Thank you, Mr. Chair, and thanks to all the committee members for inviting me to be part of the panel here today.
These are obviously extraordinary times, and the response by the government and the central bank has been equally extraordinary. They don't have a playbook for this crisis, and it's been impressive to watch the way in which we've all worked together and worked toward a common goal.
There's no doubt that the massive fiscal stimulus programs were necessary to support households and businesses through the immediate effects of the government shutdown. Similarly, there's no doubt that the massive increase in the Bank of Canada's balance sheet was necessary to support financial markets and overall financial stability to ensure the economic shutdown did not morph into a financial crisis.
In my few minutes here today, I thought I'd highlight some of the ways in which it's clear that the stimulus has been successful and some of the concerns as we look ahead to what we hope are better times.
On the fiscal front, it's difficult to fully evaluate at this point the success of all the programs, though the uptake in the CERB and the wage subsidy would suggest that they've certainly helped households and businesses bridge the immediate crisis period. The dollar figures associated with the programs—$2,000 a month for CERB and a maximum of $847 a week for the wage subsidy—appear to be appropriate, as they cover the bulk of core expenses across the bottom and the middle of income earners. Moreover, the fall in real GDP in Q1 2020 at 2.1% ended up being in the middle of the range of estimates in the Bank of Canada's April monetary policy report.
On the monetary front, of particular concern right off the bat were the strains in the Government of Canada bond market. Typically, Government of Canada debt is the safest Canadian-dollar denominated asset one can trade. Importantly, it then acts as a benchmark, creating a reference price for the market to price all other debt instruments. Therefore, an illiquid market for Government of Canada bonds can impair debt issuances across the entire financial system.
What we were seeing in March were huge spikes in illiquidity. As a result, the bank implemented the Government of Canada bond purchase program, which significantly increased how much Government of Canada bonds it purchased and held on its balance sheet. Those spikes in illiquidity were quickly brought back down and today look much closer to historical levels.
Similarly, there was much consternation about the ability of some provincial governments to continue borrowing or, for that matter, borrowing at sustainable rates. On March 26, the day before the bank announced it would start buying up short-term provincial debt, spreads across all provinces were well above 100 basis points, with Newfoundland and Labrador closing in on 200 basis points. They had all been below 100 basis points before the crisis started. By April 17, two days after the bank announced it would also buy longer-term provincial bonds, spreads had returned to much more normal levels. The latter announcement also had the effect of reducing actual borrowing costs across all provinces back to levels that we saw in February.
The bank has also expanded its large-scale asset purchase programs to deal with stresses in the private sector. Here too, illiquidity was rearing its ugly head, threatening to impair credit and capital allocation. The bank put in place a series of private sector asset purchase programs. Again, spikes in illiquidity in March shrank in April and have returned to more normal levels. In April, new issuances of Canadian corporate bonds totalled $17 billion, representing one of the largest totals in a decade.
While obviously we are not out of the woods, it is important that we think ahead and ensure that our policy responses are appropriate for the level of risk in the economy and leave us with the fewest regrets in the long term.
Canada has benefited tremendously from having a fiscal and monetary anchor over the past 25 years, including very low-risk premiums on government borrowing costs. Fiscal anchors like the debt-to-GDP ratio were rightly set aside with the spending programs required to overcome the government-imposed economic shutdown, but economic growth is likely to be sluggish for some time, and there's a danger that these temporary programs will take on more permanence, turning one-off deficits into structural deficits. Should that be the case, investors will become concerned with fiscal sustainability, Canadian-dollar denominated debt will become riskier and borrowing costs could increase rapidly.
While other countries are in similar situations, Canada is nevertheless highly dependent on both domestic and foreign investor confidence so that public and private debt can be carried at a reasonable cost. This reinforces the importance of Canada's monetary anchor: a low and stable inflation target.
With the inflation control agreement coming up in 2021 for renewal, our commitment to that 2% target becomes even more important. This commitment gives the bank ample latitude to increase its balance sheet over the next couple of years to support the economy and the financial system in a deflationary environment but provide assurance that it will promptly move to deal with any inflationary pressures as we emerge from the shutdown.
As we move from the crisis to the recovery phase, the programs that governments have put in place are expected to be wound down or modified to reflect the changing economic circumstances. However, traditional risk metrics are likely going to make even healthy borrowers appear unhealthy until the recovery is well under way and economic uncertainty has eased. On the business side, we don't want zombie firms, but we also don't want healthy firms with viable business models disappearing.
Therefore, some continued government involvement is likely warranted with the big questions being what form it will take and what principle should guide this involvement.
Governments must work to reduce as much as possible the uncertainty that's in their control. Forward guidance is not just a central banker term; it applies to fiscal authorities as well. Governments must also plan with a clear timeline how any support will evolve as the recovery evolves and will be scaled down and eventually exit as things return to normal.
I'll stop there. I thank the chair and the committee again and I look forward to the question period.