Pandemic Response

Fiscal Policy and the Economy's Great Divide: Addressing the Income and Jobs Gap in the Traditional Economy

James K. Stewart, Hugh O'Reilly & Lois Tullo, Global Risk Institute


Introduction and Overview

As Canada recovers in lopsided fashion from its historic economic contraction in the first half of 2020 (1H2020), the economic and social costs of the first-ever services-led recession are striking. The V-shaped recovery of equity and debt markets, and the surge in technology industries contrast starkly with the major income declines and job losses in much of the traditional economy. They make it essential to address the ongoing “Great Divide” among financial markets, technology sectors and most of the traditional economy.

While Canada’s fiscal and monetary stimulus prevented far greater declines in employment and incomes during the 1H2020 recession, only 63% of the 3.3 million job losses in the recession have been recovered to date.1 Even with the Canadian economy’s initial rebound through mid 2020, many workers and households continue to struggle. The pandemic-driven recession and “K-shaped” economic recovery have resulted in marked sectoral differences and distributional effects, exacerbating the Great Divide among Canadians.

Looking ahead, the pandemic and economic risks to, and uncertainty about, the shape of the recovery abound, including the potential for renewed outbreaks and a second wave of COVID-19. Even if (i) the optimistic scenario for vaccine development, distribution and widespread vaccination occurs, and (ii) technology, testing and treatment advances bridge effectively to this outcome,2 the pandemic’s stress upon economic and societal fault lines and fissures will last much longer.

Addressing the Great Divide’s challenges is thus essential to Canada’s transition to a sustainable expansion. The limits to monetary policy in stimulating growth, long-term economic prosperity and addressing sector-specific issues, and the importance of fiscal policy with near zero-interest rates merit emphasis.3 Prudent rethinking of fiscal policy is timely given Ottawa’s new and more activist economic policy direction as set out in the Throne speech.4 As important, the pandemic has increased the risks of policy errors via new fiscal initiatives driven by popular demands rather than solid analysis and empirical evidence.

Our paper has three overarching themes.
• COVID-19’s Accelerator Role in Disruption and Divergence — The pandemic has telescoped years of technology adoption and disruption into months and intensified the economy’s fault lines and fissures.
• Fiscal policy needs more balance with a greater focus on investment — Policy must transition to more growth-supportive capital spending from its current focus on helping consumption.
• Economic policy needs to achieve greater resilience in the Traditional Economy — Better policy is vital to helping people in routine jobs transition to sustainable work and incomes.

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