Thunder Bay and Sudbury: A Tale of Two Economies

 

The Conference Board of Canada has issued its March 2023 Metropolitan outlooks for Thunder Bay and Greater Sudbury and the immediate news looks good for Thunder Bay.  As a result of the construction of a new provincial jail in Thunder Bay over the new two years, Thunder Bay is expected to see its real GDP grow 3.6 percent in 2023 making it number 1 out of 24 comparable CMAs for economic growth.  On the other hand, Sudbury at only 1.4 percent projected growth for 2023 is still doing well and expected to rank 12^th out of the same 24 CMAs.  Sudbury is doing well as a result of expected persistence of demand for nickel given the growth of the electric car industry. In terms of how Thunder Bay and Sudbury will fare in the longer term based on these economic drivers, the Conference Board projects that Sudbury will see some continued growth particularly in employment but Thunder Bay after the construction boom is expected to falter somewhat given the absence of a more robust long-term driver. 

 

Figures 1 and 2 plot both real GDP growth and employment growth for Thunder Bay, Sudbury and Ontario as presented by the Conference Board reports.  While 2023 sees Thunder Bay surpass both Ontario and Sudbury for growth, for the 2024 to 2027 period, Sudbury sees real GDP growth stay at about 1.5 percent while Thunder Bay falls to just over one-half of one percent.  Despite the anticipated slowdown in 2023, Ontario real GDP growth recovers to an average of over 2 percent for 2024-27. In terms of employment growth, Thunder Bay sees a surge to a 4 percent growth in jobs created for 2024 but eventually sees employment shrink moving into 2025 to 2027.  While Sudbury also is expected to see lower employment growth moving forward, it remains positive to 2027.

 

 

 

And finally, Figure 3 provides a retrospective on local investment spending for the two cities in terms of the value of building permits from 2014 to 2021.  Fluctuations notwithstanding, the long-term trend up to 2021 has been slightly positive for Sudbury, and slightly negative for Thunder Bay. Going forward, housing starts are an important component of building permits, and the provincial and federal budgets are expected to see some initiatives for boosting housing spending.  The Conference Board is forecasting that total housing starts in Thunder Bay will fall from 193 units in 2021 to 161 in 2023 but then start to increase reaching 237 by 2027.  Sudbury is expected to follow a similar pattern declining from 434 starts in 2021 to 269 by 2023 but then recovering to 301 by 2027.

 

 

 

Both communities have aging populations which in the absence of economic opportunities attracting large scale immigration means that investment, employment, and real GDP growth in the long term will lag the rest of the province. One potential game changer is of course in the area of mining for both communities given the global demand for critical minerals and the expected development of the Ring of Fire.  Tomorrow’s provincial budget may provide a glimpse of what might happen there in terms of infrastructure spending.

Ontario Budgets: The Long View

 

As we get ready for Ontario Budget Day, its always fun to look at the long-term picture to see where Ontario has been.  And by long-term, I mean the entire period in which Ontario has been a province of Canada – 1867 to 2022.  Figure 1 uses data from historic Ontario Budgets for the and from the Finances of the Nation fiscal and macroeconomic database to construct and plot real per capita Ontario government revenues and expenditures in 2020 dollars for the period 1867 to 2022.  Real per capita revenues have grown from about $40 per person in the 1870s to reach over 10,000 dollars today.  Expenditures have followed a similar pattern.  Much of the growth in per capita spending has occurred since the mid 1960s with the expansion of public health care as well as education spending.  From 1868 to 1965, real per capita expenditures grew from $22 to $1468 and since then has grown to reach $11,470.  Indeed, the implied annual growth rate of real per capita spending over this entire period works out to about 4 percent.

 

 

 

 

 

Figure 2 weighs in with a long-term picture of fiscal balance – deficits and surpluses.  Needless-to-say, a better measure would be a deficit to GDP ratio but Ontario GDP pre-1960 is more difficult to acquire though one day constructing estimates going back to 1867 is possible.  Over the entire 155-year period covered by this data, there has been a deficit in 87 years – 56 percent of the time.  Deficits were less common prior to 1945 with deficits only 46 percent of the time whereas since 1946 there has been a deficit two-thirds of the time.  However, the post-World War II period can be divided into two periods – one of consistent surpluses and one of consistent deficits.  The longest consecutive run of surpluses in Ontario history is from 1941 to 1967. In the period since 1967, Ontario has run a deficit 93 percent of the time. 

 

And there you have it. Happy Budget Day.

Urban Density, Rules, and Thunder Bay

 

The big rage in urban policy these days is the 15-minute city – that is, living in an urban area where everything is 15 minutes away.  One could argue that Thunder Bay has been a 15-minute city for decades – no part of town is more than 15 minutes away by car.  However, the modern incarnation of the 15-minute city is one where most things one needs in the process of daily life – medical services, schools, retail, services, etc…- are within a 15-minute walk from where you live.  This used to be a feature of early cities that persisted well into the 19^th century but with urban growth and the advent of the automobile and suburbanization, we have moved away from that.

 

Nonetheless, Thunder Bay is also trying to move into the new age and part of that process involved its new Zoning By-law that passed in April of 2022.  While not ostensibly part of an official plan to build the 15-minute city, it is designed to encourage urban density.  Among other things, the plan levels “residential zoning across the city, opening the door for homeowners to subdivide any detached house, build new homes on smaller lots, and even allow for residential housing in backyards”.  In part this is expected to expand the rental housing market by allowing for more basement apartments – many of which already exist – to come out into the housing stock fully and legally and expand affordable housing.  Even the Chamber of Commerce has got into the act by supporting this policy as a return to mixed use neighborhoods and the creation of “walkable neighborhoods” where you can walk down the street and get groceries or a cup of coffee.

 

Of course, the problem is that in Thunder Bay, as is often the case, the left municipal hand does not always move in accord with what the right municipal hand is doing.  There is a degree of policy inconsistency.  On the one hand, April 2022 saw a new zoning bylaw designed to encourage urban density through a process of infill while September of 2022 sees the same municipal entity initiating planning to expand the Parkdale suburban subdivision that also requires a substantial extension to the city’s sewer infrastructure.   On the one hand we want more density in existing residential neighborhoods, but we also want new suburban residential developments.

 

However, such inconsistency is minor given it is traditional not only in Thunder Bay but across municipalities in Ontario.  It is rare to find a municipality – especially in today’s era of “housing shortages” that would not jump at the prospect of new development and associated tax revenues and development charges.  The more serious issue for Thunder Bay is that despite being a city with a CMA population of 130,000, it really feels like a much smaller and spread-out place because of its historic development as two cities.  What is actually required is more density buildings in the four to eight storey range just off of existing commercial and retail areas – including the old downtown cores.  Simply allowing for more basement apartments in existing suburban neighborhoods does nothing for “walkable communities” as they all need cars to get anywhere anyway.  If anything, this makes a car-centric city worse. Pretending that more basement apartments in areas remote from shops and services will create walkability is simply aspirational urban planning.

 

What is starting to happen especially in some of the older “modern suburbs” built circa 1960 and going forward is basement apartments being allowed without consideration for the spillover effects of more residents and especially more vehicles.  The new zoning bylaw allows 1.5 vehicles per home but some of these rental homes now have 3 and 4 vehicles most of which end up being parked on the street.  The amount of traffic on some residential streets is noticeably higher – and one should note faster.  And if the new units happen to be close to the university or college, there are invariably a lot of overnight guests adding to the urban street scene.

 

Even all this could be worked around if the City of Thunder Bay actually followed up its plans with some type of concerted implementation.  Case in point. Snow removal. The city has calendar parking in residential neighborhoods to facilitate snow clearing.  That is on even calendar days you park on the even address side of the streets and on odd calendar days you park on the odd side.  This allows for easier and efficient snow clearing as one side of the street is always clear after a storm. 

 

The problem is there are now too many cars on some streets for the parking available at the homes, so they invariably need to be parked on the road and in the winter rotated from side to side.  That has become too bothersome for the average Thunder Bay resident who prefers to park willy-nilly wherever they feel like  and so there are always cars on both sides no matter what day it is.  And if snow is in the forecast, no one cares because facilitating snow removal is a community benefit and the constant turnover of new rental residents with weaker ties to the neighborhood means they do not care as much.  Moreover, the city rarely, if ever, tries to go down streets and ticket violators as part of a program of regular enforcement – no doubt because they are “short-staffed”.  On days when it does snow, the snow plough operator has difficulty getting through the street resulting in an uneven job.  And to make it worse, more often than not even the city plough operator does not follow the rules ploughing the even side on an even day when parking there is allowed and vice versa.

 

Thunder Bay has in many respects again become the wild west. Rules? They appear to have become voluntary unless someone decides they are not.  Try following the speed limit in a school zone with two large F-150s behind you and see what its like.  If you want rules, you follow them if you like, it is your choice, seems to be the mantra.  Yet, with increased density and more people living in closer proximity, following the rules should be more and not less important.  Thunder Bay has always been a place full of independently minded people doing whatever they want when they want and that appears to extend to the city government itself which makes plans and rules and does not enforce them or even try to implement them properly.  To be fair, some of this behaviour is continued fallout from the pandemic and a reaction to the rules and restrictions that were imposed.  There is a process of social and behavioural adjustment under way in cities across Canada, and it is not over yet.  Still, it remains that the long-term outcome here is not going to be some type of urbanite planning fantasy of happy renters and homeowners co-existing in walkable suburban communities strolling hand in hand to save the environment while the city wins urban planning awards.  Rather, it is going to result in a deterioration of urban quality and community life for many residents of Thunder Bay as a result of aspirational planning with no follow through.

 

 

Ontario's Spring Budget Approaches

 

Ontario will be announcing its 2023-24 budget on March 23^rd in the wake of its third quarter fiscal update in February which reported a $6.5 billion deficit for 2022-23, an improvement over the Fall Update which had the deficit pegged at nearly $12 billion.  It would appear that fiscal circumstances are shifting rapidly as the Ontario economy appears to continue to exhibit robust growth resulting in revenues rising more than expected.  Indeed, revenues in 2022-23 are projected to be $16.6 billion higher than forecast in the 2022 budget and $9.6 billion higher than was projected in the Fall 2022 update.  Meanwhile, expenditure growth appears to be somewhat more restrained.  Compared to what was projected in the 2022 budget, 2022-23 is only up $3.3 billion. Even in the case of health spending – a contentious area given shortages and waiting lists – the province’s financial Accountability Office has noted that going forward, the province appears to be allocating billions of dollars less than what is required.

 

Indeed, a glance at some charts shows that these shifting projections go back even further to the 2021 budget that came as the pandemic recovery began in earnest.  Figures 1 and 2 plot revenues and expenditures as laid out by fiscal documents starting with the 2021 budget, the 2022 budget and the fall 2022 economic and fiscal update.  Both expenditures and revenues have shifted upwards with subsequent budgets and updates, but the shifts are more dramatic for revenues than expenditures.  Compared to revenues in 2019-20 of $156 billion, for 2022-23, the 2021 budget forecast $160 billion, the 2022 budget forecast $180 billion and the Fall 2022 update forecast nearly 187 billion to which the third Quarter update has now brought us to $196 billion.  Despite the pandemic and fears of deflation and revenue collapse, revenues today are $40 billion higher than 2019-20 – an increase of 26 percent.    

 

 

 

As for expenditures, from $165 billion in 2019-20, for 2022-23, the 2021 budget forecast $186 billion, the 2022 budget forecast nearly $199 billion and the Fall 2022 update a few hundred million more but still rounding out to $199 billion.  We are now looking at expenditures based on the third quarter update of nearly $202 billion.  Since 2019-20, expenditures have grown by $37 billion – an increase of just over 22 percent.  

 

 

 

What comes next over the course of fiscal year 2023-24 hinges on how the economy performs.  If we assume inflation coming down to 4 percent and real GDP growth of 2 percent, that still brings us to nominal GDP growth of 6 percent.  While 6 percent nominal growth is down from the nominal growth rates in 2022 and 2023, there is no reason to believe it will crash given the overall robustness of the Canadian and Ontario economies despite increases in interest rates. Historically, a one percent increase in the province’s nominal GDP is correlated with a greater than one percent increase in total revenue meaning that one can probably expect total provincial government revenues to rise by over 6 percent this year bringing revenues up easily another $15 billion.  With a deficit for 2023-23 now being projected as per the third quarter finances at $6.5 billion, it would not be a surprise if it comes in even lower and 2023-24 actually presents us with a hefty surplus.

Ontario's Chronic Health Spending Shortfalls

 

This week’s Ontario health news featured a report by the province’s  Financial Accountability Office that the challenges facing Ontario’s health system were “expected to persist” as a result of under funding and accompanying shortages of health workers. The FAO projected total health sector spending for Ontario and compared it to the Ontario government's projections and found that between 2022-23 and 2027-28, a significant gap opens up between what the government is projecting and what the FAO expects spending to be.  The cumulative shortfall over this period will be about $21 billion which over a seven year period averages out to about $3 billion a year.

 

The FAO projections were for total government health spending but one suspects that if one takes Ontario’s robust population growth into account, the future shortfalls are probably more serious.  Indeed, per person provincial government health spending going into the pandemic was essentially flat  as Figure 1 shows.  

 

 

 

 It turns out that spending shortfalls have been a feature of Ontario health spending for some time when one compares what is actually being spent to what simple models of health spending determinants predict should be spent.  

 

Generally speaking, models of health spending determinants consider the main drivers of health spending to be income (usually measured by GDP) and aging (usually measured by the proportion of population over 65 years). Fun fact: In Ontario, the proportion of population aged over 65 was 8 percent in 1965 and in 2022 stands at just over 18 percent.  Table 1 uses data from the Canadian Institute for Health Information National Health Expenditure database as well as data from Statistics Canada to present  a simple regression of the determinants of real per capita Ontario provincial government health spending. Real per capita provincial government health spending (in 2021 dollars) from 1971 to 2022 is regressed on real per capita GDP as well as real per capita federal cash transfers (health, social, equalization) – which is really a source of provincial government income.  As well, there is included the percent of the population aged 65 to 79, the percentage of the population aged 80 years and over, and a dummy variable to capture the impact of the COVID spending surge. The results are estimated with STATA using OLS .  

 

 

 

Both per capita GDP and per capita transfers are both positive drivers of provincial government spending.  A one dollar increase in real per capita federal cash transfers supports about 50 cents in real per capita provincial health spending while a 1 dollar increase in real per capita GDP is associated in a 3-cent increase.  The results also suggest that relative to the population aged below 65 years, the real aging driver of spending is the proportion aged over 80 years.  The percentage aged 65 to 79 seems to be negatively associated with real per capita provincial government spending.  Put another way, there may be a healthy survivor effect in that if you make it to 65, you are likely to be in relatively good shape until you approach 80 when the costs of aging quickly escalate.  And, these results implicitly suggest that the proportion under age 65 is a bigger driver of spending that popular belief thinks it is.

 

The coefficients in this regression can be used to generate predicted Ontario government health spending based on the determinants and then compared to actual spending.  These results are plotted in Figure 2.  In the immediate wake of the Great recession – between 2010 and 2012, actual real per capita government health spending in Ontario exceeded what the economic determinants predicted it should be.  However, from 2012 to the onset of the pandemic, not only was inflation adjusted Ontario government health spending per person flat, but it was below what the model predicts it should have been.  For example, in 2016, Ontario spent $150 per person less on provincial government health spending - about 3 percent less per capita. When the per capita numbers are aggregated to population totals, the numbers are in the billions.  On average over the period 2012 to 2019, Ontario spent an average of 1.1 billion dollars less than what the model predicts. Some years, this shortfall was as high as 2.5 billion dollars. And, with the pandemic winding down in 2022, it appears the shortfall has reemerged with spending $2.1 billion below what it should be. 

 

 While it has long been known that per capita government health spending in Ontario is below that of the other provinces, it is also lower than what Ontario's own economic and social health spending drivers predict it should be. 

Blue Ribbons and Ontario Universities

 

Ontario has made a number of announcements regarding its post-secondary education sector.  First, it extended its tuition freeze for a third year.  As you might recall, going into the pandemic, Ontario reduced domestic student tuition fees by ten percent and since then has held them frozen meaning that after three years of time and inflation, in real terms tuition has been reduced by at least twenty percent.  Though not emphasized this week, Ontario’s government grants to its universities also remain largely frozen.  As a result, with flat domestic enrollment and frozen funding, at the margin, Ontario university revenues have only been growing because they have been recruiting international students making them increasingly reliant on what could be a volatile source of revenue.

 

However, the provincial government is concerned enough about the future sustainability of its universities that it has also announced a Blue Ribbon Panel to “provide advice and recommendations to the Minister of Colleges and Universities to help keep the post-secondary education sector financially strong and focused on providing the best student experience possible. ” A blue ribbon panel or committee is generally a group of “exceptional” and “accomplished” people who are brought together to study a particularly vexing problem and bring their expertise to bear on providing solutions.  It is several notches below a Royal Commission but designed to bring a semblance of non-partisan expert advice to a problem.  This panel is expected to report back in summer of 2023.

 

Now it has already been remarked that there are no faculty representatives on this Blue Ribbon Panel.  However, it would be churlish to say the least to infer that the provincial government in any way thinks that university or college faculty are neither exceptional or accomplished.  In trying to choose faculty representatives for such a committee, one opens a can of worms larger than the universe.  If the provincial government had selected someone from the humanities, professional schools and sciences would have complained they were being neglected.  If a scientist, the humanities would have been outraged. If they chose a faculty member from a large university, the small universities would have complained.  If they had picked an economist, there would have been a chorus of criticism charging that the outcome was predetermined by selecting a minion of the capitalist neoconservative hegemony. You get the picture.

 

So in the end, the government chose a panel from people that it sees as leaders without a direct current stake in universities to study the problem.  There are no faculty nor do  there appear to be any currently serving university administrators on the panel either, though they all have links to post-secondary education in one form or another as well as board and community experience.   There is a member with student experience.  And there is past faculty and administrative experience in the case of Bonnie Patterson and Alan Harrison – who incidentally is also an economist who was at McMaster teaching at the time I was there in the 1980s.  There does seem to be an emphasis on CEO types with some financial experience and also strong representation from the new age of e-learning and other types of perceived innovative practices in education with CEOs from E-Campus Ontario and Contact North.

 

So, what will the panel decide? Well, that is to be decided obviously though I suspect e-learning and micro-credentials is one direction they are likely to emphasize. That will not please some universities who are trying to bring everyone back to the before times with full in person learning and on campus presences including night classes.  However, this is motivated as much for pedagogical reasons as it is for financial ones rooted in the need to fill parking lots, residences, and cafeterias with paying customers.  

 

The crux of the problem is that the provincial government thinks universities should be training people and providing marketable skills and is not happy where the money seems to be going.  Parents and students think that universities are supposed to provide the ticket to a career and lifestyle and do not seem to think the tuition fees worth what they are getting – though they still insist their kids go to university.  Essentially, the provincial government and the public do not perceive they are getting value for money especially given what appear to outsiders to be high paying cushy jobs for university faculty and staff. 

 

Meanwhile, university faculty believe they are independent researchers and scholars, building minds, and extending the frontiers of knowledge while university administrators seem to be conflicted players of whack-a-mole - negotiating the competing demands of government, parents and students, donors, and faculty and staff.  As the old university adage about where the money should go goes, faculty like new faculty hires, Deans like new programs, while University Presidents like new buildings.  So, the interim solution by government has been a grant and tuition freeze which universities have got around by bringing in more international students who can be charged as much as the market will bear.

 

Needless to say, this is not a scenario for long-term sustainability.  Demographics suggest that domestic enrollment in Ontario has peaked and will remain flat for some time to come.  Thus, without an increase in tuition fees, domestic students will not lead to increased revenues.  Moreover, domestic students want a flexibility in their learning environments – i.e., online learning – that seems to be at odds with the preferences of many university administrators and faculty.  Bringing in more international students is also not a stable long-term solution given that at any time that tap could shut.  And then there is the question that if the Ontario public university system is something Ontario does not want to pay more for either via public funds or private (more tuition) and is increasingly geared to international students, then why should it be as large as it is?

 

This last question is the uncomfortable one but needs to be asked given the increasing financial stress Ontario universities are facing especially in the shadow of the Laurentian bankruptcy.  Does Ontario have too many public universities given domestic demand? That is a question the Blue Ribbon Panel will inevitably have to answer.  Perhaps there should be mergers and rationalizations culminating in several province wide campuses – A University of Southwestern Ontario, A University of Eastern Ontario, a University of Northern Ontario and then a half dozen or so fully comprehensive research universities?  Should some universities be merged with community colleges to create Polytechnics?  Should there be a provincial E-University to satisfy the demand for flexible credentials earned online?  But then what of the rest of the system?

 

In the wake of the Laurentian debacle, the provincial government has nevertheless been creating new small financially weaker universities left right and center so it appears they are not too concerned that there may be too many universities.  Moreover, all communities with their own current university campuses will scream if their university is no longer a “real” university or does not offer the range of programs they are used to having.  Just don’t ask them to pay for it.  The political cost of major change is high and as a result there is unlikely to be any major change. 

 

My guess, is that along with keeping all the current players in Ontario’s university system, the end game is going to be the creation of assorted new online learning options independent of the current system and perhaps even new targeted private micro-universities that will provide the programs the provincial governments thinks should be offered.  This is in keeping with the provincial government policy towards its post-secondary sector of the last thirty years that has allowed colleges to evolve into perceived lower cost universities and universities expand their physical footprints without much thought as to what might happen down the road. 

 

Some of this is already underway and what the Blue Ribbon Panel may offer is some way of moving forward in a transitioning post-pandemic university environment that is still moving towards an unknown equilibrium.  At minimum, it will provide a justification for what the government wants to do. On the other hand, the panel may surprise everyone – including the government - with their recommendations which is why governments do not necessarily follow what Blue Ribbon Panels or Royal Commissions for that matter, suggest they do.

 

 

 

Is Canada’s Labour Shortage Actually a Productivity Slump?

 

Despite what seems to be supply side issues of staff shortages, rising demand and inflation in the wake of the pandemic, at least one contrarian view is that Canada’s labour shortage is an illusion. University of Waterloo economist Mikal Skuterud in a recent Globe Oped noted that despite perceptions of a labour shortage, Canadian labour force participation was identical to what it was in October 2018 at 65.7 percent and the absolute size of the labour force at 20.8 million is the largest it has ever been.  The “shortage” may indeed also be a result of the demand for workers in the post pandemic surge growing faster than their numbers.  Indeed, if one looks at the health sector, the supply of physicians and nurses per capita is the largest it has ever been but the post pandemic surge in dealing with postponed surgeries and procedures has been overwhelming.

 

However, the problem may be worse than you might think.  Not only is the size of the labour force the largest is has ever been but so is total employment.  If you look at the number of people employed – producing labour units so to speak - it is three percent higher than it was in 2019.  Employment did plunge in 2020 as a result of the pandemic shutdowns but it has since rebounded dramatically – by over 9 percent since 2020.  As the accompanying figure illustrates, employment is indeed the highest it has ever been.  [Data Sources: Statistics Canada, Table 14100393 Labour force characteristics, annual and 

V62471340 Canada [11124]; Gross domestic product at market prices]

 

 

However, despite more people working than ever before, the output response has been shall we say a bit sluggish?  While employment grew by over 9 percent from 2020 to 2022 as pandemic recovery set in, real GDP (in $2012 constant dollars) grew by less than 9 percent.  As a result, output per employed person has actually declined since 2020.  From 2020 to 2022 real GDP per employed person actually fell by just over one third of one percent.

 

Something has happened over the course of the pandemic that seems to have affected the productivity of Canadian workers.  Perhaps the long shutdown resulted in a deterioration of human capital and skills?  Perhaps the retirement of so many experienced workers and their replacement by less experienced entry level workers has led to output disruptions as new workers learn by doing?  Or, after the trauma of the pandemic, everyone wants more work life balance and as a result we are simply not working as hard as we used to?  Is this simply the aggregate effects of “quiet quitting?”

 

Such slowdowns in output per employed person are not unique to the pandemic era and based on the chart have occurred before – for example during the Great Recession and also between 2014 and 2016.  History suggests that we do recover from these “productivity” slumps and based on past performance one would expect the same over the next couple of years.  The disruption of the pandemic will take a number of years to fully work its way through the economy and the social fabric of the country.  The bigger problem in terms of productivity is if this time things are going to be different, and the productivity slowdown becomes a permanent feature.  Given that Canada has had economic productivity issues for decades, this latest iteration of an old issue is disconcerting to say the least.