Yes, Ottawa was right to tell Canadian businesses to repay their CEBA loans

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In 2020 and 2021, the federal government handed out $49-billion to nearly 900,000 Canadian businesses through the Canada Emergency Business Account. It was just one of Ottawa’s big pandemic-era support programs, with CEBA designed to help small companies stay afloat.

A lot of the money the feds doled out during the pandemic took the form of what were basically grants. For example, millions of unemployed Canadians got up to $500 a week, for up to 28 weeks, from the Canada Emergency Response Benefit. Payments were subject to income tax, but except for people who filed false or unjustified claims (and there were quite a few of those), CERB recipients knew the money was theirs to keep.

CEBA was different. It was a loan. A loan offering unusually generous terms – more on those in a moment – but a loan nonetheless.

And Jan. 18 was the deadline. Business groups lobbied hard for a longer repayment period and better terms. The Trudeau government, after granting a short extension, said no. And it stuck to its guns.

Was that the right call? There’s no definitive answer, since CEBA, like every government spending program, comes with both costs and benefits. But on the whole, I think Ottawa struck a fair balance.

The pandemic made CEBA necessary. And extremely low interest rates made it affordable.

For most of 2020, the yield on the five-year government of Canada bond hovered around 0.4 per cent. At such a low interest rate, $49-billion in borrowing has an annual carrying cost to taxpayers of just $200-million a year.

And that $49-billion, lent out in the midst of a pandemic-induced recession, helped businesses stay in business. This meant they continued to employ workers and buy goods and services from other companies.

In a recession, private sector demand pulls back, with businesses laying off people and consumers spending less, which can lead to a self-perpetuating cycle of ever more layoffs and ever less spending. It makes sense for government to borrow, and to run up bigger deficit, so that it can break the downward spiral by injecting money into the economy.

That’s what the feds did in 2020 and 2021. Through CEBA, Ottawa subsidized billions of dollars of economic activity, in the form of businesses that continued to operate and spend, at a cost to the federal treasury of just a few hundred million dollars a year.

In the depths of the recession, the extra economic activity probably generated more tax revenue than it cost. It was a good trade.

And unlike most pandemic programs, CEBA was a loan. It came with very favourable terms, but Ottawa always intended to get (most) of its money back.

How favourable were the terms? CEBA’s interest rate was zero per cent, with no repayment of principal required until 2024. What’s more, CEBA was partly forgivable. A business that took out the maximum $60,000 loan in 2020 or 2021, and repaid by last week’s deadline, only had to repay $40,000. The other $20,000 is forgiven.

Imagine buying a car that way: Drive away in a $60,000 vehicle today, don’t pay a cent for three years, and then only pay $40,000. By my math, that’s an annual interest rate of minus-12.6 per cent.

Under normal circumstances, Ottawa shouldn’t make loans like that. But COVID-19 was obviously not a normal circumstance. Businesses that took CEBA didn’t get into financial trouble because of poor management. They were victims of circumstances beyond their control.

That’s why CEBA and other programs were needed, and why their terms had to be generous.

On Monday, Finance Minister Chrystia Freeland and Small Business Minister Rechie Valdez announced that an estimated 75 per cent of CEBA recipients had met the deadline. They repaid their loan from Ottawa, entitling them to have up to one-third of the principal forgiven.

The one-quarter of businesses that weren’t able to find the money to meet the deadline, including by borrowing from a bank or other lender, have lost the opportunity for partial loan forgiveness. However, it’s not like Ottawa is about to seize their assets or order them to closer their doors. Instead, their remaining CEBA loans, which had a 0-per-cent interest rate, will now carry an interest rate of 5 per cent.

On a $60,000 loan, that’s an annual interest payment of $3,000. That’s better than what’s on offer these days from at the bank – particularly for a business that tells its banker it doesn’t have the wherewithal to cover even a $250-a-month loan payment.

Ottawa could have chosen to extend the zero-per-cent interest rate for another year, to the end of 2024, as some business groups urged. But interest-free loans for borrowers aren’t free for the lender. And the lender here is all of us. According to the Parliamentary Budget Officer, a one-year extension would have cost taxpayers more than $900-million.

On balance, the Trudeau government was right to create CEBA during the depths of the pandemic recession. On balance, it was right to give it generous terms. And on balance, with the pandemic recession long behind us, the Trudeau government was right to start bringing CEBA to a close.