Northern Economist 2.0

Thursday, 23 May 2019

The Big Challenges Addressing Ontario’s Deficit & Debt Problem

The last couple of days have seen two reports – one by Statistics Canada and one by the Ontario Financial Accountability Office – which taken together provide the best picture yet as to why Ontario faces a big fiscal challenge in resolving its deficit and debt issues.  First, the Financial Accountability Office (FAO) in its Spring 2019 Economic and Budget Outlook under its baseline projection projects that Ontario’s budget deficit decreases from $11.7 billion in 2018-19 to $7.3 billion in 2020-21 and improves rapidly over the following three years, reaching balance in 2022-23 and a relatively large surplus of $6.4 billion by 2023-24.  

Yet, the FAO notes that the 2019 Ontario Budget projects smaller deficits over the next two years due to the government’s more optimistic outlook for revenue growth.  However, beginning in 2021-22, the 2019 budget incorporates provisions for unannounced revenue reductions and spending measures. This would lead to higher deficits and add to Ontario’s debt. The Province should still achieve a balanced budget by 2023-24, due to its plan to significantly restrain the growth in program spending.  The 2019 budget will see program spending grow at just 1 percent annually over the next five years bringing per capita government spending from $10,494 in 2018-19 to $9,391 – a decrease of 10.5 percent.  Per capita government spending in Ontario is already the lowest in the country and this additional decline would widen the gap even more.

So why is Ontario unable to provide provincial government program spending closer to the national average? The answer to that lies in another report by Statistics Canada titled Income Growth per Capita in the Provinces since 1950 which examines GDP per capita and real GDI per capita over a 66-year period to provide insight on which provinces experienced the most growth over the course of this period, and how this affected per capita income levels across provinces.  The news for Ontario is pretty grim in terms of economic growth rates.  Whereas in 1950, Ontario had the highest GDP per capita of the ten provinces – followed by British Columbia and Alberta – by 2016 it was down to 4thplace with Alberta, Saskatchewan and Newfoundland and Labrador in the top three positions.  More startling is the growth rate of per capita income – which places Ontario at the bottom of all the provinces over this period (See figure).


So, Ontario in a sense over the last 50 years has spent beyond its means in an effort to keep up with the other provinces in terms of the provision of public services but that has still not been enough.  It now has the lowest per capita spending of the ten provinces, the largest provincial total public debt, the second highest per capita public debt, and is engaged in an effort to balance its budget which will widen the program spending gap further with the other provinces.  Now some may point to the factor here as a revenue problem driven by the unwillingness of Ontario to raise taxes.  Ontario indeed has the lowest total revenue per capita among the ten provinces but it has the third highest per capita tax revenue – after Quebec and Newfoundland.  Ontario’s relatively higher per capita tax revenue is offset by lower revenues from resource royalties, federal transfers as well as all other revenues when compared to other provinces.  No, it is not a tax revenue problem.

The problem is three-fold: First, Ontario has had a weaker economic growth rate relative to the other provinces and needs to boost its productivity and economy to grow faster thereby expanding its tax base.  Second, Ontario has not had has a resource sector boom that has enabled provinces like Alberta and Saskatchewan to leap ahead in terms of income and ultimately government spending and nor is it likely to get one from northern Ontario resources anytime soon given the slow pace of development.  Third, as a result of its strong tax base - all things considered – Ontario is still a source of federal government revenue and ultimately transfers to other parts of the country which allow those regions to maintain a higher level of spending.  While balancing the budget by 2022-23 will resolve Ontario’s fiscal situation, it remains that the long-term pressures driving its fiscal imbalance are still there.  

Friday, 17 May 2019

Canada's World Role: Time to Grow Up


Canada is experiencing a particularly rough patch in terms of its international relations given the recent acrimonious trade negotiations with the United States over NAFTA, the deterioration in diplomatic and economic relations with China in the wake of the Meng Wanzhou affair and the recent spats with Saudi Arabia and now even the Phillipines.  Despite our efforts to reach out diplomatically to our allies and gain their support for our predicaments, no one is going to come to our aid.  While some of this can be traced to the deterioration of a rules-based world economic and political order and the rise of more populist regimes, the recent setbacks suffered by Canada have another direct contributor – the United States and especially President Trump. 

The United States has signaled to the world that its America First policies extend to its closest North American neighbours – Canada and Mexico – and that there are limits to any “special” relationship with Canada.  The lifting today of the tariffs on steel and aluminum does not change this.  The NAFTA negotiations not only saw tariffs imposed on Canada but a set of particularly personal attacks on the Prime Minister and the negotiating team.  Essentially, the Prime minister was “slapped around” in public by President Trump and the message this conveyed did not go unnoticed in the rest of the world.  The message was that Canada no longer enjoyed any special protection from its close affiliation with the Americans – it was just another American foreign relation.

This may all seem far-fetched to the members of Canada’s governing Laurentian elites whose views are still anchored in the Golden Age of Canadian diplomacy of Lester Pearson but then most of them probably did not attend a rough and tumble northern Ontario elementary school in the 1970s.  Unlike the zero tolerance environments of today’s elementary schools, violence in the playground was quite prevalent several decades ago.   If the biggest kid took a dislike to you during recess and slapped you around, it was a signal to his minions that they could slap you around too.  Taking a stand on principle and shouting out the importance of fairness and values would simply get you another pummeling.  The trick to survival in that environment was to lay low and not attract too much attention while still getting things done.

So, Canada is in a situation not of its own making but one in which it is going to have to work hard to forge the economic relationships we need to support our standard of living.  After all, about one third of our GDP is rooted in exports which means that we cannot just take our balls and go home to play. However, we do have to be more hard-nosed about reciprocity in our economic relationships with countries that are able to use Canadian rule of law to their advantage when it comes to investing in Canada but do not extend the same privileges to our citizens and companies.  Our overall diplomatic efforts to build alliances must continue but in the long run they need to be coupled with something else – we need to get bigger if we want to ensure we are not so readily pushed around on the world playground. 

Canada needs to continue to grow its population to expand its economic mass and needs to do so through migration incentives that place population in centers other than Toronto, Montreal and Vancouver to promote broader development.  Canada also needs to spend more on its own defense if it wants to be taken more seriously.  There are challenges coming to our Arctic sovereignty and unless we are planning to give the region away to Russia, the United States and China, we need to be able to effectively command access and transit through the region.  We cannot depend on the United States or other allies to promote our interests – we need to do it more astutely and assertively ourselves. 
 

Wednesday, 1 May 2019

Thunder Bay's Municipal Tax-Ratio Challenge


One of the items at the Monday April 29th Thunder Bay City Council meeting was a discussion on tax policy and a move to bring it more in line with provincial requirements.  Namely, the province has property tax ratio thresholds and in order to meet them there needed to be a reduction in non-residential tax ratios as follows: Industrial ratio from 2.925444 to 2.63, Multi-residential from 2.422438 to 2.0, and Commercial from 2.137932 to 1.98.  This has been a process that has been underway since 1998 and partly as a result the share of the tax levy paid by residential ratepayers has been rising over time while that of non-residential has been declining. 

In Thunder Bay at present, nearly two-thirds of the tax levy is borne by residential ratepayers while the other third is non-residential or essentially business property taxation. In 1990, it was about a 50/50 split. It should be noted that the City of Thunder Bay’s financial statements now report taxation revenue without dividing it into residential and non-residential as used to be the case only a few years ago.  To get that information, one now has to go onto the government of Ontario website and access the Financial Information Returns provided by municipalities which can be quite a daunting task.  This lack of transparency on the part of the City of Thunder Bay in reporting these important numbers more directly is a disappointment.

Of course, municipal public finance can be a pretty arcane and complex issue– even for an economist - and the discussion the other evening was actually more spirited and informative than usual, all other things given.  Administration affirmed that the tax levy this year would remain the same and the changes to the residential burden would be phased in but in the end based on the short segment I observed they did not successfully allay the concerns of councilors that residential taxes could rise even if the tax levy stayed the same.  Indeed, the emphasis that the tax levy is going to remain the same this year did not deal with the concern that taxes for residential will rise more than they otherwise might in future.  How can this be?

Friday, 26 April 2019

Ontario Budget 2019: Some Spending Details


Well, the dust is settling from the April 11th 2019 Ontario provincial government budget and it is time to spend a little more time looking at some of the details in spending.  There are many stories in the media about assorted cuts coming down the pipeline, but it remains that overall spending is up and projected to continue rising though at a much lower rate.  Indeed, as discussed in my previous post, total spending is expected to rise from $162.5 billion in 2018/19 to reach $164.4 billion representing an overall increase in spending of 0.6 percent. This of course is a much lower growth rate in spending than was the case under the previous government.

What is more interesting is what a more detailed analysis by ministry expense category reveals.  Approximately two-thirds of ministry expense categories are expected to decrease while one-third have actually experienced an increase. Table 1 lists the ministry expenses by ranked percentage increases whereas Table 2 does it by ranked expenditure decreases. Increases in spending range from 550 percent for the Treasury Board Secretariat Capital Contingency Fund to 0.5 percent for the Training, Colleges and University Base Budget. Despite what may seem to be very large increases for the Treasury Board Secretariat they are on amounts that represent less than one percent of total spending. With respect to the Treasury Board Secretariat, the government also notes that: “The Province has put in place a prudent Operating and Capital Contingency Fund housed in the Treasury Board Secretariat. This fund is the main driver of the increase in the Ministry’s 2019–20 budget, in addition to an increase in employee pension benefits paid.” (Ontario 2019 Budget, p. 298).  Other increase of note also include Infrastructure (Base) (261%), Total Transportation (10.9 %) and Interest on the Debt (6.4%).

It should be noted that Health and Long-Term Care and Education (Primary & Secondary) together represent in 2019/20 a total of $95 billion or about 60 percent of the spending total.  While there are changes within both these categories underway designed to create efficiencies it remains that Education is going to grow by 2.6 percent and Health by 2.2 percent.  It is fairly simply math to realize that if categories representing 60 percent of government spending are going to grow by over 2 percent when total spending is growing by 0.6 percent, then there are going to have to be reductions in many other categories which account for the other 40 percent of spending.




 
Here the list is much larger (therefore two tables) and some of the percentage increases also larger.  Reductions range from -0.4 percent for the base budget of Municipal Affairs and Housing to -67.1 percent for Natural Resources and Forestry Emergency Forest Fire Fighting.  However, the total budget for Natural Resources and Forestry is declining by -19 percent while the base budget is declining by -3.2 percent.  While the Total Budget for Training, Colleges and Universities is declining by -6.1 percent, its base budget is actually growing by 0.5 percent while the student assistance component is declining by -33 percent.

To its credit, the provincial government has embarked on what appears to be a pretty substantial review and restructuring of government spending in all categories.  Within expenditure categories it is choosing what to increase – albeit at a lower rate than in the past – and what to substantially reduce.  Some categories have been hit immediately with some large reductions.  Some of these reductions include the winding up of one-time funding and therefore appear quite large for the coming year which is why a comparison of base budget rather than overall totals might be more appropriate.  However, the ultimate aim appears to be a substantial restructuring with priorities being selected.  It would appear the priority is to deal with the province’s fiscal situation while ensuring that overall budgetary cuts do not occur particularly in the key areas of health and education.  Indeed, all things considered, the transfer partners in the municipalities, universities, schools and hospital sectors (MUSH) have gotten off relatively lightly.  This naturally means larger declines in the remaining 40 percent of government spending. It cannot realistically be otherwise.

Friday, 12 April 2019

Ontario Budget 2019: Some Preliminary Thoughts


Well, the Ford Government’s first budget is out. Detailed analysis of the new fiscal numbers takes time but for now, some quick preliminary thoughts on what I think will ultimately be a positively received budget by the Ontario public despite the criticisms that will be leveled by both the right and left of center critics.  This positive public reception is not just because of popular new measures in alcohol, gaming and cannabis – such as earlier starts to establishments - that will facilitate consumption.

The right will argue that the move towards fiscal balance is not occurring fast enough.  Moreover, Ontario’s debt pile is projected to grow past $343 billion to reach $360 billion with an accompanying increase in debt service costs.  Meanwhile, the left will emphasize any harm to services from reductions needed to find public sector efficiencies. Indeed, the lead up to this budget has seen some particularly vociferous commentary about the “storm” coming to Ontario and the "apocalyptic" cuts coming to public services.

Yet, many middle of the road Ontarians may probably find this to be a reasonable budget that is less harsh than many expected. After all, spending is still going to be up slightly next year – from $162.5 billion to $163.4 billion and then to $165.6 billion the year after.  With signs the economy may be slowing down, the government is certainly not keen to worsen any potential downturn with a slash and burn budget.  However, the next four years may also be one of the most transformative periods in recent Ontario public finance if the government succeeds in implementing its vision to better manage Ontario’s public sector while maintaining services.

The Ford government is expected to end 2018-19 with an $11.7 billion deficit and is bringing in the 2019-20 fiscal year with a $9.3 billion deficit with plans to balance the budget by 2023-24. With respect to fiscal progress, the Ford government could have balanced the budget in about three years if it had decided to freeze nominal spending for a couple of years.  Instead, it is planning to allow total spending to grow at about one percent annually which is still very restrictive relative to the projected increases of the last Liberal budget.  Spending in Ontario is being placed on a much lower growth trajectory so that over time it will eventually match revenues.  Given that compensation is a big part of public sector spending in Ontario, the one percent number is a signal of what wage increases can be expected in the public sector. 

 
After inflation, real spending in Ontario will nevertheless decline and therefore there will need to be choices made on where greater reductions and efficiencies will occur. However, some of those efficiencies will be used to fund new initiatives whether they be dental care for seniors, a new child daycare tax credit, opening new long-term care beds on a faster schedule, investments in public transit, and ultimately even some tax relief down the road.

More specifically, despite creating a new single health agency and optimizing productivity, over the medium-term health sector spending is still expected to grow an average of 1.6% annually to 2021-22. Education is expected to grow 1.2 percent annually.  On the other hand, post-secondary education and training is expected to decrease at 1% annually and while justice, and children and social services, will each decline at about 2% annually. 

In terms of efficiencies, aspects of the government plan are going to take shape via coming expert panels and task forces. Education is a key area with changes in class sizes the first step that was taken.  A task force to find efficiencies in how the four systems operate will inevitably lead to suggestions for more coordination of procurement and spending across school boards, standardization of pay scales and perhaps even some type of consolidation of facilities in declining enrollment areas as well as administrative and management functions that preserve the distinctive nature of each system.

Then there is post-secondary education where the budget has communicated a desire to tie college and university funding more to performance outcomes.  The key issue here is what those performance outcomes are going to be. Along with graduation rates and employment success, one might expect to see research output and measures of commercialization success or community outcomes as additional measures.  However, Ontario’s post-secondary sector especially at the university level is quite diverse and constructing a one-size-fits all set of measures will be politically challenging given the regional role many universities play. 

However, where the government will garner more sympathy from the public is with respect to its position on trying to do something about aging university faculty who can continue working past 65 and earn a salary and if still working after age 71 also collect a pension. However, university pensions are not like school teacher pensions – there is no province wide university pension system but each university has its own so again there is no easy one-size-fits-all solution.  The government will at minimum need to separate its thinking with respect to those universities with plans that are defined benefit-where the employer bears the risk - from those that are defined contribution – where the employee bears the risk.

And then there is health care, Ontario’s largest single budgetary expenditure.  Health care in Canada has been looking for transformative change for years and the inevitable result has been more and more spending.  The slowdown in growth rates of the last few years may ultimately prove to be temporary, driven in part by a slowdown in new drug products and postponement of capital spending. With a pledge to end hallway medicine and increase the number of long-term care beds, combined with an aging population and the arrival of new high demand pharmaceutical products, any savings found by true transformative change in Ontario will be rapidly eaten up by other spending.  This will be the area of greatest challenge.

So, there you have it.  This budget has a lot of plans for change by implementing reforms and best practices and innovation but for the moment they are just plans.  Politics is the art of the possible and the next couple of years will reveal what is possible and what is not.  Much hinges on how the economy performs, and especially whether we go into a small recession.  If the economy does better than expected and revenues are buoyant, the government will be able to shrink the deficit more than expected and spend more money.  Angst generated for media purposes and twitter universe rants aside, I think a sizeable silent chunk of the Ontario population will give the provincial government the benefit of the doubt for now.

Tuesday, 2 April 2019

Addressing Violent Crime in Thunder Bay


Mayor Bill Mauro has gone public in his calls for help in dealing with crime in Thunder Bay.  In reports by Thunder Bay Television and the Chronicle-Journal, the Mayor has called on the federal and provincial governments for assistance in dealing with the spike in violent crime that is afflicting Thunder Bay.  The City of Thunder Bay is hard pressed to deal with the financial impact on the police budget of the recommendations made by the Office of the Independent Police Review Director (OIPRD) to deal with systemic racism and now the spike in gang-related violent drug crime that is underway.

Thunder Bay is experiencing a surge in violent crime that has been underway for a number of years. While overall crime rates are down in Thunder Bay as shown by overall traditional crime rates as well as the Crime Severity index, violent crimes are up. As Figure 1 below shows, overall crime as measured by the Crime Severity Index (Source: Statistics Canada) has fallen from a peak of 126.25 in 1998 to reach 88.25 in 2017.  Violent crime, however is at 145.81 in 2017 and was 122.62 in 1998.  When linear trends are fitted to the data, violent crime has been trending up over time while overall crime severity has been trending down with non-violent crime severity quite flat.




Monday, 1 April 2019

Regional Economic Divides a Challenge for Ontario Budget 2019


The Financial Accountability Office of Ontario recently issued a report called Incomes in Ontario: Growth, Distribution and Mobility which summarizes recent trends in personal income in Ontario in the areas of income growth and distribution.  Among the findings were that Ontario’s median income growth was the slowest among the provinces between 2000 and 2016, that there has been an increase in income inequality in the province, and that relative and  inter-generational income mobility has declined – that is over time, it has become more difficult for lower income Ontarians to move up the income distribution and that children of higher income parents are more likely to become high income earners themselves.

As the report states: “It has become more difficult for Ontarians to “get ahead” – that is, move up the income distribution. In this report, upward income mobility is defined as the share of working-age Ontarians who move up at least one income quintile over a five-year period. This share declined from 41 per cent in the early 1980s to 32 per cent more recently. The decline was most pronounced for lower-income Ontarians.”  Moreover, what is also of interest is that while Ontario’s productivity has grown, incomes have not kept pace suggesting that Ontario’s economic growth has not translated directly into increased personal incomes.

Much of this report focused on Ontario wide trends but one of the most interesting pieces of information is Figure B.1 in the appendices - a map titled Median household income across census divisions in Ontario.  In this map, median household income from the 2016 Census is plotted by major census division in Ontario in four categories – Less than $65,000, $65,000 to $69,999, $70,000 to $74,999 and finally more than $75,000.  The map taken from the report is shown below and illustrates Ontario’s great regional economic divides.

 

Ontario’s highest household income regions stand out as mainly two islands on the map – the area surrounding downtown Toronto – that is the GTA and central Ontario – and the Ottawa region.  Downtown Toronto itself has substantially lower household incomes than the surrounding GTA and GTA belt area. The east and the southwest have swathes of lower income areas and then there is the North.

Thursday, 21 March 2019

Reflections on a Town Hall: Trudeau in Thunder Bay

Well, in the wake of the release of the 2019 Budget, Prime Minister Trudeau is off to Thunder Bay where he will be hosting a Town Hall on the campus grounds of Lakehead University on Friday March 22nd.  Indeed, the preparations for his arrival are already underway as the grounds of the C.J. Saunders Fieldhouse where the event will occur are being swept and tidied up from the accumulated grit of a harsh winter.  This is apparently Trudeau’s first visit to Thunder Bay since 2016 which is a signal that the election campaign is already underway.  The festivities get underway at 7 pm (but if you want a front row seat you need to register and arrive by 5:00 pm).

Thunder Bay can be considered a relatively politically safe place for the federal Liberals to have a Town Hall given the two ridings have returned mainly Liberals to Ottawa for nearly 100 years.  Thunder Bay voters are actually very conservative voters in the sense that they dislike change and always do the same thing – that is, return Liberals to Ottawa.  The only way they deviate from their inherent conservatism is to actually vote Conservative. Indeed, the last federal Conservative party politician who was elected was Robert Manion, who if memory serves me correctly, was around in the 1930s.  Of course, there was MP Joe Commuzzi circa 2007 – who started as a Liberal but then switched to the Conservatives and served as a Minister– but he was not elected as a Conservative so my initial point stands.

So what issues will Prime Minister Trudeau have to face in Thunder Bay? Well, the audience is likely to be filled with gushing supporters who will hang on his every word and engage in numerous standing ovations despite the recent disillusionment over the SNC-Lavalin-Raybould Affair.  Indeed, the Prime Minister is probably looking forward to an evening’s relief from the stress and acrimony of Ottawa.  There is nonetheless the potential for some fireworks and charged questions on a number of topics should the Town Hall decide to deviate from what is likely to be a large pep rally.  For those who might be interested, here are the parameters of just two interesting question areas.

What is the Federal Government going to do to help Thunder Bay address the December 2018 report by the Office of the Independent Police Review Director on relations between Indigenous People and the Thunder Bay Police Service? It is true that the local police are a municipal function and municipalities are creatures of the provinces, but it remains that First Nations and Indigenous peoples are a very important responsibility for the Federal government.  The recommendations for the Thunder Bay Police Service are going to involve a substantial increase in expenditures on an already stretched municipal tax base.  Is there any real federal financial assistance coming or is Thunder Bay on its own in dealing with this? Indeed, given that Thunder Bay is a regional centre for health and education services for area First Nations, what can the federal government do to assist in this regard?

As well, what is the Federal Government doing to actually implement its own growth plan for the  Northern Ontario economy?  All of us are familiar with the 2011 Northern Growth Plan released by the Ontario Liberal government which, over the course of the next 25 years, was supposed to assist the North in reversing its economic decline.  Well after five years of the provincial Northern Growth Plan – the plan to end all plans – the population of the North remains flat, employment is down and the value of new investment is also down.  

This lacklustre result has not deterred the Federal government from announcing its own Prosperity and Growth Strategy for Northern Ontario in April 2018 with twelve areas of action.  However, since then there really has not been much to be seen and heard as to specifics of what this strategy entails, aside from mentioning the strategy whenever there is an announcement of federal money from FEDNOR as was the case in Sudbury in December 2018.  Aside from this, there is little to be found in a Google News search when the term "Prosperity and Growth Strategy for Northern Ontario" is typed in.  So, is there an actual Federal action strategy for Northern Ontario or is it just another election marketing ploy?

I guess we will have to wait until tomorrow night to see if we learn anything new.  I for one expect there will indeed be some entertainment involved in this Town Hall Meeting.  Who knows, maybe we'll even get yet another announcement of federal support and commitment for the Ring of Fire? At the very least, in an election year one might expect some federal infrastructure dollars to finish four-laning the highway to Nipigon.

Friday, 15 March 2019

Why Thunder Bay Needs a Municipal Organizational Review


Thunder Bay Mayor Bill Mauro has called for an organizational review of how the City conducts its operations and has directed the City Manager to prepare a report that will deal with the scope of the proposed review.  This is in the wake of a 2019 Budget that saw the new council come in with a total tax levy of 2.29 percent which is below the annual average increase of the previous council’s four-year term of 3.6 percent.  However, there is room for improvement and an organizational review is a good way to try and put the city on a more sustainable tax levy path.

The BMA 2018 Municipal Study (see below) provides some quick comparisons in its Executive Summary that show why Thunder Bay needs a longer-term strategy to keep future increases closer to 2 percent. A property tax comparison shows that for the most part, property taxes in Thunder Bay are higher than either the provincial average or the average for northern Ontario. A basic detached bungalow has property taxes that are 10 percent higher than the provincial average and 19 percent higher than the average for northern Ontario.  For a two-storey home, Thunder Bay is 30 percent higher than the provincial average and 22 percent higher than the northern Ontario average. It should be noted that house values in Thunder Bay are substantially below the current provincial average - which incidentally in January 2019 was $554,936 while in Thunder Bay for February 2019 it was closer to $256,000. [Had to calculate this myself as the Thunder Bay site reports the median but not the average. Take 13.8 million dollars and divide by 54 sales]. A homeowner in Thunder Bay pays anywhere from 10 to 30 percent more in property taxes than the provincial average for a home that is about half the value. How's that for the Thunder Bay competitive advantage when it comes to attracting new business?
 


Our property taxes on apartment buildings are also higher than the average for the province or the North as are those for neighborhood shopping malls, office buildings, hotels, vacant industrial land and standard industrial land.  The only categories where we are  lower are motels – where we are 11 percent below the provincial average and 13 percent below the northern average – and large industrial land – where we are 3 percent below the provincial average but 8 percent above the North.

This raises questions of long term sustainability of these taxes given the slow economic and population growth in the City as well as the affordability when it comes to households paying these taxes.  While taxes are levied on the value of property, they are paid out of current income and here Thunder Bay also does not perform as well.  The slide below continues the comparison but this time on property taxes as a percent share of household income and water/sewer charges plus taxes as a  percent share of household income.  


 

For both these measures, we are higher than the provincial and northern averages though one may argue that the percent difference is small.  Average household income in Thunder Bay was $87,359 (the provincial average for municipalities in the BMA study was $102,194) with property taxes (at 3.9 percent on income) representing $3,407 dollars.  At the provincial percent share, taxes would be $3,319 - $88 dollars less - and at the northern Ontario percent share it would be $3,145 - $262 dollars less.  If our property taxes were as affordable as the Northern Ontario average - each household would pay $262 dollars a year less.

Why do we have higher taxes? That is the type of question a good organizational review would help answer.  When you start looking at the cost comparisons for services like general government, ambulances, general assistance, assistance to the aged, parks, sports and recreation, library, cultural services, police, and fire, Thunder Bay is usually at the higher end of the cost rankings for comparison Ontario municipalities.  While we can make arguments that the higher costs are a function of the geographic spread of the city, its regional role or its aging demographics, it remains that our costs are higher even when compared to other northern Ontario cities with similar features such as Greater Sudbury or Sault Ste. Marie.  

At the same time, the evidence suggests that we are increasingly providing a regional role in terms of health and education services and servicing a population larger than the official statistics might indicate.  Every year, thousands of university and college students move to Thunder Bay to acquire their education boosting our population from September to April.  Then there are the outlying First Nation communities who come to the city to also get health and education services many of whom also stay for extended periods to access these services.  However, how much more additional municipal service provision results from these demands that have to be met by the municipal property tax base is not a question with ready answers due to a lack of data - or at least publicly available data.  There is only so much a simple country economist can analyze if the data is not available. 

So, an organizational review is a good thing if it takes a look at how things are currently being done as well as what the actual demands for municipal services in Thunder Bay are.  If we have a municipal tax base for a City of 110,000 but are servicing a more regional population of 130,000 then we need to find some solutions.  An organizational review is not about cutting service but how to meet our current and growing needs and doing it in a manner that does not fiscally punish residential households and businesses in Thunder Bay.  Its about how to do more with less.  Simply throwing up your hands and saying taxes are higher here because things cost more is not really an option.  Things cost more for a reason and the organizational review should find out why.






Sunday, 10 March 2019

Some Recent Posts, Activities and Other Musings

Along with Northern Economist, I also contribute to two other blogs - the Fraser Institute and Worthwhile Canadian Initiative.  I try to post material related in some way to Northern Ontario on this blog - albeit with a fair number of exceptions.  My posts on the other two blogs tend to be almost exclusively on either provincial, national or international economic issues and often with a strong economic history bent.

I just did a post on Worthwhile Canadian Initiative comparing the most recent employment numbers to what transpired in the early 1980s.  The inspiration for this was a number of media reports that gushed positively to no end about how well employment was performing and that there was plenty of steam left in Canada's economy.  Indeed, a number of stories noted that Canada's January-February employment growth in 2019 was the best since the same two months on 1981.  Of course, all of these stories neglected to add what happened after February 1981 which was one of the most severe recessions in the postwar period that saw unemployment rates peak at nearly 13 percent.  For this post, click here.

And then there are my last two posts on the Fraser Institute blog.  As part of the lead up to the March 19th Federal Budget, I take a look at federal government finances and note that large deficits are on track until 2022-23.  A key point is that there has not been a revenue slowdown.  While these deficits might be understandable during a recession or as part of a strategic investment mandate, it is not really the case here.  It is just more spending.  For this post, click here.

Finally, a post on the evolution of the United States federal debt looks at the the contribution to the debt to GDP ratio ranked by president all the way back to George Washington who incidentally was pretty good at fiscal management given the hand he was dealt in the wake of the American Revolution.  Overall, wartime presidents have seen the largest increases in their debt to GDP ratios with Franklin Roosevelt and Woodrow Wilson topping the ranking.  For this post, click here.

Overall, it has been a pretty busy time between blogging, the occasional media interview (did The Current in December with an interview after Stanley Fischer) working on research papers in health and historic wealth inequality, public presentations - did Port Arthur Rotary in November and on the books for Fort William Rotary in April - and other assorted research projects.  Of course there is never enough time to do everything and my historical projects on Lakehead Port Statistics pre-1950 and constructing a fiscal series for Ontario pre-1960 are going to take a lot longer than anticipated...

In other news, I am off on some travels this month.  Have a trip to Regina coming to visit their Economic Department and I will be heading off  to Sudbury and Laurentian University next week for a couple of presentations during their Research Week. My first presentation is a paper co-authored with Rob Petrunia (Lakehead) as follows:

Monday March 18th: 1:00 – 2:35 pm Economic Inequality and Crime Rates in Canada (Governors’ Lounge, 11th floor, R.D. Parker Building)The Department of Economics will present a talk by Dr. Livio Di Matteo (professor of Economics at Lakehead University) on a critical issue in an age of globalization and technological change: the rising trend in income and wealth inequality and its adverse social effects.

My second presentation is titled "Arrested Development: Northern Ontario's Economy in the Past, Present and Future and is part of the following session:

Tuesday March 19th: 10:00 – 11:30 am The Economy of Northern Ontario: Structural Changes and Implications for the Labour Market( Governors’ Lounge, 11th floor, R.D. Parker Building)The Department of Economics will present a seminar on the changing economic landscape and the effects of long-term structural changes on the labour market of Northern Ontario

The latter talk with be a pretty expansive overview of the history of Northern Ontario's economy in terms of its development, the host of government initiatives and plans over the decades, what has worked or not worked, and thoughts about the future.

If you are in Sudbury for Research Week, feel free to attend!









Saturday, 2 March 2019

Air Canada and Thunder Bay: The Saga Continues...


Well the Air Canada service story out of Thunder Bay has gotten more interesting. After announcing they were going from six to three flights a day to Toronto out of Thunder Bay – albeit on larger jets – they have also announced that they are ending direct Thunder Bay Winnipeg service.  There was a 5:35am flight to Winnipeg and one back at 10:15 in the evening.  While you can still get to Winnipeg from Thunder Bay via Toronto, it is effectively a reduction in Air Canada capacity out of Thunder Bay and the surrender of that direct route to Westjet which still has direct Thunder Bay-Winnpeg service.

The more interesting part of the story that was reported on TBNewswatch was that it states the airline said that on the changes being made to the Thunder Bay-Toronto run, the total number of available seats “will increase from 390 to 408 daily because the A319 is a much larger plane”.  This was a bit of a head scratcher given that as you know I had estimated in a previous post that there was going to be a reduction in capacity from 468 to 408. The capacity for the Q400 was assumed to be at the max – 78 seats – which multiplied by the current six daily (weekday)  flights – gives you 468.  So, going from 468 to 408 is a -13 percent drop which to me is a capacity reduction.

If you take the current number as 390 and divide by 78 you get five – that is as in five flights a day.  However, Air Canada has six flights a day on weekdays – but currently five direct flights a day on the weekend.  If you take 390 and divide by six you get 65 which is well below any of the figures I have seen for seat configuration for a Q400 on SeatGuru for either Westjet, Air Canada or Porter.  Indeed, often the configuration is for 74 seats – a bit below the maximum capacity. 

So, it appears that Air Canada in stating (according to the TBNewswatch story) that daily capacity is growing from 390 to 408 – an 18 seat increase which in percent terms is about 5 percent – is referring to its weekend capacity.  Its weekday capacity is still going down from 468 to 408 (or 444 to 408 if you want to use the 74-seat configuration) which represents a decline of 13 percent (or 8 percent using the 74-seat configuration).

Overall, if you use 78-seats as the measure for a Q400, total weekly capacity on the Thunder Bay-Toronto run will be going from 3,120 seats a week (5 times 468 plus 2 times 390) to 2,856 (7 times 408).    This is a reduction of 264 seats on a weekly basis or a drop of about 8 percent.  If you use the 74-seat measure, Air Canada on the Thunder Bay-Toronto run is going from 2,960 seats to 2,856 seats – a reduction of 104 seats on a weekly basis or a 4 percent drop. 

Whatever way I look at the numbers it seems to point to an overall capacity reduction by Air Canada out of Thunder Bay – even without including the elimination of the Winnipeg runs.

 A special thanks to my Northern Economist reader out of Dryden who alerted me to the numbers at the end of the Feb 26th TBNewswatch story!


 

Sunday, 24 February 2019

And Here it Is! The New Air Canada Thunder Bay-Toronto Schedule

Well, you can now book starting May 1st on the new schedule Air Canada has for the Thunder Bay-Toronto run.  As noted in my last post, much was made of the move to larger A319 jets that would shave off 20 minutes off  a flight from the current turboprops but the more frequent schedule of six flights daily has now been replaced by three flights a day.  One thing remains the same however, the earliest flight out of Thunder Bay to Toronto is still at 5 am.

Going from Thunder Bay to Toronto, Air Canada now has three flights a day and every day:  5am, 11am and 5:15pm. 



 Coming back, its 8:20am, 2:30pm and 9:10 pm.



So there you have it, the new Air Canada out of Thunder Bay.  It will be interesting to see how it does compared to the competition from Porter and Westjet.  Going to Toronto on a weekday, Porter in early May currently has seven flights from Thunder Bay to Toronto Island (as opposed to Pearson for Air Canada): 6:45am, 9:00am, 11:10am, 12:40am, 2:10pm, 4:05pm and 7:15pm.  As for the return, another seven flights at 8:30am, 9:55am, 11:25am, 1:25 am, 4:35 am, 6:45pm and 8:20pm.  As for Westjet (which goes to Pearson also), from Thunder Bay to Toronto it is 6:10am, 11:50am and 5:50pm while the returns are departing at  9am, 3:10pm and 9:50pm.

Air Canada has cut capacity starting in May by 13 percent going from 468 to 408 seats.  Porter at seven flights a day with a Turboprop (assuming 78 seat capacity) will have 546 seats available while Westjet with three 78 seat Turboprop flights will have 234 seats.  So the smallest local player here is Westjet and given that they appear to be having some issues that have caused it to lag Air Canada nationally, one wonders if they will be the airline hit hardest by these changes in the Thunder Bay market and as a result be the most likely to exit.  Or will they counter with their own jet service and business class to compete directly with Air Canada on the Thunder Bay run?

Stay tuned.

Friday, 15 February 2019

From Air Canada to Thunder Bay with Love...Well Maybe Not


Air Canada chose Valentine’s Day to announce a number of route changes that consist of removing older, slower, more frequent and smaller regional propeller planes (the Q400s) currently operating under Jazz and substituting newer, faster (by about 20 minutes in Thunder Bay's case) less frequent but larger jet aircraft (A319s) operating under the Rouge banner.  In the case of Thunder Bay, this means that the current six flights a day to Toronto (with 78 seat capacity for each flight) will be replaced with three flights a day (with 136 seat capacity each).  If you do the math, daily capacity on the Thunder Bay-Toronto run for Air Canada will actually fall from 468 to 408 – a drop of about 13 percent. That means you can expect a price increase at some point in the future even though the newer planes and crews Rouge uses are likely lower cost per passenger mile.

I guess I am now old enough to remember the preamble to the era of airline deregulation when Norman Bonsor, my Transportation Economics professor, would intone that deregulation was a plus for small regional markets like Thunder Bay because more expensive jet service would be replaced by more frequent and cheaper albeit slightly slower turbo-props – which is indeed what came to pass in Thunder Bay.  Air Canada’s announcement is a bit like back to the future but the new jets today are much more fuel efficient and cost effective than they were in the 1970s and 1980s.

Still, I am looking forward to seeing how this transition proceeds and the passenger response.  Going from six flights a day to three will reduce passenger travel flexibility and one expects that Air Canada will schedule its three daily flights to Pearson similar to what Westjet is doing (which incidentally also in the last while went to three from four flights daily but still uses Q400s).  For May, Westjet is showing departure times to Pearson from Thunder Bay of 6:10am, 11:50am and 17:50 pm and returns to Thunder Bay from Toronto departing at 9am, 15:10 and 21:50.  One suspects that given Air Canada is more directly competing for passengers to Pearson with Westjet, it will have its flights in slots pretty close to Westjet.

Air Canada’s move pretty much consolidates the alternatives from Thunder Bay into two – going to Pearson at nearly the same times at three times a day or going to the Island Airport.  Of course, Porter is still maintaining its Q400 6-7 flights a day service to Toronto Island which means it may pick up even more business travel from Air Canada.  It is unfortunate that Porter was not able to bring regional jet service to the Toronto Island airport because 5-6 flights a day from Thunder Bay on smaller yet faster regional jets such as a CRJ550 or CRJ700 (50 and 78 passenger max respectively) would definitely have smoked the competition out of Pearson.  Still, I suspect that Porter will see a pickup in its bookings given its greater flexibility as well as its downtown location for business travellers. It will however probably need to reinvest in its aircraft stock as its fleet begins to age.

The other claim that was made was that the Rouge airplanes were roomier and more comfortable.  Perhaps I am missing something here but having flown on some of the newer jets and flown Rouge overseas, I found the seating in the Q400 was actually a bit roomier compared to my last Rouge flight.  But it will be roomier in business class (the 136 seat version of the A319 has a business class) and that may also be part of Air Canada’s strategy to hold onto business travellers who are much more lucrative to airlines than the rest of us.

 
So, the changes have pros and cons and it will be interesting to see how everything comes out in the wash.  The increased competition may eventually spark some real consolidation on the Thunder Bay route - after all, if Air Canada adopts Westjet time slots with larger and faster planes to Pearson, one might see an exit by Westjet and going down to only two airlines out of Thunder Bay.  That really would be going back to the future. Or Westjet may respond by bringing in jets which will spark a pretty competitive period until the inevitable departure by one or more players brings back monopoly and higher prices. Interesting times are ahead.

For those of you who have travel with Air Canada booked in May from Thunder Bay to Toronto, you can look forward to a message soon rescheduling your flight. Have a wonderful long weekend.

Tuesday, 12 February 2019

The Incredible Shrinking Newspaper and the Decline of the Forest Sector


Going through some old stuff, I came across a full newspaper from 1981 – a copy of the Tuesday June 30th edition of the Thunder Bay Chronicle-Journal.  Examining it, one is struck by how hefty the paper was in terms of both paper volume as well as article content compared to what is currently being published.  Indeed, I put this old copy of the Chronicle-Journal on my dining room table alongside the Monday February 11th, 2019 edition for a comparison (see the photo) and the differences are quite striking.


Newspapers have indeed shrunk.  The 1981 version of the Chronicle-Journal was 15 5/8 inches (39.7 cm) wide and 22 5/8 inches (57.5 cm) long while the 2019 version is 11 ½ inches (29.2 cm) wide and 22 5/8 inches (57.5 cm) long.  More important is the thickness.  The 1981 newspaper consists of two section – each 32 pages long while the 2019 version is in two sections – each 10 pages long.  The long and short of it is that the amount of newsprint required has shrunk by over two-thirds.  Even more interesting is the fact that until the mid 1990s, Thunder Bay actually had two papers published – a morning edition which was the Chronicle-Journal and an evening edition known as the Times-News.

When what looks at what has happened to the Canadian forest sector over the last fifteen years, one only needs to take what has happened at our own local paper and extrapolate it across North America.  Newspapers have been either shrinking in size or simply going out of print completely.  There was certainly a lot more advertising in the pages of the 1981 version of the Chronicle-Journal and competition from electronic media and the internet have been important factors in the decline in the demand for newspapers.

Along with changing consumer preferences when it comes to news sources, there have been other shocks to the pulp and paper industry.  The recession of 2008-09, international newsprint and pulp competition from lower cost suppliers, a high Canadian dollar, aging capital stock and high electricity prices were all factors which helped decimate the Northwestern Ontario pulp and paper industry in the first decade of the 21st century.  Across Canada, employment in logging, pulp and paper and wood dropped by over 40 percent between 2004 and 2014 while the number of paper mills fell from 50 to 30 – also a 40 percent decline.

It is really quite remarkable that newspapers have been able to survive at all given the size of the demand and technology shocks hitting them over the last thirty years.  I must admit, that while I have adjusted to the era of e-papers, I do occasionally miss having a more hefty newspaper in hand.