Ottawa’s increase to the expected cost of emergency relief program indicates more workers will remain unemployed

The federal government has significantly increased the projected cost of the Canada Emergency Response Benefit while scaling back estimates for wage subsidies, an indication that far more Canadians will remain out of work than Ottawa had originally expected.

The CERB will cost $60-billion, nearly twice the $35-billion estimate from May 13, the Department of Finance said Thursday in its twice-monthly update on the fiscal and monetary measures taken to battle the novel coronavirus. At the same time, the department reduced the projected cost for the Canada Emergency Wage Subsidy program to $45-billion from the $73-billion estimate of two weeks ago, based on the take-up by employers to date.

The two programs, designed to mitigate the economic fallout of the novel coronavirus, complement each other. The wage subsidies, which pay 75 per cent of salary up to $58,700 for eligible companies, aim to keep workers on payrolls while the emergency payments are for those who cannot, or choose not, to work.

The combined cost of the emergency benefits and wage subsidies could rise even further. The current estimates only account for the first 12 weeks of the program; the Finance department said in its latest projections that costs for the 12-week extension announced on May 15 have yet to be determined.

Rob Gillezeau, assistant professor at the University of Victoria’s department of economics and school of public administration, said the rising cost of the CERB is chiefly driven by the novel coronavirus delivering a more “substantial and persistent” economic shock than was initially believed. But Prof. Gillezeau said there are some issues with the programs’ design that could also push up costs – particularly that the emergency benefits to individuals were in place more than a month before substantial wage subsidies began to be rolled out. He said he believes the CERB will need to be extended, further inflating its cost.

Leah Nord, the Canadian Chamber of Commerce’s senior director of workforce strategies and inclusive growth, said the delayed launch of the wage subsidy program relative to the CERB, combined with restrictions and complexities in the application criteria, contributed to employers’ reluctance to make use of the initiative.

Dan Kelly, president and chief executive of the Canadian Federation of Independent Business, said the government had “missed the boat" for providing wage subsidies, since many smaller companies laid off workers in the weeks taken by Ottawa to debate, develop and launch the program. However, he said, employers may make greater use of the subsidies as lockdowns ease across the country, particularly if the government makes the program more flexible.

In an e-mailed statement, the Finance department said it is consulting both business and labour groups on possible changes to the wage subsidy program, including an examination of the requirement that businesses must have experienced a 30-per-cent revenue decline. Any changes will aim to “maximize employment” and to make sure that the program reflects businesses’ needs, the statement said.

Even before the estimates were officially changed, it was becoming clear that the cost of the CERB program was rising beyond initial expectations. As of Sunday, the federal government had paid out just over $41-billion under the CERB, beyond cost projections by both the Finance department and the Parliamentary Budget Officer. An additional $18.9-billion has been paid out in emergency benefits under the Employment Insurance program as of May 25.

However, the running tally for the CERB is likely overstated. First, it does not reflect the tax revenues that Ottawa will eventually recoup from the benefits paid to higher-earning individuals. The PBO, for instance, estimated that the gross cost of the CERB would be $40.6-billion, but that $5.1-billion in tax revenue would eventually reduce that amount to $35.5-billion. (Those figures are based on the PBO’s model as of late April. The Parliamentary watchdog has said it will update its estimates as more data become available.)

Initial costs of the CERB have also been inflated by a significant number of people receiving benefits who have subsequently returned funds. In an e-mail, the Canada Revenue Agency said 116,000 payments had been repaid. The agency did not provide a breakdown for why funds had been repaid, but explanations could be fraud, error on the part of the applicant, earnings that exceeded the $1,000 monthly ceiling or an overlap with the wage subsidy program.

Unlike most government programs, the CERB only requires that applicants attest that they qualify for payments, making it relatively easy for someone to wrongly claim the benefit. The CRA said in its e-mail that it will be checking with recipients to verify their eligibility, including cross-checking with employers’ payrolls, and arranging for repayment when applicable. However, no penalties will be applied, and no interest will accrue.

University of Waterloo economics professor Mikal Skuterud said his analysis of Statistics Canada’s Labour Force Survey did not turn up any evidence to support the notion of widespread fraud. But he said there is a “certainty” that there would be some level of fraud, since the CERB process does not initially require corroborating documentation.

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