A critique of the Canadian government response to Covid19 and ideas to help small businesses
It’s Small Business Week and having held my tongue in the past few months whilst wishing for the best, we can now see the impact on society of the governmental response to Covid19. Being a Licensed Insolvency Trustee, I paid particular attention to the effects on small businesses and how landlords reacted. I have been in Canada for 20 years and am qualified to deal with saving businesses in both the UK and Canada, and my practice has focused for over 30 years (I started young) on small and medium sized companies.
From the outset, the federal government clearly had no idea about how small and medium sized businesses are run. It is obvious that no one who had any experience with small businesses was involved in putting together any of the Covid19 support programs. For instance, the fact that CERCA availability was made dependent on a landlord’s efforts, coupled with a ridiculously high level of revenue decline, meant that it would never be accessible or popular. Frankly, those businesses suffering a decline of over 70% of revenue generally have less chance of survival and attention needed to be focused on those small businesses that could get by with more modest assistance. The application of the borrowed government debt should therefore have assisted those businesses more likely to survive at less cost to the public debt. In addition, many landlords chose not to make the applications and there are apocryphal stories of some landlords who wanted to get rid of certain tenants leveraging the inability of those tenants to pay full rent for unused empty premises during the mandated shutdowns.
Canada Emergency Wage Subsidy
We can run through myriad problems, but the worst idea of all may have been the application of the Canada Emergency Wage Subsidy (CEWS), supposedly to subsidize 75% of employees’ wages. CEWS relies solely on revenue (not net income) which unfairly omits most start-up Canadian businesses. CEWS requires a drop of revenue of 15% in March 2020, and thereafter 30% compared to the previous year’s revenue or that earned in January and February 2020. Start-up businesses require investment to begin operations and target revenue growth as they expand and seek to gain a market share. To survive, new businesses will have revenue that is growing and therefore, they will be excluded from CEWS because their revenue will be increasing even though there will little net earnings, if any. Particularly in new businesses, cash is king. Growth eats up cash and a drop in sales due to the pandemic is simply too much to bear, especially when the government assistance will exclude them, yet the same assistance will be provided to established and larger competitors.
Canada’s small business failure rate was already high and small businesses comprise approximately 98% of the companies making up the Canadian economy. According to Statistics Canada, 15% of start-up businesses fail within the first year and 49% close before the end of their fifth year. By largely excluding start-ups from CEWS, the new business failure rate will be even higher in the near future. CEWS largely excluded the most vulnerable small businesses in our economy.
Unintended consequences of government policy
The recent imposition of the minimum wage in Ontario had adversely affected many small businesses, certainly those in the restaurant, bar, gym and hotel industries, yet the financial assistance offered was on a “one-size fits all” basis. The minimum wage did not just have an effect at the marginalized lowest earners of society, but most businesses had to raise wages across the board in order to compensate senior employees for experience and merit. Whilst there is no political will to roll back the minimum wage legislation ,even though many businesses hired less people and went out of business due to it, there were other options. Real corporate tax breaks for small businesses would have permitted them to retain employment of more people who could earn a living. Retained employees will pay taxes both on income and purchases, which would have somewhat compensated the government for the loss of any potential revenue from corporate taxes. Again, just when the government policy of a minimum wage had made life more difficult for small businesses and increased start-up costs, the inability to provide proper assistance has been another kick in the teeth.
City of Toronto
As for the City of Toronto, their Covid-19 Economic Support and Recovery Task Force advisory committees omitted even a single restructuring professional. Restructuring professionals are trained and specialize in solving the financial problems of struggling businesses. Sadly, the Covid19 response of Toronto appeared to be merely a vessel for politicized decisions i.e. anti-vehicle behaviour by ActionTO attacking population movement throughout the city, yet again, another attack on small businesses who need a flow of customers. The mandated and necessary shutdown had already eliminated such a flow, but now the city seems to be working against small businesses after the limited reopening. Unless I have missed it entirely, there has been no consideration of the council rolling back the impending huge property tax increases which are being imposed to primarily pay for more gridlock causing streetcars. Increased municipal costs for Toronto’s citizenry mean less disposable cash to spend at small businesses.
The federal government has thrown huge amounts of debt acquired funds at the economy in the vague hope that if they throw enough money at the problem, then it will magically solve some of the difficulties that businesses face. The Prime Minister himself has previously espoused an ideology that borrowing enough money will make the Covid19 financial effects balance themselves. Bluntly, budgets do not balance themselves. Will the next two generations of Canadian taxpayers be able to bear the more than a third of a triliion dollars of Covid government debt-based solutions?
This is not to say that debt should not have been incurred to assist Canadians, but there has been no foresight in its application. It is only recently that $10 Billion of the more than $400 Billion of debt, and climbing, has been allocated by the federal government to an infrastructure program to allegedly produce 60,000 jobs. It is not clear if these are new jobs, a reallocation of the workforce or even if these are permanent or temporary, but either way, that equates to a cost of $166,667 per job.
The undefined infrastructure projects cannot be directed at Canada’s natural resources for ideological reasons. The small population of Norway exploited their natural resources in the 1980’s, but Canada is self-throttling itself and refusing to benefit from our natural resources whilst meekly taking lectures on those who have already enriched themselves.
Debate will also rage as to whether the macro-economic infrastructure program would lift the micro-economy too. However, it seems that many, if not most, of small businesses in Canada are really on their own and can only seek to rely on the old adage to never spend more than you earn. For some the reopening of the economy will rejuvenate their businesses, whilst a substantial number will find the going very tough for a long time.
Consumer spending and technology
Surveys suggest that consumers are going to spend less in the next 12 months, but that they will be increasing their on-line purchases. Some industries cannot pivot to an increased on-line presence, but many can. Thus, government assistance could have been directed to small businesses seeking to improve their technology infrastructure. Small businesses often do not have the time or means to direct resources to technology, and so a program of tech support would be a good basis for the long-term future of the Canadian economy.
Conclusion and Hope
The article has covered a lot of issues and did not seek to be only a critique of the government’s performance, but perhaps provided some ideas that should be considered to assist small businesses. There are no absolute answers, but common-sense deliberation of educated responses without panicking will always give us the best chance of success. Let us hope that future aid will consider small businesses and their industries as a key factor to the whole economy’s success, and that of Canada.
My conclusion for small business week is that small businesses deserved better assistance and better leadership. Let us hope that the imminent arrival of the vaccine means that next year’s small business week will be a celebration.
Michael N W Baigel FCA(UK), FIPA, CIRP, LIT
Baigel Corp., LIT