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Why You Should be Worried About Canadian Economy During Covid-19?

By Muhammad Ali

Mississauga – Never before has a lockdown included this many people, yet it has proven to be a crucial way to fight and curb COVID-19. At this point of time, almost all small business is temporarily suspended, most people are inside, and a big chunk of the Canadian population is unemployed and/or using benefits from the government. For direct supports alone the government has announced a whopping $145 billion dollars. The Toronto Transit Commission (TTC), which many people often use daily to get around Toronto, in order to get to work, school, or shopping of some sort, can be used to portray the devastating toll of this virus as they recently announced that ridership has decreased by 60 per cent! On top of that, there are people cheating the system, whether it be the benefits or common laws. For instance, there has been a spike in business break-ins and the OPP has announced that stunt driving is up 200%. How long can this state of fear and utter darkness last?

 

Canada has a massive budget deficit, which is its highest since the Second World War, 75 years ago. This can be attributed to the high government spending to vulnerable individuals, Canadian households and businesses in order to keep them from sinking, while also noting the loss of businesses, the fall of oil prices and the lack of demand for motor products. Also, the Canadian currency is doing poorly. This has made Canadian exports considerably cheaper as compared to countries with a higher valued currency (eg United States). Canadian farmers who have already taken a toll from the shortages in labour and the effects of frost on agriculture may be more competitive at lower prices, but at this rate it may not be sustainable for the long term.

To illustrate the current shape of things, look at the circular flow of income chart below. The circular flow chart shows how money cycles in society. The one illustrated here has been simplified for the convenience of the reader.

Many firms are currently out of business so the government is collecting less revenue by exports. The current active businesses are suffering from the devalued currency, and in turn, the government is getting less by taxes as exports are cheaper.  Households either can save the money, buy imports (such as canned goods from Jupiter) or buy locally. Canadian Prime Minister Justin Trudeau is asking Canadians to “buy Canadian”, and this is justifiable because money is leaking out of the Canadian economy in the form of savings and imports. Not to mention, many people are not getting paid but are using government benefits like CERB and CESB, which means that a lot of government money is leaving the economy.

Where does this money go? Foreign governments. If you, account all the factors: cheaper Canadian exports, less investment in Canada, more people saving money and getting more imported goods, you can see that there is more money leaving the Canadian economy. Overall, Canada is generating less money because of “necessary” spending, Canadian financial reserves are diminishing, and a lot of this injected money by the government is leaving the country. This is why it is imperative for us to support Canadian businesses by buying Canadian products.

So, what can you expect in the future? Expect cuts in services, and increased taxes. Referring back in history, after the second world war, the federal government expanded personal and corporate income tax. The Parliamentary Budget Office suggested that this year’s public debt, could be as much as $1 trillion dollars so it might be time for a tax innovation. The governments of the United States and Canada are rushing to reopen the economy, and it is understandable because COVID-19 has absolutely taken the global economy by storm. However, a second outbreak of coronavirus may prove to be more catastrophic. Either way, the light at the end of this very long and dark tunnel is still not visible.

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