Keeping businesses afloat in the short run merely postpones the stress on our financial system, government finances, and ultimately the recovery itself, writes Philip Cross in the Financial Post. Below is an excerpt of the article, which can be read in full here

By Philip Cross, July 17, 2020

Justin Trudeau justified Canada’s record $343-billion (and counting) deficit by saying the federal government borrowed for Canadians during the pandemic so they didn’t have to. What he left unsaid was that the income support was almost exclusively directed to households, not businesses. But without a recovery of the business sector there will be no sustainable growth in Canada.

The business sector increasingly struggles to finance itself. Last week’s financial snapshot revealed that the government has done little to help businesses cut their borrowing. Keeping firms afloat in the short run only to see them swamped by too much accumulated debt merely postpones the stress on our financial system, government finances, and ultimately the recovery itself.

The key to recovery for firms is finding a mechanism that addresses their excessive debt loads. Firms in Canada entered the government-mandated shutdown of non-essential services with historically high debts, partly the result of years of tantalizingly low interest rates offered by central banks.

Since the pandemic hit, most businesses have seen their revenues plunge. But they still have had to pay their fixed costs, such as property taxes, rent, utilities, mortgages and other debt, which is why a Statistics Canada survey found nearly half of firms report expenses were unchanged during the pandemic. As a result, even businesses with fundamentally sound business models borrowed heavily during the lockdown. Bank loans to firms jumped eight per cent between February and May, with small business borrowing rising an estimated $117 billion due to the pandemic.

All this borrowing has forestalled a rash of business failures but firms’ high and accelerating indebtedness at a time of declining revenues means many eventually will become insolvent. Delaying rent or tax payments, as many have been able to do, merely means these expenses will come due just as the moratorium ends, with no guarantee revenues will return to the pre-crisis or higher levels needed to pay deferred expenses.

***TO READ THE FULL ARTICLE, VISIT THE FINANCIAL POST HERE***

 

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