INST Committee Report
If you have any questions or comments regarding the accessibility of this publication, please contact us at accessible@parl.gc.ca.
CHAPTER 3: THE FEDERAL GOVERNMENT'S
IMMEDIATE RESPONSE
The tragic events of September 11 are unique and unprecedented. The economic forecasting community cannot recall of a comparable event that would serve as a good guide for projecting the severity and the duration of the economic stimulus set in motion on that day. This is precisely why caution must be observed when evaluating the first chapter’s economic forecast. For the same reason, the appropriate policy responses by the private sector and governments are equally uncertain in such situations. The impacts of natural disasters, such as that of South Florida’s Hurricane Andrew in 1992, resemble a terrorist attack because they too involve the localized destruction of a country’s physical capital stock. The major differences between the two events being that a hurricane, as a natural phenomenon, does not usually entail the loss of consumer and investor confidence and could at least be partially foreseen so that some preparations could be taken. Criminal acts with a political or social dimension, like the assassinations of the Kennedy brothers and Martin Luther King Jr., are man-made disasters that usually precipitate losses in consumer and investor confidence and, as such, are also a close cousin of a terrorist attack. Both these events share the characteristic that their planning and implementation were well concealed from the policing authorities and the public, and their consequences could not adequately be mitigated pre-emptively. The major difference between these two events, of course, is that an assassination does not entail a loss in the nation’s productive capacity or physical capital stock. After-the-fact responses have been the primary means of dealing with crises brought on by terrorism and they can be divided into two types: immediate reactions, some of which are emergency responses with some element of prior planning; and long-term planned policy measures that are meant to correct the situation so that there is no recurrence of such events. |
Travel-related industries were the hardest hit by the shock effects … Governments moved quickly to offer airlines compensation for direct event-related losses and to provide back-up insurance for airports. … The impact of lower interest rates is not immediate, but it is pervasive and it is powerful. Monetary policy … remains the best way of easing the cyclical problems facing Canadian companies and consumers alike. … Fiscal policy … is not the best means of combating the temporary effects of the economic cycle, but it will have a profound impact on Canada’s ability to deal with the structural challenges facing Canadian companies in a wide range of industries. [Thomas d’Aquino, Business Council on National Issues, 47:10:40] |
This chapter deals with the former, but is limited to the economic responses that have been mostly directed at providing compensation or restoring consumer and investor confidence. The following chapters are left to assess the longer term responses, which will be directed at stopping terrorist activities in the least intrusive way to commerce and trade, as well as to human rights and freedoms.
The federal government responded immediately to the September 11 terrorist attacks in a number of ways; responses of various kinds continue. In his appearance before the Committee, Canada’s Industry Minister mentioned a number of actions or steps that will lead to action, including financial compensation, taken so far by his Cabinet colleagues. Here is a non-exhaustive list:
The important tax reductions announced [in October 2000] by my colleague, the Honourable Paul Martin, along with other fiscal and adjustment measures announced after September 11, such as infrastructure announcements and the $160 million assistance package to the airline industry, will play an important role in the medium-term economic recovery. There has also been a 90-day fixed backstop insurance for airlines and airports and of course, a few days ago, a further $75 million loan guarantee to Canada 3000. …
In addition, since September 11 the Bank of Canada has lowered its key policy interest rates by 125 bases points for a total reduction of 300 basis points since the beginning of the year. This brings interest rates to their lowest level since 1961 — 40 years. These cuts are intended to stimulate the economy by boosting consumer and business confidence. …
Since September 11 the government has announced new anti-terrorism measures totalling $290 million, which brings our total new investment in policing and security and intelligence to $1.8 billion since the 2000 budget. …
In addition, the CCRA is to expedite the sharing of information with the United States Customs Service and, of course, the Prime Minister has created the Cabinet ad hoc committee on security. [The Honourable Brian Tobin, Minister of Industry, 44:8:40]
Other government decisions taken include:
- an additional $20 million through the Canadian Tourism Commission to kick-start travel of Canadians, and of Americans from bordering states, within Canada; and
[1] However, Canada 3000 has since filed for bankruptcy.
the Business Development Bank of Canada has been instructed to provide qualifying customers the option of postponing principal repayment for up to four months, particularly those engaged in tourism, transportation, wholesale and exports.
The government further acknowledges that other industries will be seeking compensation as a result of the closure of Canadian airspace in response to the events of September 11, including Air Canada which has further requested loan guarantees on its outstanding debt that it believes is no longer financially sustainable. So it has become quite clear to the Committee that the immediate responses of the federal government might end up costing the federal treasury almost $500 million, not including the lost tax revenues resulting from a more depressed economic activity over the next fiscal year than what would have been the case without the terrorist attacks.
Airline and Airport Measures and Government Compensation
When it became clear what was happening on September 11, Canadian airspace was immediately closed to all but military, police and humanitarian flights. In the following days, the Government of Canada gradually permitted the resumption of domestic, trans-border and international flights, but normal service was delayed even as late as Friday, September 14, as airline companies worked to reposition their aircraft, stranded passengers and staff. Full airline service eventually came back on-line, but air traffic plummeted and has remained at below-normal levels ever since. Box 3.1 provides a chronology of decisions made by Canada’s Transport Minister for the month of September.
Industry representatives claim that government compensation for the closed airspace is justified on the basis that their costs cannot be avoided as fast or as easily as their aircraft can be grounded:
[W]e are an industry which is faced with very high fixed costs. Our aircraft is the single biggest fixed cost. Our supplier relationships and our union agreements build in a lot of costs that are extremely difficult to manage in short-term cyclical situations. The general rule of thumb in the industry is: when you try to save costs, what you do is you park airplanes. You take capacity out of the system. … But for every 20% of capacity you take out of the system, you really only save 10% because you have a huge ongoing cost … regardless of whether you fly … or park the airplanes … [Cliff Mackay, Air Transport Association of Canada, 47:9:15]
Box 3.1 Closure of Canadian Airspace: Sequence of Events The following is a chronology of events and major related announcements following the closure of airspace on September 11, 2001, in response to the terrorist attacks in the United States: Tuesday, September 11 Immediately following the tragic events in the United States, Transport Minister David Collenette declared that no commercial or private aircraft were allowed to depart Canadian airports until further notice. The only exceptions were military, police and humanitarian flights. The Canadian aviation system immediately began preparations to accept flights previously destined for the United States that could no longer land in that country. At the time of the terrorist incidents, approximately 500 aircraft were en route to North American airports. More than half these aircraft returned to their points of departure; the remaining 226 continued on to various destinations across Canada. Security measures were also immediately taken at airports across the country, including evacuation of some areas and deployment of police or security at key access points. Wednesday, September 12 Minister Collenette announced the lifting of restrictions on domestic air travel within Canadian airspace, and also announced that Canadian airports would operate under heightened security measures. Diverted flights were then released for travel to their original destinations (flights to the U.S. still required clearance from the Federal Aviation Administration). Heightened security measures announced included increased police presence at major airports, increased passenger screening and enhanced security procedures, including more hand searches of baggage. Thursday, September 13 Minister Collenette announced that restrictions on international, trans-border and private flights had been lifted. Passenger flights to the U.S. not previously released were also allowed to resume, although many airports in the United States remained closed to trans-border traffic. Friday, September 14 The Minister removed restrictions imposed on cargo flights — the last of the flight restrictions imposed in Canadian airspace on September 11, 2001. The Minister emphasized that the return to normal flight operations in Canada continued to be a gradual process. This was especially true for trans-border flights into the United States, where certain airports remained closed. Sunday, September 16 The last of the 226 flights diverted to Canadian airports was cleared to leave for its final destination. Monday, September 17 Minister Collenette announced that cockpit doors on all Canadian airline passenger flights, domestic and international, must be locked for the full duration of flights. Transport Canada is also working with the U.S. Federal Aviation Administration and other authorities to improve the security aspects of cockpit design, in particular cockpit doors. Saturday, September 22 Minister Collenette announced that the Government of Canada would provide a 90-day indemnity for third-party war and terrorism liabilities for essential aviation service operators in Canada to help ensure aviation services can be maintained uninterrupted. This action was taken in response to the decision by international insurers to no longer provide the required levels of war risk liability insurance previously in place. Tuesday, September 25 Minister Collenette announced that Transport Canada is purchasing a quantity of new, advanced explosives detection systems (EDS) for use at priority Canadian airports. These new systems will supplement explosives detection systems already in use at Canadian airports. Source: http://www.tc.gc.ca/releases/nat/01_h125e.htm |
Industry spokespersons further argued that government compensation to individual companies must take into account a number of factors such as:
[T]he operators in Canada are not operating in a homogeneous market. Just to give you some examples, Air Transat is a leisure carrier. It operates strictly in the leisure market and most of its flights are charter, as opposed to scheduled. It’s a matter of public record that they are experiencing significant pressure, from a cash point of view.
WestJet, on the other hand, a low-cost, no frills domestic carrier, with almost exclusively short-haul flights, is doing reasonably well in very difficult market circumstances. Its balance sheet is strong and it’s in a market niche which is not anywhere nearly as challenged as some of the other markets that other carriers are in.
First Air is another example of an airline that is weathering the storm well. It is a regional carrier, primarily in the North, and has a good mix of cargo and passenger facilities, with a relatively low cost structure and is doing reasonably well.
Air Canada, on the other hand, … is facing very significant pressure on the demand side. Fifty per cent of [its] business was in trans-border and international and that market is not coming back. They have done major cuts and they are frankly having to be very aggressive to try to reduce their cash requirements. [Cliff Mackay, Air Transport Association of Canada, 47:9:25]
Transport Canada arrived at $160 million in compensation after an examination of financial information provided by Canada’s largest carriers, supplemented by a sample survey conducted by the Air Transport Association of Canada. This work placed losses for the airline industry attributable to the closure of Canadian airspace at approximately $150 million. The government’s program also incorporates the cost of administering the compensation and allows for the possibility of larger claims once a full accounting of losses is done.
In terms of Air Canada’s request for a government loan guarantee, the Committee agrees with the advice that the government should resist bailing out airline companies suffering from structural rather than September 11-created problems.
There can be some targeted relief, perhaps, but [s]ome people are hiding behind the smoke of September 11. There were problems going into September 11. If there are new demands on airlines perhaps on security measures and things, then yes but if in terms of bailouts, the answer is no. [Catherine Swift, Canadian Federation of Independent Business, 45:16:35]
However, the Committee is unsure at this time whether the government’s compensation offered to Air Canada, amounting to something more than $100 million, along with Minister of Transport’s two recent decisions that directly affect the company’s operations, is sufficient. These two decisions include the elimination of the capital restriction on individual share ownership in the company to no more than 10% of its outstanding stock and the freeing of the company from its job termination obligations following its takeover of Canadian Airlines International Inc. Structural and September 11-created problems are not so easily disentangled. Moreover, although the industry was mostly deregulated more than a decade ago (i.e., Canadian ownership restrictions still apply) and the government wants private-sector solutions to these financial problems, a government loan guarantee should not be dismissed out of hand. Indeed, it may be in the public’s long-term interest to provide such a short-term solution; it may be all that is required to ensure the viability of a Canadian-owned national airline company. The Committee, therefore, recommends:
9. That the Government of Canada carefully examine the viability of Canada’s air transport industry.
In light of the losses incurred by travel agencies, as described in the previous chapter, industry representatives requested that the government establish a fund of $20 million to which individual agencies could apply for compensation, based on their volume of business during the same one-week period last year. This, they insist, would not be a handout or bailout: "This is compensation for our customers being removed from flights and put in places unknown, and then with us having to try to get them home" [Randall Williams, Association of Canadian Travel Agents, 46:15:55].
A decision by the Minister of Transport is still pending.
The Government of Canada almost immediately after September 11 adopted its new Anti-terrorism Plan, which has four objectives:
- Stop terrorists from getting into Canada and protect Canadians from terrorist acts;
- Bring forward tools to identify, prosecute, convict and punish terrorists;
- Prevent the Canada-U.S. border from being held hostage by terrorists and adversely affecting the Canadian economy; and
- Work with the international community to bring terrorists to justice and address the root causes of such hatred.
This plan was provided legislative support with the introduction of Bill C-36, An Act to amend the Criminal Code, the Official Secrets Act, the Canada Evidence Act, the Proceeds of Crime (Money Laundering) Act and other Acts, and to enact measures respecting the registration of charities in order to combat terrorism, to the House of Commons. The Government of Canada then announced new initiatives that would provide:
- $10 million in new RCMP funding to increase airport security;
- $45 million in new funding to enhance integrated policing activities, improve technology, increase protection services and enhance information sharing with other government departments, as well as international and domestic law enforcement agencies; and
- $9 million to be allocated annually for increased staffing in priority areas.
Together, these new funding initiatives will better equip security agencies to identify and track down any terrorists already in Canada and to keep terrorists from entering the country.
Chapter 1 describes two important economic impacts of the terrorist attacks: the destruction or loss of capital stock, both physical and human; and the loss of consumer and investor confidence arising from uncertainty about future terrorist and military events. In economic terms, the former impact is best characterized as posing a supply-side problem, while the latter is a demand-side problem. The destruction of capital stock, like Hurricane Andrew of 1992 or the OPEC oil crisis of 1973, exerts upward pressure on prices, but a loss in consumer confidence exerts the opposite influence on prices. Because the latter impact is far more significant than the former in this case, rising inflation is not a cause for concern, at least in the short run. Both problems, however, unambiguously point to depressed economic activity, actually making the ongoing slowdown much deeper and prolonged than it would otherwise be.
Times such as these dictate more financial liquidity through lower interest rates; a positive economic stimulus is clearly in order. The Bank of Canada immediately realized this situation and moved swiftly (by September 17), as did the U.S. Federal Reserve Board (U.S. Fed), lowering its key Overnight Rate for chartered bank deposits by 1.5 percentage points to 3.5%. As the Bank of Canada put it:
The tragic acts of terrorism in the United States on 11 September may pose significant challenges to consumer and business confidence in the United States, Canada, and elsewhere. Accordingly, the Bank is taking this action today [lowering its target for the overnight rate by one-half of one percentage point to 3.5 per cent] to underpin confidence and provide further support for economic growth in Canada. The Bank’s decision to act outside of its normal schedule of announcement dates reflects the need for prompt action to counteract potential effects on confidence in the aftermath of the extraordinary events in the United States. [Bank of Canada, News Release, September 17, 2001]
Both the U.S. Fed and the Bank of Canada continued this easing of monetary policy such that Canada’s Overnight Rate, as of November 1, stands at 2.75%, the lowest it has been in more than four decades.
Small business representatives are hoping that the chartered banks will pass on these favourable credit conditions to small businesses and consumers:
One of the things we are concerned about, post-September 11, is a tightening, a credit crunch. That’s the worst thing that can happen at this time. We’re treating this, what happened, similarly to what happened with the ice storm. We’ve written the banks; we’ve written to Revenue Canada: let’s not hurt cash flow, let’s not squeeze at this particular time. If there is a cashflow issue or if communities are having hard times at the border, or if they’re with trade and manufacturing and they’re late in some of their remittances, let’s give them a break … [Garth Whyte, Canadian Federation of Independent Business, 45:16:00]
The Committee is confident that the Bank of Canada’s strategy of lowering lending rates will be successful in stimulating the economy and that we will see these lower interest rates passed on to consumers and small and large businesses. The Committee is concerned about the insensitivity of credit card interest rates to changes in the chartered banks’ prime rates. The Committee will study these matters in a more detailed fashion when it resumes its routine discussions with Canada’s chartered banks on small and medium-sized business lending and banking practices.
The Committee, however, would caution people on the limits of monetary policy. In the ordinary conduct of monetary policy, timing is important. The lag between an interest rate cut and the positive economic stimulus it generates is usually thought to be six to nine months. So the actions taken by the Bank of Canada since September will not largely be felt until the second quarter of 2002 at the earliest. However, the Bank of Canada had been lowering interest rates, by as much as 2.5 percentage points, between
[2] The target for the Overnight Rate is the Bank of Canada’s key policy interest rate. It is the appropriate policy rate for international comparisons - for example, with the target for the federal funds rate in the United States and with the two-week repo rate in the United Kingdom. The target for the overnight rate is the midpoint of a 50-basis-point operating band. The Bank Rate is the upper limit of this band.
January and September 2001 in order to stimulate spending. The prospects for economic recovery sometime in early 2002 are therefore good, assuming that consumers will again join the spending treadmill and investment opportunities of the business sector are sufficiently sound to justify higher corporate debt loads.
The Minister of Finance has decided to table the federal budget in December 2001 rather than the customary February period to provide an immediate fiscal response to the tragedy of September 11, 2001. A second benefit of an early budget — probably its more important contribution in light of these tragic events — would be to immediately shore up and restore consumer and investor confidence in Canada.