An Economic Look Ahead to 2019

Given the international economic tumult of trade wars, rising interest rates and Brexit, everyone is interested in what 2019 may bring for the global economy and here are my thoughts as laid out in a short post for Focus Economics:

"The only certain things about the world economy in 2019 are uncertainty and volatility given the current state of trade relations between the world’s two largest economies at a time when economic growth in both also appears to be slowing down.  The United States had a strong 2018 and is likely at the top of its economic cycle.   Despite President Trump’s protests directed at the Federal Reserve, interest rates are projected to continue rising and if there is continuing disruption to U.S. and world trade the U.S. economy may enter a mild recession.  Compounding this are the potential negative wealth effects on spending by consumers and investors of an increasingly volatile stock market which is reacting to a high degree of political and economic uncertainty.  As for China, its rate of growth while still robust by European or North American standards is nevertheless slowing down and this is being exacerbated by the impact of US tariffs as well as a massive amount of Chinese debt that will constrain future prospects for infrastructure spending.  Naturally, a resolution of the current trade disputes between the U.S. and China would go a long way in improving the world economic outlook.  With respect to Europe, growth there has also been slowing and the ultimate impact of Brexit remains a large source of economic uncertainty.   Meanwhile Japan continues to expand but very weakly. And of course, it remains that the recovery from the 2008-09 recession is incomplete given that fiscal stimulus and easy money have in the end generated an even larger global debt pile.  Based on all this, the optimistic projection for 2019 is that overall growth will remain positive but slow from rates achieved in 2017 and 2018.  The pessimistic projection for 2019 is that continued trade disputes, gradually rising interest rates, debt overhang and economic uncertainty will come together to tip the global economy into recession"

There are other viewpoints in this Focus Economics blog post and you can of course check them all out here.

Dealing With China: Maybe We Need a New Approach?

In its dispute with Canada over the Meng Wanzhou affair, China has definitely upped the ante.  Along with the detention of Michael Kovrig and Michael Spavor, the announcement that Canadian Robert Schellenberg has now been given a death sentence for drug smuggling sends a message that China is definitely a bully and will continue to target Canadians until it gets what it wants - Canada's release of Meng Wanzhou to China.  China has obviously a lack of expertise with respect to Canada in its foreign service and diplomatic corps given its misreading of Canadian law as well as Canadian practices, conventions and sensibilities.  No doubt, it thinks its latest actions will spark an offer to trade Meng Wanzhou for the three Canadians in some sort of bizarre international hostage swap straight out of the plot of a low budget drug cartel movie.

As a small country, Canada does not have the clout to force China to do anything.  Obviously, the message that China is sending to the rest of the world - that it will resort to the "kidnapping" of other country's citizens while guests in their country as a bargaining tool - will do little to advance its soft power in the rest of the world.  China's government may think it is now a major power on the world stage and that it should be treated with more respect but respect must be earned and with power also comes the responsibility to set an example if you are truly trying to gain influence.  China has sadly shown itself as a mean-spirited bully and has resorted to a grand theatrical strategy because it feels it can scare small countries like Canada to do their bidding.

What is Canada to do?  I am not an expert in international affairs but I think our relatively quiet and reasonable behavior to date is simply being viewed by China as a sign of weakness.  The Canadian response to China's bullying needs to be a response that in no uncertain terms communicates that their behaviour to date is unacceptable.  Canada needs to be as creative as possible in sending its message to China.  I would urge the Canadian government to consider any or all of the following set of actions and naturally to word them as firmly but as politely as possible.

1. Issue an immediate travel advisory to all Canadians considering travel to China that they may be at risk of arbitrary arrest and detention.  As well, an advisory to all Canadians conducting business in China that their safety should be a concern and that the Government of Canada cannot guarantee their safety while operating in China.
2. The Chinese Ambassador to Canada should be immediately summoned to Rideau Hall and given a dressing down by the Governor General that the behaviour by the Chinese government of Canadian Citizens in China is not only disrespectful but appalling in the community of nations and diminishes China's standing in the world.  The displeasure of the Canadian people must be stressed in no uncertain terms.
3. Canada's ambassador to China should be temporarily recalled to Ottawa for immediate "consultations and instructions"
4. Given Canada's concerns about the deteriorating relations between Canada and China and our ever present concern for safety of all our visitors, an immediate RCMP presence is to be instituted around the Chinese embassy in Ottawa and all other Chinese consulates in other Canadian cities.  As well, given that the issue that has sparked all of this is the arrest of Meng Wanzhou on an extradition request by the United States, we should also post enhanced security around the United States Embassy as well as the residences of Meng Wanzhou in Vancouver.
5. A Royal Commission should be struck to evaluate the future of Canada-China trade and economic relations in light of the recent deterioration in relations with public hearings to commence immediately.  Serious consideration to be given to the question that the prospect of further increasing trade with China is not in Canada's best interests.
6. With respect to Huawei and the adoption of its 5G Network in China, the Canadian government should finally announce that it plans to ban Huawei from Canadian 5G networks in accord with our American, Australian and New Zealand allies.

 Ottawa may view these actions as not "constructive" because they might further inflame China.  I would venture that China is already inflamed and thinks we are going to be intimidated into doing their bidding.  I'm not sure being calm, reasonable and quiet is getting us anywhere.  Why not try something different.

Municipal Government Inflation Rates: How Much higher?

On Tuesday night this week, Thunder Bay City Council began its budget deliberation process and there was a fair amount of grilling of City Administration by councilors with respect to the overview of where spending and tax rates would be going over the next few years.  Apparently, councilors were surprised when Administration said that the city had a $20 million annual infrastructure gap for the next 15 years as well as projected tax increases at over 3 percent – 3.83 percent for 2020 alone – until 2024.  Part of the questioning involved the standards being applied to estimate the infrastructure gap and clarification was requested. This of course is a reasonable question given the extremely wide range of estimates available for infrastructure gaps at least at the national level.

I tuned in for a bit on Tuesday night and caught part of an exchange between Councilor Mark Bentz and City Manager Norm Gale in which Councillor Bentz expressed some disquiet at the projected tax increases until 2024 being well in excess of increases in the Consumer Price Index inflation rate. The reply from the City Manager was that the Municipal Consumer Price Index was not the same as inflation from the Consumer Price Index and that it was indeed much higher.  So, I decided to do a little digging to see what the source of such a statement might have been and to see indeed how much higher an inflation rate you could get for government spending in general.

It turns out the City of Edmonton actually did a bit of research into this issue and published a report titled Municipal Price Index 2018 in which they compared consumer inflation and municipal inflation from 2012 to the present and provided some forecasts for the future. It turns out that based on their estimates for Edmonton, the inflation rate for municipal government services was indeed higher than for consumer prices but as Figure 1 illustrates, the gap is not as large as one might think. Over the entire period 2012 to 2019(forecast), the average consumer price inflation rate for Edmonton was 1.6 percent while the average municipal inflation rate was 2.2 percent for an average difference of 0.7 percent.  
 

So, what about Thunder Bay?  Well Figure 2 plots the inflation rate since 2012 for Thunder Bay based on the CPI.  It then plots inflation based on the Government Expenditure Implicit Price Index obtained from the 2018 CIHI National Health Expenditures Data Appendix A.  It then also plots the municipal inflation rate for Edmonton from Figure 1 and the annual increases in Thunder Bay’s municipal tax levy.  Note that for 2019, the CPI Inflation rate for Thunder Bay and the GEIPI rate are both assumed to be 2 percent.  So, what do we get?

Thunder Bay’s municipal tax levy increases since 2012 and forecast into 2019 are generally all well above any of these measures of inflation including the municipal inflation rate calculated by the City of Edmonton. The average CPI inflation rate for Thunder Bay over the 2012 to 2019f period is 1.5 percent.  The inflation rate based on the Government Expenditure Implicit Price Index (GEIPI) is 1.4 percent while the municipal inflation rate for Edmonton is 2.2.  The average Thunder Bay municipal tax levy increase for this period was 3.3 percent.

So, unless one is going to argue that municipal “inflation” in Thunder Bay is nearly double that for consumer prices – and I would need to see some evidence for that rather than just a blind assertion by City Administration – then one would have to conclude that this year’s 3.25 percent proposed increase in the tax levy is too high.  Obviously, the rate of municipal inflation is going to be partly determined by the City in terms of what they negotiate to pay for various goods and services as well as the choices of what goods and services to consume or provide.

If we go with the Edmonton forecast for municipal inflation of 2.7 percent – then to bring the tax levy down from 3.25 percent to 2.7 percent, there needs to be about $1.7 million dollars in reductions from this year’s proposed tax levy increase.  If you want to bring the levy down to a two percent increase, then there would need to be a $2.4 million reduction in the proposed levy.  So, whichever way you look at it, we can probably do better than 3.25 percent this year.

Thunder Bay Budget 2019: Onward and Upwards Simply Won't Do This Time

The 2019 Thunder Bay municipal budget has arrived, and the proposed budget projects a total increase in the municipal tax levy of 3.25 percent. The proposed levy is $195.9 million which represents an increase of $6.2 million over last year’s budget of $189.7 million.  You can get a nice summary of the proposed changes in this summary article by Jeff Walters given that the actual executive summary document released by the City of Thunder Bay is really quite lengthy and as usual a rather opaque document with its summary of total tax supported(gross) spending, tax supported (Net), rate supported (Gross) and rate supported (Net) spending all of which include capital spending and government grant supported spending and are all well in excess of the $195.9 million tax levy which is not mentioned until the second page.

This first budget is an important test of the new Mayor and City Council in that it will provide an indication of their approach to municipal fiscal matters.  Indeed, the incoming Mayor in his assessment of major issues facing the City noted that taxation levels were one of his top three priorities  (along with infrastructure and crime).  There is of course a difference between the level of taxation and the size of a rate increase – reducing the level of taxation actually means having a negative rather than positive change to the net municipal levy. However, as Figures 1 and 2 show, the trend over the last two decades has been one of constant increases with a median increase in the levy of 3.1 percent. That is to say, half of increases were above 3.1 percent and the remainder below with the lowest increases being for the years 2000 at 1.1 percent and 2010 at 1.2 percent.  Hopefully we will not again see years like 2004 and 2006 as given the current levels of taxation they would represent an economic disaster for many local households.

 

 

An important issue for Council to ponder is the recent tendency for municipal budgets to generate large surpluses as was the case with the 2018 budget which was on track for a $3.6 million surplus as of October 2018.  While such surpluses are often used to replenish reserve funds, it remains that it becomes easy to budget when one overshoots with spending estimates and banks the savings at taxpayer expense.  Given that the increase in the municipal tax levy in 2018 was $5.75 million, it suggests that one could have had a much smaller tax increase and still run a modest positive variance in the $1-$2 million range.   And the fact is that 2017 also saw a budget surplus in the range of $8 million as a result of “one-time costs” that were lower than expected.  Essentially, municipal services - some of which are more regional than local it is to be noted - are being funded by local ratepayers as well as a broader range of cultural and social services and added to that a municipal "savings program" designed to build up reserves. Moreover, the residential ratepayer has been bearing a rising share of the tax burden given the decline in the city's industrial base.

I suppose whether you think using municipal property tax revenues to hit such a wide range of targets is a good idea depends on whether you believe the purpose of property taxation is to fund local services or whether it has a broader range of goals.  Municipal taxation is traditionally supposed to be "benefit" taxation - that is it is to be used to fund local services to residential property and property owners - rather than a form of wealth taxation - which is actually how the tax is levied.  If benefits and services to property are tied to the value of the property, then  the current approach works.  However, we all know that there is a wide variation in services to property.  As well, the aim should be for prudence in the budgeting to provide services with some effort to maintain reserves for unforeseen expenses.  At the same time,  the municipal ratepayer should not be treated as a sort of unlimited liability insurance provider when it comes to budgeting by being used to generate large surpluses that result in taxes higher than needed to fund operating service and needed capital projects.

So, what should this year’s increase in the municipal levy be?  Well, increases in levy supported spending should not exceed the rate of growth of population and inflation.  Given inflation in the rate of 2 percent and population increase of zero you are looking at 2 percent rather than 3.25 percent as the upper bound for this year’s increase.    True, unforeseen circumstances could cause more spending than anticipated later on in the year rather than a reduction but then that is what reserve funds are for and they have seen some healthy replenishment over the last few years.  Going ahead with the 3.25 percent increase is an indication of business as usual as 2017 and 2018 also saw increases in the total levy of over three percent.  Council will need to go through the list of proposed increases and ask for a pretty good justification of why they are needed.  Onwards and upwards is simply not a good option this year.

Ontario's North and the Future of Labour Force Growth

Northern Ontario and New Brunswick are similar in population size and face similar economic challenges given their rapidly aging populations and slow population growth.  However, with its provincial status, New Brunswick is often able to attract considerably more attention for its predicament as opposed to Ontario’s north whose issues are essentially buried within a much larger population focused on the GTA.  Indeed, a spate of stories over the years have noted New Brunswick’s declining birth rate, its outmigration, and its shrinking population.    

It is now common knowledge that northern Ontario’s population is aging at a more rapid rate than the rest of Ontario and that its population growth now rests on its Aboriginal population which is both younger and faster growing than the rest of the population.  Indeed, the 2016 Census showed that population was actually increasing in some northern Ontario Districts and attributable to the rising aboriginal population.  Given the projected labour shortages for northern Ontario that have been forecast as a result of an aging population and outmigration, it stands to reason that the Aboriginal population will have to play an increasingly important role in filling positions.

This role for the growing Aboriginal population has not only been noted for northern Ontario but for Canada as a whole which also faces the prospect of labour shortages given that nearly 20 percent of current employment is filled by those aged 55 years and older and the decline in labour participation rates particularly among those aged 15 to 24.  In his remarks made as part of the David Dodge Lecture in Public Finance at Queen’s University last spring, Bank of Canada Governor Stephen Poloz noted that: “Employment rates among indigenous peoples—one of the youngest demographic groups in Canada—remain well below those of the rest of the country.”

This is the challenge, not only for northern Ontario but for Canada as a whole.  For employment rates among our Aboriginal population to go up, they need to increase their participation rates and as the accompanying figure illustrates – there is much work to be done.  Figure 1 shows that the labour force participation rate for the Aboriginal population over the period 2007 to 2017 has remained consistently below that of the total population.  The average labour force participation over this period for the total population for those aged 15 to 64 is 78 percent compared 64 percent for the aboriginal population.  Figure 2 shows that a consistent gap also is present for the employment rate for those aged 15 to 64 which averaged 72 percent for the total population but 61 percent for the aboriginal population.

 

Needless to say, this national situation is invariably also a feature of the northern Ontario economy and the challenge for 2019 should be to take further steps to devise a strategy to increase the labour force participation and employment rates of the Aboriginal population.  The first step is increasing human capital and training.  While this is probably easier for Aboriginal populations closer to major northern Ontario urban centers, we also need to do better in the case of more remote populations also.  Our region’s economic future depends on our getting this right.