Federal Finances in Review

 

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

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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