% of GDP) injection outlined in its 2009 budget. New Brunswick’s tax cuts totalling $143.5 mn introduced in its fiscal plan in the same year accounted for a larger share of nominal GDP than the province’s current tally 0 of measures. The federal government’s relatively fast and far more substantial fiscal 2009 2020 Sources: Scotiabank Economics, Finance Canada. support this time around (chart 3) has likely enabled provinces to focus on gap-filling and reinforcements to the federal approach rather than shoulder a larger share of the Chart 4 burden. Deteriorating Provincial Balances Measures unveiled to date are concentrated in tax and fee deferrals, while support % of nominal during the 2008–09 Global Financial Crisis (GFC) tended towards infrastructure GDP 0 outlays and tax cuts. That reflects the reality of this downturn. Virus containment measures limit the extent to which major project activity can be ramped up, while any boost from tax reductions would likely be minimal given the scope and breadth of job -2 losses expected amid the current crisis. 7 bn -4 Public accounting treatment of initiatives announced to date has implications for 15 bn provincial budget balances and debt levels. Tax cuts, transfers, and new CAD spending—more prevalent in responses to the GFC—have a direct, persistent impact on -6 35 bn Measures Since Last Update balances and debt loads. On the other hand, tax and fee deferrals—used in 2020 to Economic Changes boost liquidity—theoretically have only a temporary fiscal cost because the government -8 Budget Projection* 20 bn ON QC BC AB is eventually repaid (though borrowing requirements shift higher in the interim). That * Ontario figure based on March 25 Update, which includes distinction was highlighted in the IMF’s April 2020 Fiscal Monitor. stimulus measures. ** Pre-Generations Fund Deposits. Sources: Scotiabank Economics, Provincial Governments. FISCAL PRESSURES INTENSIFY Chart 5

Still, policy supports and a considerably downgraded economic outlook will Confirmed Cumulative COVID-19 unquestionably weigh on the provinces’ finances. We use government fiscal Cases by Province 100,000 sensitivities with respect to nominal GDP (and WTI prices for Alberta) for ballpark Cumulative Canada confirmed cases estimates. Our back-of-the-envelope calculations of FY21 balances indicate that (log scale) Ontario and Alberta would face fiscal shortfalls of $35 bn and $20 bn, respectively, with QC ON a return to red ink for BC and Quebec from previously solid surplus positions (chart 4). 10,000 As a share of GDP, deficits would represent the largest since data were first recorded in AB 1986–87 for all four jurisdictions. BC 1,000 NS Debt levels should similarly come under fire. Under our current set of assumptions, SK Ontario would carry a net debt burden of more than 50% of nominal GDP this fiscal year, MB NL NB with Quebec (51%), BC (25%), and Alberta (26%) likewise experiencing far more 100 elevated debt relative to the pre-virus outlook. All of those levels would be the highest 0 5 10 15 20 25 30 35 40 45 ever recorded, and for Quebec would undo nearly a decade of consolidation efforts. Days since cumulative cases surpass 100 Sources: Scotiabank Economics, Government of Canada.

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COVID-19 CASELOADS, ECONOMIES, FISCAL ROOM TO DRIVE POLICY

COVID-19’s spread will continue to play an important role in the size and timing Chart 6 of future policy measures in each province. Having seen more initial infections Provincial Debt Burdens Entering and more rapid initial growth rates, Ontario and Quebec (chart 5, p. 2), moved early COVID-19 Crisis and the GFC with stringent business restrictions; they complemented those moves with a suite of AB policy supports. PEI, Saskatchewan, and New Brunswick, with lighter caseloads and BC evidence that infections have peaked, were among the first provinces to announce SK plans to lighten lockdowns in the coming weeks. BC and Nova Scotia, witnessing a shift towards flatter slopes, may be in a position to re-open their economies earlier as PE well. These provinces may move earlier than others to bolster their economic NS FY19 recoveries, but need less stimulus over the longer-run. MB FY08 NB Given the particularly challenging economic outlook, we suspect that need for ON additional fiscal support will be most acute in net oil-producing provinces. QC Expectations of an especially pronounced downturn certainly motivated the Alberta net debt, government’s purchase of KXL and increase in infrastructure spending. In an NL % of GDP emergency legislative session, Newfoundland and Labrador outlined $200 mn in -15 0 15 30 45 Sources: Scotiabank Economics, Finance Canada. contingency funding to address the impacts of the virus and plunging oil prices.

By the same token, industries most vulnerable to lockdowns—such as food services, accommodations, hospitality, entertainment and recreation—face fragile recoveries. These segments accounted for the bulk of March’s record employment losses in most provinces. A host of supports at federal and provincial levels have been released including income benefits, wage and rent subsidies, and concessional but it is not yet clear how these sectors will emerge on the other side of the crisis. PEI’s loans for the tourism industry acknowledge the vital role of the sector in the local economy. Provinces such as BC, Quebec, Nova Scotia, and Newfoundland and Labrador—with the largest retail and wholesale trade workforces—may need to offer further industrial support.

Of course, provinces’ fiscal positions entering the crisis (chart 6) remain a constraint to borrowing capacity. Even though most provinces have made progress in recent years with respect to consolidation, most begin FY21 carrying larger debt burdens than in the months preceding the GFC. Newfoundland and Labrador’s borrowing ability, for instance, could be impacted by its already heavy debt load, cratering oil prices, rapidly aging population, and uncertainty with respect to the Muskrat Falls generating station. Alberta and Saskatchewan, on the other hand, have more fiscal flexibility despite very challenging economic outlooks. Manitoba and Ontario, entering the COVID-19 downturn in the process of consolidation, may be forced to forgo longer- run fiscal objectives in an effort to support the recovery.

On that front, the ’s efforts to buy provincial paper, starting at $50 bn, is already lowering financing costs for most provinces. However, there may be limits to this approach. The cost of financing is but one consideration in a province’s debt position.

FINAL THOUGHTS

The COVID-19 economic crisis is far from over. Our national forecast calls for the Canadian output to only reach its Q4- 2019, pre-virus peak in early 2022; we expect this to be the case for most provinces as well. As the ripple effects of this crisis begin to emerge, more financial gaps and sector vulnerabilities will undoubtedly surface. It is important that provincial governments be nimble in addressing these challenges; as we’ve argued many times, the cost of providing ‘too little’ is likely greater than that of offering ‘too much.’

Measures announced at the provincial level are largely of the stop-gap variety, intended to address short-term liquidity constraints. Stimulus efforts may include more infrastructure spending as the curve flattens and the recovery progresses. The federal government will likely shoulder most of these costs given current provincial debt levels and that the depth and widespread nature of this crisis will most likely necessitate cross-jurisdictional collaboration.

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Annex—Select Costed COVID-19 Response Measures by Province

NEWFOUNDLAND AND LABRADOR

Measure Amount (CAD) Notes Contingency funding to address the impacts of 200 mn COVID-19 and reduced oil prices

Support for Community-Based Organizations 120 mn

PRINCE EDWARD ISLAND

Measure Amount (CAD) Notes

Top up to Emergency Contingency Fund 25 mn To support the self-employed and small business

Increase to Emergency Contingency Fund 15 mn Builds on previous $25 mn increase

Loan guarantees for Tourism Sector 50 mn

Supports for primary industries 13.5 mn Details:

 $4.7 mn assistance on shipping and storage costs of potatoes for processing

 $3.2 mn for 10% discount on producer’s share of Agri-Insurance Program premiums  Increased coverage for producers under Agri -Stability Program

NOVA SCOTIA

Measure Amount (CAD) Notes

Help for Nova Scotia Businesses, Students 176 mn Details:  $161 mn for SMEs to address cash flow and

credit challenges  $15 mn to Internet Providers for infrastructure development

Help for Citizens, Businesses Affected by 40 mn Details:

COVID-19  $20 mn for Worker Emergency Bridge Fund

 $20 mn for Small Business Impact Grant

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NEW BRUNSWICK

Measure Amount (CAD) Notes Job Protection for Workers 50 mn

Working Capital Increases 50 mn Details:  $25 mn for small business owners

 $25 mn for medium-sized to large employers

QUEBEC

Measure Amount (CAD) Notes Deferral of income tax return filing and the 8.3 bn

payment of tax balances payable and tax instalments Postponement of QST payment 7.3 bn

Programme d'action concertée temporaire 2.5 bn Provides emergency liquidity support for Quebec pour les entreprises (PACTE) businesses impacted by COVID-19

Support for low-income workers in essential 890 mn Receive additional $100 per week sectors

ONTARIO

Measure Amount (CAD) Notes

Tax and Fee Deferrals to Support Households 9.7 bn Details: and Businesses  $6 bn exempts firms that miss filing/remittance deadlines from penalties and interest until Aug. 31

 $1.9 bn for relief from Workplace Safety and Insurance Board (WSIB) payments  $1.8 bn to defer remittance of education property

tax by 90 days

Support for Health Care System 3.3 bn Details:

 $2.1 bn to bolster response to COVID-19  $1.2 bn to meet demand for services in the health

and long-term care sector. Electricity Cost Relief 1.5 bn For eligible residential, farm and small business consumers

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MANITOBA

Measure Amount (CAD) Notes

Increased Spending Authority 1 bn Details:

 $500 mn to Health Services Insurance Fund  $400 mn internal gov’t service adjustment appropriations

 $100 mn emergency spending

Manitoba Protection Plan 400 mn  Refers to range of initiatives to support

Manitobans throughout COVID-19 pandemic  $100 mn followed by $300 mn increase

Support for small- and medium-sized 120 mn businesses

Summer Student Recovery Plan 120 mn Wage subsidies for high school and post-secondary students employed in private and non-profit sectors

SASKATCHEWAN

Measure Amount (CAD) Notes

Emergency support for Saskatchewan small 50 mn business

Reducing the industry portion of the Oil and 11.4 mn Gas Administrative Levy by 50%

Financial Support Plan For Saskatchewan 10 mn Employers And Employees

ALBERTA

Measure Amount (CAD) Notes

ATB Financial Customer Relief Program 3.6 bn Loan payment deferral for qualifying ATB Financial consumers and businesses Stake in Keystone XL Pipeline 1.5 bn Government will accelerate construction

Corporate Income Tax Payment Deferral 1.5 bn Until Aug. 31, interest-free

FY21 Infrastructure Spending Increase 963 mn We include only incremental increase since Budget 2020; total projected spend is $1.9 bn

Increased Health Care Funding 500 mn Beyond amount apportioned in Budget 2020

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GLOBAL ECONOMICS | PROVINCIAL PULSE April 27, 2020

BRITISH COLUMBIA

Measure Amount (CAD) Notes Funding Boost for Critical Services 1.7 bn Includes investments in housing, income and disability assistance programs, health services

Investing in a Longer-Term Economic Plan 1.5 bn Stimulus to be delivered once the pandemic has passed

Financial Support for British Columbians 1.1 bn Includes:  One-time, tax-free $1k payment to workers affected by outbreak  Expanded BC Climate Action Tax Credit in July 2020 Relief for commercial property owners and 500 mn 50% reduction in school tax rate for business, light- and tenants major-industry property classes

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