NORTHERN ECONOMIST 2.0

Friday, 20 December 2024

Federal Finances in Review

The last week has been a chaotic one in Ottawa given the resignation of the finance minister on the eve of the Federal Economic and Fiscal Statement (FES), the turmoil over the Prime Minister’s leadership and the ongoing verbal assaults of President-elect Trump on Canadian sovereignty. Nonetheless, lost in all of this is that after a considerable delay, there has finally been an update to Canada’s Fiscal Reference Tables (FRT) and Figures 1-4 here provide an overview of both the past (1966-67 to 2023-24) as laid out in the FRT and the future (2024-25 to 2028-29) such as it is laid out in the FES.

Figure 1 provides a nice snapshot of the federal fiscal footprint – the federal spending to GDP ratio. Over the period of this chart, the federal footprint reached a maximum of 25.6 percent in 2020-21 during the pandemic. This was of a course an outlier year and if one takes this out, one nevertheless notices that from a low of 13.9 percent in 2013-14, the federal fiscal footprint has gradually drifted upwards notwithstanding the pandemic and in 2022-24 stood at 17 percent. While not at the level of the 1980s when it exceeded 20 percent, it remains that the federal fiscal footprint both in 2023-24 and going forward to 2028-29 is the largest it has been since the late 1990s and marks a calculated expansion of federal public sector size relative to GDP.

Part of this rising expenditure has been financed via borrowing and in 2023-24 the deficit stood at nearly $62 billion. From 2023-24 to 2028-29, Canada is forecast to accumulate another $242 billion dollars in deficits bringing the national net debt to $1.549 trillion by 2028-29. Figure 2 plots the deficit to GDP ratio, and it stands at nearly 2 percent for 2023-24 and is forecast to drop to 0.7 percent by 2028-29 – assuming of course that given the deficits projected, nominal GDP growth proceeds at 4 percent annually. Given the slowdown in the economy that appears to be underway and the likely imposition of US tariffs in 2025, this would appear to be an exceptionally rosy GDP growth forecast.

Figure 3 plots the net debt to GDP ratio, and it began to take a definite upward path starting in 2019-20 when it went to 37 percent from 33 percent the year previous. It peaked at just over 44 percent in 2022-23 and is only going to come down slowly to about 42 percent by 2028-29. Now, while up by recent standards, it is nowhere near where it was during the federal fiscal crisis of the 1990s. Yet, the debt is mounting, and interest rates are higher than they were during the debt and spending spiral of the pandemic and so debt service costs have gone up.

In 2019-20, debt service costs were $24.4 billion representing about 7 percent of federal revenues that year. For 2024-25 they are anticipated to be more than double at $53.7 billion or 10.8 percent of federal revenues. By 2028-29, it is projected that annual debt service costs will reach $66.3 billion or 11.3 percent of federal revenues. As Figure 4 illustrates, we are again nowhere near the numbers of the federal fiscal crisis when well over 30 percent of federal revenues went to service the debt. At the same time, we appear to have settled at a plateau over 10 percent for the foreseeable future and that is money better spent on programs.

In her resignation letter, the outgoing finance minister appeared to have a fiscal epiphany as she noted the need to keep our fiscal powder dry to face the economic challenges coming down the pipeline. The trends of the last few years suggest that there has been a certain dampness to federal fiscal powder for the last few years that is expected to persist into the future. While there is still fiscal room to manoeuvre, a large recessionary shock will quickly erode that room given the gradual enrichment of long-term federal spending via assorted initiatives over the last decade as illustrated by the federal expenditure to GDP ratio. This suggests that dealing with a major recession will be more challenging that it would have been a decade ago.

Wednesday, 4 December 2024

Thunder Bay’s Economy: The Year Past and the Year Ahead

Well, it is nearly year’s end and for Thunder Bay, time for a retrospective on economic things past as well as a brief look ahead. Thunder Bay has had a particularly good year given that population is growing, construction is up, and the Port is doing the best it has in years. The really big driver in Thunder Bay this past year would have to be the construction sector given the continuing construction of the new more than one-billion-dollar provincial prison as well as substantial rental accommodation construction. In the case of the jail, as the Conference Board noted in its November 2024 Metropolitan Report on Thunder Bay’s economy: “Work on the jail really helps.” Think about it, Thunder Bay’s GDP is just shy of $6 billion. A project the size of the jail represents a massive distortionary shock to the local economy.

There are many workers who are commuting to Thunder Bay for the construction work or commuting through Thunder Bay to work at the mines and this has helped buoy demand for accommodation and services this year. Indeed, local employment is up as well having grown from about 61,200 workers in 2021 to 63,700 by 2024 and is projected to reach nearly 65,000 in 2025 as current activity continues. And our CMA population is indeed up also and now expected to be well over 130,000. However, 65,000 seems to be the upper end of our new “post forest sector crisis employment range.” Prior to the forest sector crisis in the early 2000s, our employment used to fluctuate between 65,000 and 70,000. There has been a permanent downsizing of local employment. Even the Conference Board has noted that: “Despite the run-up, employment remains below the 2003 all-time summit of 65,500 workers.”

Given the reliance on construction, the real concern is moving into 2026 to 2027 when the provincial jail construction winds up given the massive scale of the project. The projection for housing starts coming from the Conference Board suggest an annual flow of less than 200 new starts a year for the foreseeable future. While the Art Gallery and the proposed Turf Facility may take up some of the construction slack as the jail project winds down, neither of those projects are of comparable scale to the jail project. If there is a silver lining to this, it is that local homeowners might finally be able to get a hold of a local tradesman to do their repairs and renovations.

By the end of next year, the full impact of changes to international student visas will also have emerged which will more fully affect the local post-secondary sector as well as local retailers that rely on international student labour. Should the currently lagging lithium and critical mineral projects finally emerge by this period, then they will likely help take up the economic slack. Unfortunately, at present with the sales of electric vehicles slowing, it appears that demands for regional lithium development may have stalled for the time being. As well, the demand for forest sector products remains weak. Indeed, when it comes to GDP growth, the Conference Board notes that: “Thunder Bay’s real GDP has essentially stagnated against this sombre backdrop. It is on tap to ease by 0.2 per cent in 2024, after rising only 0.1 per cent in 2023. We expect 2.0 per cent growth in 2025. Local GDP growth will ease to 1.2 per cent in 2026 and 0.7 per cent in 2027, then return to 1.2 per cent in 2028”.

And then there is of course what the impact of President Trump and the proposed tariffs may be on the local economy. It is of course unclear what the impact of tariffs might be unless they are also applied to regional natural resource products. There are industries in our area that ship to the U.S. including wood and paper products, and minerals and a slowdown here may also impact the Port of Thunder Bay. However, the incoming US President is more of a known quantity this time around and the evidence is that he is quite transactional with much of his behaviour designed to stake out bargaining positions. Canadians should be prepared to wheel and deal. It will be a tumultuous year to be sure with President Trump sending out assorted signals about how he feels about Canada.

Tuesday, 12 November 2024

Ontario Health Spending: What's Up and What's Down

The Canadian Institute for Health Information (CIHI) has released its 2024 National Health Expenditure Trends data and it paints an overall picture of rising health spending. As I have noted elsewhere, total health-care spending in Canada is expected to increase by 5.7 percent in 2024, after rising 4.5 percent in 2023 and only 1.7 percent in 2022 coming on the heels of the pandemic. The picture for provincial government health spending is also one of increase but once adjusted for population and inflation, the results are more mixed particularly if one looks at changes since the year before the pandemic. Over the period 2019 to 2024, British Columbia and Prince Edward Island see the largest increases in real per capita provincial government spending at 17 and 16 percent respectively while at the bottom are Manitoba and Nova Scotia, which over the five years have seen their per capita provincial government health spending stay essentially flat. Ontario, over this same period saw an increase of just under seven percent.

Figure 1 plots real per capita Ontario provincial government health spending ($2010) from 1975 to the present and the evidence shows that since 2010, real per capita health spending spending growth was lackluster at best rising from $3,617 to $3,783 - an increase of of 4.6 percent or about half a percent annually. After 2019, the pandemic saw a ramping up provincial government health spending to a peak of $4,316 in 2021 - an increase over two years of almost 14 percent. Since 2021, there has been a decline in real per capita spending and in 2024 it is estimated to sit at $4,040 - for a decline of about 6 percent. Nevertheless, real per capita provincial government health spending in 2024 is still projected to be 6.8 percent higher than 2019.

What is quite interesting is how spending by expenditure category has performed over the 2019 to 2024 period. Figure 2 plots the percentage change in real per capita provincial government health spending by category. Over this five year period, the largest increase has been for real per capita spending on other institutions - namely, long-term care - at nearly 50 percent. This is of course understandable in the wake of what transpired in long-term care homes during the pandemic as well as the promise to build more long-term care beds for an aging population. Next is home and community care at 10.7 percent , followed by public health at 9.3 percent and then hospitals at 8 percent. Other professionals is next with an increase of 5.3 percent followed by capital at 3.2 percent. What comes next however is even more interesting . All other health care net of home and community care spending is down by about a third of one percent. Spending on provincial government drug plans in real per capita terms is down 4.4 percent while physician spending is down 5.8 percent. Finally, real per capita provincial government health spending on health administration is down nearly 24 percent.

The surprise here is that spending has dropped on two items that directly affects a lot of individuals in Ontario - namely, government paid for prescription drugs and physician services. Obviously, if one measures availability of physician services by how much is being spent per person after population growth and inflation, it is obvious that Ontario is having trouble keeping up in this category. With an aging population, the decline in physician and also drug plan spending is definitely going to be felt even if the provincial government asks us to take solace in the increases in long-term care, home care and hospital spending.

Monday, 28 October 2024

Technological Change and Employment in Economic History

Technological change has been the chief contributor to economic growth since the industrial revolution. Yet, technological change always seems accompanied by anxieties related to long-term unemployment despite increases in both total employment and per capita income over the last 150 years. This anxiety continues with the current onset and diffusion of assorted new technologies including AI, machine learning and quantum computing. Yet the evidence suggests that despite over 150 years of rapid technological change, more jobs have been created than destroyed so that on net employment has continued to rise and matched or exceeded population growth.

My coauthor Olivia Di Matteo (UBC) and I have a paper on the program of the Social Science History Association Meetings in Toronto this week that looks at whether the past can inform the future when it comes to the impact of technology – quantum computing in particular – on the economy. Our paper overviews the recent history of technological anxiety with comparison to actual outcomes, surveys the state of quantum computing and the challenges it faces, and then tries to extrapolate from current available metrics and past performance what the potential effects on employment and income might be. The historical evidence suggests a positive and significant relationship between income, employment and assorted measures of technological change including computing measures. Going forward there is no reason why future growth cannot benefit from new quantum technology, but much depends on having a measure of quantum computing to gauge its impact on income and employment. Measuring the impact of quantum computing is more difficult given that new metrics apart from those obtained during the age of classical computing may apply.

The focus in this blog post is the historical evidence on employment performance in three countries at the forefront of technological change over the last 150 years: The United Kingdom (Figure 1), Canada (Figure 2), and the United States (Figure 3)[See note at end of post for data sources]. The United Kingdom’s experience as the first industrial nation revealed increases in both employment and the labour force as technological change both created and destroyed jobs but with substantial net job creation. Indeed, using census records on employment in England and Wales since 1871 and Labour Force Survey Data from 1992, Stewart, De, and Cole (2015) show declines in occupations such as agricultural labourers, washers, launderers, telephonists, and telegraph operators both in absolute numbers and as a share of employment. Meanwhile, these declines were accompanied by increases in other occupations such as accountants, bar staff, hairdressers, and other services. Overall, employment in the United Kingdom has trended steadily upwards since the mid 19th century irrespective of massive technological change as Figure 1 illustrates.

The picture is similar for Canada, as illustrated in Figure 2. Between 1851 and 2021, in tandem with a population that grew from 2.4 to 38.3 million – a 16-fold increase – estimates of the Canadian labour force show growth from 762,000 to 20 million – a 26-fold increase in size. Employment data is available from 1891, and over the period 1891 to 2021, employment in Canada grew from 1.6 to 18.0 million – a 11-fold increase – while the labour force over the same span also increased from 1.7 to 20 million – an approximately 12-fold increase. The slowdown after 2017 in terms of labour force and employment can be attributed to the impact of the pandemic, and as the chart illustrates, there was recovery by 2022. Evidence for the United States parallels that of the United Kingdom and Canada with respect to employment as illustrated in Figure 3. Again, from 1900 to 2022 – ostensibly a period of great technological change – total employment in the United States expanded six-fold while the population grew four-fold.

So, why all the anxiety about technological change? Well, despite the historical evidence to date, there is a background foreboding that much like mutual fund returns, the past may not be an indicator of the future if the onset of quantum information technologies, AI and machine learning together somehow represent a fundamentally different economic process that unlike the past will destroy more jobs than it creates. However, at this point these new technologies are still in their infancy and there is really no reason at this stage to expect the future to be that much different than the past, unless the relationship between technological change and its contribution to the economy itself shifts in some unforeseen fashion.

Sources/References

Data Sources for Figures 1-3: UK [ Data Source: A millennium of macroeconomic data for the UK, The Bank of England's collection of historical macroeconomic and financial statistics, Volume 3.1.], Canada: [Denton and Ostry (1961); Historical Statistics of Canada; Statistics Canada Catalogue 71-201 Annual, 1973 & 1989, Historical labour force statistics, actual data, seasonal factors, seasonally adjusted data; Statistics Canada, v102029212 Canada [11124], Labour force (Persons), Total, all occupations; Both sexes v102029368 Canada [11124], Employment (Persons), Total, all occupations, Both sexes]; USA:[ Historical Statistics of the United States (HSUS) from 1900 to 1945 and that of the Bureau of Labour Statistics (BLS) from 1948 to 2023.]

Stewart. I., D. De, and A. Cole (2015) Technology and People: The great job-creating machine. Deloitte.

Tuesday, 15 October 2024

Inflation, Productivity and Real Wage Stagnation: Canada 1960 to 2023

Today’s CPI inflation numbers have many breathing a sigh of relief with the expectation that with inflation below 2 percent, more interest rate relief is on the way and Canadians can resume their high personal borrowing lifestyle. Lost in the short-term euphoria and celebration of expected lower borrowing costs is the long term cost that inflation has had on our standard of living given the low productivity gains of the last five decades. Nowhere is this more evident than when one takes a look at how real wages have performed over time.

Figure 1 plots the average annual monthly hourly Canadian manufacturing wage – nominal and real – for the period from 1960 to 2023. The nominal hourly manufacturing wage data and the All-City CPI data are both from the US Federal Reserve of St. Louis data sets [CPALCY01CAA661N; LCEAMN01CAM189S] with the real hourly wage data in $2015. Why manufacturing wages? Well, the manufacturing sector has generally been held up as the beacon for good quality and high paying jobs with a lot of hand wringing as manufacturing jobs have declined as a share of employment. It sounds old fashioned but many still regard manufacturing jobs as the “high ground” of an economy in terms of value added to which I would also add the resource sector (including agriculture).

When nominal hourly wages are examined, their performance looks impressive. The monthly nominal manufacturing wage in Canada in 1960 averaged $1.78/hr. By 2023, it was $30.66/hr and the average annual growth rate of real nominal hourly wages in manufacturing was 4.7 percent. However, when adjusted for inflation using the All-City CPI for Canada with 2015 as the base year, real nominal wages barely double over the period going from $13.64/hr to $24.91/hr. The average annual growth rate of real hourly manufacturing wages over this entire period was only 1 percent annually. Given that at 1 percent annual growth it would take approximately 72 years for a quantity to double, we can expect real hourly wages in manufacturing to be double those in 1960 by 2032.

Figure 2 plots the annual average growth rate of real hourly manufacturing wages and adds a 5^th order polynomial smoothing plot. When one examines both Figure 1 and 2, it becomes apparent that the stagnation in real wage growth really sets in during the 1970s. There was a brief uptick in real wage growth in the wake of the FTA and NAFTA (in 1988 and 1994 respectively) but decline sets in again after the 2008-09 financial crisis. When one combines the productivity decline that starts in the 1970s following the first oil price shock with the effects of inflation, the erosion of the standard of living – as captured by real wages – is dramatically illustrated. It makes the case for why bringing inflation under control is so important and also why we need a productivity agenda to drive Canadian policy going into the next election.