Prime Minister Stephen Harper is depending on parents to open their wallets and start spending the billions he’s rolling out in family benefits in hopes of kick-starting Canada’s economy ahead of a fall election.
The C$3 billion ($2.3 billion) in payments, which the jobs minister describes as “Christmas in July,” are aimed both at winning votes for Harper’s governing Conservatives and driving consumer spending as the country teeters on the brink of recession.
On Monday, families received lump sums of $520 per child under age six, and $420 for those aged six to 17 -- the more kids in a home, the greater the windfall. Monthly payments from this point on will be $160 and $60 for each age group.
“It’s such a large bump in income, we do believe it will have a meaningful effect,” said Douglas Porter, chief economist at Bank of Montreal, which projects the one-time UCCB boost will drive consumer spending to grow at an annualized rate of 3.5 percent in the third quarter.
That’s the second-highest of 19 forecasts in a Bloomberg survey whose median estimate was for 2.3 percent consumer spending growth this quarter.
The Canadian economy has contracted for four straight months, prompting the Bank of Canada to slash its 2015 growth forecast nearly in half last week and throwing Harper’s pre-election promise of a balanced budget into question.
Central bank Governor Stephen Poloz said last week the program, known as the Universal Child Care Benefit, will probably give a “noticeable bump” of one percentage point to consumer spending in the third quarter, helping the world’s 11th-largest economy recover from a “mild contraction” in the first half of 2015. A Canadian election is scheduled for Oct. 19.
How effective the child payments are as stimulus will depend on how they’re spent. Economists expect a portion to be saved, used to pay down debt or simply set aside, as the benefits are taxable.
If one quarter of the C$3 billion injection is actually spent by households, it would boost consumer spending by roughly 1.1 percent, according to Paul Ferley, assistant chief economist at Royal Bank of Canada in Toronto. He expects between a quarter and a half to be spent.
“It would be significant in the third quarter, but that boost is not going to get repeated in August,” he said, referring to this week’s retroactive one-time payment. “With it going to households, there’s a chance it gets spent very quickly so it kicks in faster for the economy, as opposed to an infrastructure spending program, where there may be longer lags.”
The Universal Child Care Benefit was initially introduced as an alternative to a national daycare program. Its expansion was enacted into law last month, though backdated to January, leading to the lump-sum payments this week.
The official opposition New Democrats say the Conservatives are “playing politics” on the eve of an election, and have called for a national daycare program with fees capped at $15 per day. The third-place Liberals have pledged to overhaul the UCCB and replace it with a benefit that gives more to low-income families, saying the UCCB “is not fair” because it gives equal payments to the wealthy.
Meagan Murdoch, a spokeswoman for Employment Minister Pierre Poilievre, said the Conservatives have not estimated what share of the C$3 billion will be spent. “We believe parents are best positioned to decide how they spend it,” she said in an interview. “Government doesn’t need to be monitoring how parents spend their money.”
The poor economy may mean the money won’t be spent, according to David Tulk, chief Canada macro strategist at Toronto Dominion Bank. Parents will save it or spend it depending on how they perceive the economy, said the economist, who sees consumption growing 2 percent in the third quarter.
“The sense is that more of it will be saved the worse the feeling is,” he said.
Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said the funding will serve as stimulus -- though how effective it will be remains unclear. CIBC projects consumer spending will rise 1.9 percent in the third-quarter, below the average of economists surveyed by Bloomberg. Various other economic forces, such as weakened employment growth, will damp the impact of the cash, he said.
“It depends on what you view the alternative as,” Shenfeld said Monday by phone from Toronto, asked about the C$3 billion in child-benefit payments. “If the alternative was they would have burned it, it’s more stimulative.”