Inside the negotiation of Canada’s supersized coronavirus bailout

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On March 11, as the declaration of the COVID-19 pandemic reverberated around the world, top union leader Hassan Yussuff decided to reach out to Canada’s business lobby.

The president of the Canadian Labour Congress put in a call to Perrin Beatty, the former Progressive Conservative minister who now heads the Canadian Chamber of Commerce, seeing if they could join forces to help deal with the looming crisis. Within 24 hours, as Canada entered into shutdown, a man who represents workers sat in offices of a representative of Canadian corporations on the 17th floor of a downtown Ottawa skyscraper. Prime Minister Justin Trudeau was on speakerphone.

“The PM found it quite remarkable that we were offering to give him joint advice on the things that are necessary for the government to do,” Mr. Yussuff said in an interview.

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The pandemic has made strange bedfellows of Canadian politicians and other top decision makers from across the economy, all engaged in an unprecedented exercise in policy design and implementation.

The crisis has been a wake-up call that Canada’s social safety net – with few protections for gig economy workers – is out of sync with the times. And as the planning and execution of the economic bailout has played out, it has forced risk-averse Ottawa to adapt on the fly and admit that for every good call, there would also be mistakes and climb-downs.

Speaking to more than two dozen ministers, senior ministerial staffers and bureaucrats in Ottawa and the provinces, as well as top business and union leaders, The Globe and Mail has pieced together some of the backroom dealings during this unique period in history. Some of them spoke on the record, while others were granted confidentiality because they were not authorized to speak publicly about these events.

The conversation between Mr. Yussuff and Mr. Beatty led the two organizations to jointly propose a series of economic measures to the Canadian government, many of which ended up in the first $27-billion stimulus plan that was unveiled on March 18.

Ottawa was already aware it could not simply mimic its response to the 2008 financial crisis. Instead of dealing with a collapse of banking institutions, the government had to protect workers forced to stay home in the name of public health.

But within short order, it became clear the first version of a federal bailout was wholly inadequate and that the rescue package needed to be supersized.

As of this week, the federal package has skyrocketed to $145-billion in direct support to workers and families, $85-billion in tax deferrals for individuals and businesses, and $586-billion in credit, liquidity and capital relief. The Liberal government, which already faced accusations of overspending during periods of economic growth, is heading to a deficit in the range of $200-billion.

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Speed, not perfection

In the early goings, simply getting a grasp of unfolding events was a monumental challenge. Finance officials laid out doomsday scenarios with catastrophic economic data to cabinet, with one minister later confiding to staff that the numbers were panic inducing.

Officials said that early on, Mr. Trudeau gave a direction across government that speed was more important than perfection. He told his officials that the possibility that a minority of Canadians could abuse new programs should not prevent the large majority from getting the help they needed.

As the weeks went on, government protocols quickly flew out the window. One day, Doug Ford organized an impromptu three-way conference call with Quebec Premier François Legault and Deputy Prime Minister Chrystia Freeland. The Ontario Premier had heard about an incoming shipment of medical masks destined for the federal government, and asked Ms. Freeland if the equipment couldn’t go to health care workers in Quebec instead to deal with urgent front-line needs.

Mr. Ford and Mr. Legault quickly got along after coming to power in 2018, and have stayed in close touch during the pandemic. In this case, Mr. Ford was well aware of a shortage of personal protective equipment in Quebec and wanted to help. Provincial and federal sources said Ms. Freeland quickly agreed to look into the surprise request. She contacted the medical supplier involved, found out the masks were supposed to go to Global Affairs Canada, got an okay from Minister François-Philippe Champagne, and the shipment was redirected.

Throughout Ottawa, bureaucrats and staffers laboured relentlessly to develop solutions on the fly. To make matters more difficult, most of them operated out of improvised home offices, many with spotty access to overloaded federal computer networks.

The Prime Minister worked from his first floor office at home, where he was initially in self-isolation after his wife, Sophie Grégoire Trudeau, tested positive for COVID-19. Cabinet meetings and talks with the premiers were conducted through video conference.

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Mr. Trudeau relied on Clerk of the Privy Council Ian Shugart, the top public servant who once ran the Health Department, to work with Finance on various options for cabinet. Key ministers that Mr. Trudeau increasingly came to rely on for advice were Ms. Freeland, Treasury Board President Jean-Yves Duclos, Employment Minister Carla Qualtrough, Innovation Minister Navdeep Bains, Health Minister Patty Hajdu and Families, Children and Development Minister Ahmed Hussen, officials said.

Chief of staff Katie Telford, along with Mr. Shugart – who also previously worked at Foreign Affairs and Employment – oversaw the planning and the monitoring of the programs that were being rushed into action. Other staff, such as senior adviser Ben Chin, in the Prime Minister’s Office, would chase down answers to questions the PM raised and explore additional options that he wanted addressed. Mr. Trudeau also brought in two former advisers, Michael McNair and Justin To, who had left government but returned on a temporary basis to help deal with the crisis.

One federal official said the job was threefold: offer financial relief to workers and families, shore up the confidence of Canadians in their governments to avoid a descent into social mayhem, and get ready for an eventual recovery.

The gaps in existing systems became quickly evident, especially for workers in the “gig economy” of unstable, part-time or contract jobs. On March 16, Mr. Trudeau offered a vague promise to help these Canadians “buy groceries and pay their rent.” In so doing, he acknowledged that Employment Insurance – a bedrock social program since the early 1970s – was no longer up to the task.

When the details of Ottawa’s first financial rescue package came out two days later, the new spending seemed staggering: $15-billion in emergency benefits for workers who were not eligible for EI, as well as a new 10-per-cent wage subsidy for small businesses, among other measures.

But early reviews for the package came back negative. Mr. Yussuff and Mr. Beatty, among others, felt the measures weren’t enough for employers to keep workers on staff. Air Canada – one of the country’s largest employers – started massive layoffs within two days.

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Meanwhile, the legislation to enact the package led to an unnecessary standoff with the opposition. Facing a broad backlash, the government dropped plans to give itself extended taxing and spending powers until the end of 2021, and Bill C-13 was adopted on March 25.

That day, speaking in the Senate, Finance Minister Bill Morneau defended the new Canada Emergency Response Benefit (CERB) – which offers $2,000 a month to eligible workers – as superior to wage subsidy programs adopted in some European countries, which delivered the money to employers. “We are providing a wage subsidy that’s going to go directly to employees,” Mr. Morneau said.

There was some grumbling from within Mr. Bains’s Innovation Department and at Small Business, headed by Mary Ng, about Finance’s unwillingness to move faster and more broadly at the outset. Among business leaders, there have been complaints that Mr. Morneau did not consult before he pushed forward with programs, only to have to backtrack and make corrections.

“There’s no question it has been challenging to get quick action from some elements within the Department of Finance. It’s hard to determine if that’s political or civil service level,” said Dan Kelly, president of the Canadian Federation of Independent Business. “I totally get that Finance officials have to start to immediately put their minds to what the loopholes are, how the program can be abused and with the assumption that will happen, and that, unfortunately, is the enemy of speed.”

Other officials said Finance was simply looking for the proper mechanism to have the spending achieve its stated objectives. Mr. Morneau’s position was that while more funds were available, it is important to ensure the government only spends what is necessary.

A spokesman for Mr. Morneau said the response to date is worth more than 10 per cent of Canada’s gross domestic product, adding Finance has taken into account the need for more spending when Canadians are ready to “bounce back.”

“Our strong fiscal management over the last mandate has given us the necessary leverage to quickly move forward with that plan, and we will continue to do more to ensure a quick economic recovery when the time is right,” said Pierre-Olivier Herbert, the director of communications for Mr. Morneau.

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The wage subsidy debate

A special COVID-19 cabinet committee – chaired by Ms. Freeland and featuring ministers such as Mr. Morneau, Mr. Duclos and Economic Development Minister Mélanie Joly – was put in place in early March. As the crisis worsened, the committee was in charge of developing the rescue package for approval by Mr. Trudeau.

During the internal debate over a wage subsidy, Ms. Freeland took to talking privately about the need for a more robust response that would place the Canadian economy into “a medically induced coma,” a senior official said. Her argument – as others were making around the world – was that economies needed to be frozen in time until physical-distancing measures were scaled back.

Once again, Mr. Yussuff turned to the Prime Minister for help.

“He had good judgment. He realized that if the objective was to keep people on the payroll, to keep their jobs and their attachment to their workplace, the only way this is going to happen is that you have to broaden the scope,” Mr. Yussuff said.

On March 27, the government flip-flopped on its previous position, when the Prime Minister announced a 75-per-cent wage subsidy that would allow more companies to access more money. In fewer than two weeks, the financial package ballooned to more than $100-billion. The response from labour and business was positive. Within days, Air Canada rehired laid-off workers.

“The wage subsidy is the single biggest ticket for business and what they announced initially was too narrow and too little. But it wasn’t out of malicious or some sort of ideological problem,” Mr. Beatty said in an interview. “They were trying to make a program as they went along and they have substantially redrawn it a couple of times since.”

The $73-billion wage subsidy was by far the federal government’s biggest direct spending measure, but Ottawa continued to react in response to criticism from opposition parties and experts. New direct funding measures were put in place for artists, part-time workers and students.

“I do believe we could have prevented waves of layoffs had the wage subsidy been signalled, even if not delivered earlier, in a more substantive way,” Mr. Kelly said. Unlike other ministers, the PMO and provincial finance ministers, Mr. Morneau did not have substantive conversations with Mr. Kelly about the emergency measures.

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Help for small business

A large loan program, meanwhile, was put together in record time as a result of frequent talks between Mr. Morneau and the chief executives of the country’s big banks. By the time the Finance Minister announced the creation of the Canada Emergency Business Account, under which Ottawa would guarantee $40,000 interest-free loans to small businesses, the banks’ CEOs and the heads of their retail divisions had already begun working together behind the scenes.

Accustomed to jockeying for market share, the bank executives were dialling in on conference calls with their rivals. Tempers flared at times as the program was designed, sources said, because of conflicting priorities between bankers and bureaucrats. The banks strived to meet their customers’ pleas for quick relief, while the government wanted them to fulfill their due diligence to be able to account for the spending and prevent fraud. The CEBA was officially launched on April 9, offering an estimated $41.25-billion in credit and $13.75-billion that would not have to be paid back.

There were tensions, too, between Ottawa and the provinces, particularly Alberta and Saskatchewan, over federal emergency relief for the oil and gas sector. At one point, Ottawa cut off negotiations with Alberta when some of the details of the planned aid package – including the potential $15-billion price tag – were leaked to The Globe.

On March 25, Mr. Morneau told the Senate that a specific announcement of measures for the oil and gas sector was imminent. “I’m not talking about weeks. I’m talking about hours, potentially days,” he said.

But frustration mounted as hours, days and then weeks went by without an announcement. On Friday April 17, Ottawa came up with a package that met with relieved approval of the two provinces. The plan included $2.5-billion to clean up orphan oil and gas wells, stop methane gas leakage and credit for small and medium-sized energy companies. In announcing the oil and gas support, Mr. Morneau explained the order in which the government measures were rolled out.

“You’ve seen us deal with people first,” he told reporters. For businesses, Mr. Morneau said the government first focused on small operations, then mid-sized firms. Further, yet-to-be-announced plans are under consideration to provide credit “for the largest of firms.”

In other parts of the government, the emphasis was put on getting as much money out of the door as quickly as possible. As bureaucrats and ministerial staffers designed the CERB, it was quickly decided it would be administered through the Canada Revenue Agency, which has robust computer networks and already issues millions of cheques and payments every year.

One official said the major concern across government in the lead-up to the launch date of April 6 was not the program’s cost, but whether the systems would hold up. If there was one nightmare scenario, it was a repeat of the Phoenix pay fiasco in which Ottawa was unable to pay its own employees, the official said.

The Professional Institute of the Public Service helped to design a portal for the CERB from scratch. The system delivered. As of this week, Ottawa has processed more than 9.5 million applications under the CERB and issued more than $22-billion in benefits.

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The Bank of Canada’s role

The beginnings of the economic response in the first half of March also required close co-operation among Finance, the Bank of Canada and the Office of the Superintendent for Financial Institutions (OSFI); all three controlled important pieces of the puzzle to deliver relief, most crucially to ensure vital credit channels remained open for businesses and individuals. In a rare public demonstration of their co-ordination, Mr. Morneau, Bank of Canada Governor Stephen Poloz and Superintendent of Financial Institutions Jeremy Rudin held a joint news conference on March 13 to lay out the steps they were taking together to maintain stability in the banking and financial systems.

By mid-March, Mr. Poloz and his five deputy governors were in constant discussion – albeit mostly virtually – as the central bank raced to stay on top of the surging demand for cash and credit. Mr. Poloz was on the phone twice a week with the CEOs of the country’s Big Six banks (Bank of Montreal, Royal Bank of Canada, Bank of Nova Scotia, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, National Bank of Canada), seeking their input and co-operation in keeping crucial funds flowing and keeping the lending taps open. The Governor was also talking regularly with the heads of other major central banks.

By the end of March, the Bank of Canada had cut its key interest rate three times in just more than three weeks by a total of 1.5 percentage points, leaving it at a record-tying low of 0.25 per cent. In late March, it stepped in with a landmark program to buy at least $5-billion a week in Canadian government bonds – reinforcing the very foundation of the bond market – adding to the numerous programs it had already announced to ensure short-term credit for banks, businesses and provincial governments. In mid-April, it announced that it would be purchasing longer-term provincial and corporate bonds, too. By that point, the Bank of Canada had poured roughly $200-billion into the financial markets in an effort to keep the country’s money flowing – with the promise of more to come.

Despite the mammoth challenges ahead, the government did not ask Mr. Poloz to extend his seven-year mandate on June 2, even though a confidant of the central bank Governor said he was willing to do so if asked.

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The path ahead

There are many unknowns about the eventual return to postpandemic life. As one official said, Ottawa is still trying to measure the size of the crater that will be left behind by the pandemic.

Reopening up sectors of the economy and schools while safeguarding the health of citizens is a daunting challenge. Older Canadians remain highly vulnerable to the current and future COVID-19 waves, and the government continues to worry about the novel coronavirus taking hold in Indigenous and remote communities.

Business and labour groups are urging Ottawa to set up a national working group, much like the NAFTA advisory council, to provide input on kick-starting the economy when stay-at-home restrictions are gradually lifted. The goal would be to offer advice on health protocols for each sector of the economy, as well as the conditions that would trigger their reopening.

“It’s not a matter of simply putting a key back in the ignition and turning it and the motor starts. We have lost several cylinders and there is a great deal of repair that needs to be done,” Mr. Beatty said.

University of Saskatchewan professor Janice MacKinnon, a former provincial finance minister who specializes in fiscal policy, said the government deserves credit for moving quickly to support the millions of Canadians who suddenly lost their income due to the pandemic. However, she said action for key industrial sectors such as oil and gas came too late and is not enough.

“It’s wonderful to say ‘let’s support the workers.’ Good. But the workers have to have industries to go back to,” she said.

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With this looming fiscal crunch, the government will look to quickly wind down the programs that were created to deal with the crisis.

To prepare for the future, Mr. Trudeau held what he calls a “stock take” – a time to take stock of the situation – with top aides, including the Clerk of the Privy Council, and academics such as University of British Columbia economist Kevin Milligan, Atkinson fellow Armine Yalnizyan, Carleton social policy expert Jennifer Robson, Wilfrid Laurier University economist Tammy Schirle, C.D. Howe institute researcher Grant Bishop and Ivey Business School professor Mike Moffatt. In addition, Mr. Trudeau invited his Treasury Board President, Mr. Duclos, who was a public-policy expert and a professor of economics at Laval University before going into politics in 2015.

The session was focused on analyzing the government’s response to the current crisis. But in the back of the minds of participants was also finding long-term fixes to the gaps exposed by the pandemic. Officials worry not only that EI proved inadequate and outdated, but that Canada’s agricultural sector – which is heavily reliant on foreign workers – and long-term care for seniors are key vulnerabilities.

The Prime Minister came out badly wounded from the most recent election – dogged by political interference in the criminal prosecution of SNC-Lavalin and the blackface photos – and his government reduced to a minority. The sense in Ottawa is that Mr. Trudeau doesn’t want to be solely judged on his immediate reaction to the unprecedented emergency. His legacy actually hinges on his ability to eventually move Canada’s social safety net back in step with the times.

With reports from James Bradshaw, Bill Curry, David Parkinson and Sean Silcoff

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