Finding Canada's Most "Entrepreneurial" Province

 While employment in Canada is up since the pandemic what is disturbing is the shift towards public sector employment combined with a trend away from self-employment over the longer term.  As has been noted, since January 2014, public sector employment in Canada has expanded from 3.5 to 4.4 million workers—a 27 percent increase—private sector employment grew from 11.6 to 13.4 million—a 15 percent increase—and self-employment shrank by approximately half a percent.  From January 2020 to the present, public-sector employment has expanded nearly 17 percent going from 3.8 to 4.4 million. Private sector employment grew from 12.6 to 13.4 million, an increase of 6 percent. Self-employment fell from 2.8 to 2.6 million—a drop of 7 percent.  Self-employment has been in decline for some time but the pace picked up with the pandemic.

Of course, a regionally diverse economy like Canada has provincial differences across all kinds of economic and fiscal indicators and self-employment is no exception.  While all provinces have seen a long-term decline in their self-employment share of employment, there are some interesting provincial differences.  Figure 1 uses Statistics Canada data on employment by class of worker to plot monthly self-employment shares of employment from 1976 to the present. Up until the late 1990s, the self-employment share was actually rising in all the provinces with the exception of Saskatchewan and Prince Edward Island.  The declines there are likely a reflection of farm consolidation in the agricultural sector as family farms are businesses and both these provinces have large agricultural sectors.

 

However, starting in the late 1990s, self-employment declines also commenced in the other provinces and the decline has picked up steam since the pandemic.  Self-employment peaked in Canada at just over 17 percent in the late 1990s and then declined to just under 15 percent by 2019 and has now reached approximately 13 percent.  Self-employment as an employment share actually spiked upwards during the early months of the pandemic as layoffs hit other sectors but then begins to decline rapidly.  One suspects the length of the pandemic with its restrictions was a contributing factor to many small businesses winding up their activity.

The decline of self-employment is disturbing because small business are in many respects a backbone for entrepreneurship and innovation.  New ideas are often translated into reality via the creation of a small businesses and while businesses are always being created or destroyed, if on net more small businesses are being wound up than created, then the long-term result is a smaller field for the development of entrepreneurial skills.   Small businesses provide opportunities for financial independence outside of traditional large employers and many small businesses being locally owned and based are also active in communities providing support for an assortment of charities and community activities.  And while self-employment as the owner of a small business may only account for 13 percent of total employment, these businesses in turn further employ a lot of private sector workers.

If one accepts the self-employment share of employment as a metric for entrepreneurship in Canada, then a provincial ranking does provide one measure of where entrepreneurship is most important.  Figures 2 to 4 provide a provincial ranking at three points in time and when combined they illustrate two types of trends.  First, there is an overall decline in self-employment particularly after 2000 and second, there is a shift across provinces. 

 

 

 

 If one starts in 1976, the self-employment shares are highest in Saskatchewan and Prince Edward Island at 29 and 21 percent respectively.  At the bottom are Ontario, Quebec, and New Brunswick.  By 2000, Saskatchewan is still on top, but its self-employment share has diminished to 25 percent. Meanwhile, British Columbia moved into second place from fifth in 1976.  Ontario and Quebec moved up to sixth and seventh spot respectively while at the bottom are Newfoundland and New Brunswick.  However, in the 2000 ranking, with the exception of Saskatchewan and PEI, the other provinces all saw some fairly hefty increases in their self-employment shares from 1976 to 2000.  Moving to 2024, all the provinces have seen a decline in self-employment shares over the 2000 to 2024.  However, the ranking now places British Columbia, Ontario and Alberta at the top and Nova Scotia, New Brunswick, and Newfoundland at the bottom.

So, self-employment as a share of total employment in Canada has been in decline for nearly a quarter century.  However, there are variations across provinces.  The takeaway from this is not that BC, Ontario and Alberta are the most entrepreneurial provinces.  The takeaway is that since 2000, all the provinces have become less entrepreneurial as measured by self-employment shares of total employment but in this diminished state of entrepreneurship some remain somewhat more entrepreneurial than others.

 

Municipal Spending in Ontario: A Long-Term Overview

 This originally appeared on the Fraser Institute Blog. 

Municipal dollars in Ontario—where did the money go?

— April 24, 2024

   

Municipal budget season in Ontario recently ended and the evidence reveals some fairly substantial tax increases around the province. For example, Waterloo Region approved a property tax increase of 6.9 per cent while Toronto passed an increase of 9.5 per cent. Hamilton ultimately saw an increase of 5.8 per cent after fears of a double-digit tax increase were unveiled in the fall while Kingston saw one of the lower increases coming in at 3.5 per cent. For the most part, these increases exceed the current consumer price index (CPI) inflation rate of approximately 3 per cent and rather anemic GDP growth performances.

Given these tax increases have exceeded both inflation and income growth, it’s more than a matter of curiosity to understand what drives the increases. Municipal governments in Ontario provide numerous services to ratepayers, and their budgetary actions can have a major economic impact on households and individuals. An overview of municipal expenditures at the provincewide level using data from the provincial Municipal Financial Information Return illustrates not only how much total expenditures and household taxes have grown but the categories driving the expenditure over time.

The first chart below plots total municipal expenditures along with average property taxes per household from 2000 to 2022. Since 2000, municipal operating expenditures have more than doubled going from $21.3 billion to $53.4 billion. It should be noted that total municipal operating spending has grown by 151 per cent while population has grown 61 per cent and the number of households by 134 per cent. Meanwhile, property taxes used to fund that spending have also grown from an average of $3,580 per household to $5,471 per household. Importantly, municipal operating expenditures do not include capital spending and much of that spending has been funded by debt. From 2000 to 2022, municipal net debt grew from $3.8 billion to $25.5 billion—nearly a six-fold increase in debt.

Over this period, the municipal workforce in Ontario grew from 216,367 to 234,235—an increase of 8.3 per cent over roughly 20 years. Much of the additional municipal spending is going into higher wages and salaries per employee rather than simply more employment. Indeed, any examination of the public-sector salary disclosure data for Ontario finds that the number reported earning more than $100,000 grew from 586 in 2000 to 61,021 in 2022 while the average salary for those over $100,000 rose from $118,333 to $127,294—an increase of eight per cent. While the average salary of those earning more than $100,000 has increased modestly, the growing number of municipal workers earning those high salaries has been the big expenditure driver. Put another way, in 2000 approximately one-third of one per cent of municipal employees on Ontario earned $100,000 or more whereas in 2022, that percentage had grown to 26 per cent.

Where does the money go? The second chart shows the composition of municipal operating expenditures in 2022—the four largest expenditure items were transportation (22 per cent), social and family services (18 per cent), protection to persons and property (17 per cent) and environment (15 per cent). These four items together accounted for more than 70 per cent of municipal operating expenditures. What’s more interesting is the growth rates of all these categories since 2000 especially when compared to the growth rate of economic indicators.

Municipal operating expenditures since 2000 have grown the most in the categories of health and emergency services (335 per cent) followed by planning and development (215 per cent), then transportation and “Other” categories at 207 and 208 per cent respectively. Of the 11 expenditure categories, nine have grown faster than either nominal provincial GDP, real GDP, population or inflation (see third chart below). General government and social and family services have grown the least at 45 and 79 per cent respectively. While the relative restraint with respect to general government is welcome, the slower growth of social and family services given the social problems afflicting many Ontario cities seems a curious choice of priorities.

So, pulling everything together, here’s the story that emerges. Municipal operating expenditures in Ontario over the period 2000 to 2022 have grown 2.5 times faster than general inflation and double that of population. They have also grown a bit faster than the province’s output.

The increase in spending is driven by spending on wages and salaries but not in the manner one might think. Average salaries in the municipal sector for those making more than $100,000 annually since 2000 have grown by only 8 per cent but the number of individuals making those salaries has grown in the thousands of per cent. Within the broader public sector, in 2000 municipal employees accounted for 6 per cent of individuals on the salary disclosure list whereas by 2022 they accounted for 23 per cent.

In Ontario, municipal tax dollars have gone not so much into an expansion of services but into paying substantially more for roughly the same total number of people providing those services. And the areas of greatest spending increase have been in health and emergency services and planning and development. While the former can be explained by the pandemic and the opioid crisis, one must wonder where the value for money is with respect to planning and development given shortages of affordable housing and homelessness that have been allowed to develop across Ontario’s municipalities over the long term.

What New “Affordable” Housing Looks Like in Thunder Bay

 As the federal government ramps up the billions to address the housing crisis in Canada including $6 billion to construct housing infrastructure. $1.5 billion to protect existing apartment buildings and a $15 billion apartment loan program, one would expect to see progress on the affordable housing front.  In the end, the issue is not really a shortage of housing to either buy or rent but affordable housing.  A glance at assorted real estate site in any city shows a large number of listings either for sale or for rent.  However, when one looks at the price, it is the cost of renting or buying that stands out, not a dearth of listings.

An illustration can be made for Thunder Bay which is seeing a large number of new rental building under construction.  A glance at Rent Panda reveals that some recent building projects are renting for some pretty hefty prices.  Take for example the two north side rentals in Thunder Bay shown below  – 80 Junot which is essentially adjacent to the Picton Street area and across from an EMS station – and 312 Crossbow – which is in a prime north side neighbourhood.  Location aside, both of these new build rental units are two bedrooms and two baths and rent for $2450 and $2400 a month respectively – utilities not included.  Two people earning minimum wage together could expect to earn at best close to $60,000 a year.  The rent alone will take up nearly half of their gross income, never mind the utilities.

Perhaps, south side rents are less?  Well the accompanying slide shows that a new build two bedroom one bath on Mary Street near Neebing Avenue is going for $2,300 a month though it includes water as a utility but likely not hydro.  I guess we could argue that these are all new builds and maybe we should settle for something older.  Well, a three bedroom one bath house on East Christina Street on the south side is renting for $2400 a month.  

The point here is that there is housing available for rent and some of it is new and quite nice but at $2300 and upwards a month and often excluding utilities, it is not affordable housing given the average incomes in Thunder Bay.  Median household income in Thunder Bay is just shy of $80,000 a year which means that half of households earn less than this.  At these rental prices, these below median income households will see close to half of their household income go to rent and utilities.  This is not affordable housing.  This is not geared to income or social housing.  This is where the shortage lies not only in Thunder Bay but across the country.

Ontario’s Evolving Salary Disclosure List

 

Just before the arrival of the Easter weekend, Ontario released its annual public sector salary disclosure list.  The 2023 edition of the list saw a total of just over 300,000 individuals on the list earning a total salary amount of $38.2 billion for an average salary of $126,941.  What is interesting is looking at the long-term evolution of the list from its debut under the Harris government in 1996 to the present.  The list was instituted during Premier Harris’s Common-Sense revolution as a mechanism to essentially provide accountability for public sector salaries and spending and hopefully restrain their future growth.  Any public sector worker with a salary of $100,000 or more is on the list and that nominal salary bar has been the same since 1996. If the salary threshold has been adjusted for inflation using the CPI since 1996 – the all-Item CPI has increased by about 85 percent since 1996 – the threshold today would be about $185,000.

 

Figure 1 presents the total number of employees on the Ontario public sector disclosure list at five key points: the debut under Premier Mike Harris in 1996, the total at the end of the Eves era (which could really be called the Harris-Eves era given Eves was only premier over the 2002 to 2003 period), the end of the McGuinty premiership in 2013, the end of the Wynne era in 2018 and the current release for 2023 at the end of just over half a decade of Premier Ford. Figure 2 presents the total salaries earned by those on the list at the same points in time as Figure 1. 

 

 

 

In the first release of the list in 19967, there 4,501 public sector workers on the list earning a total of 546.8 million dollars for an average salary of $121,495.  By the end of the Common-Sense Revolution era, the number of employees on the list and total earnings had nearly quadrupled at 20,368 employees and $2.6 billion respectively.  After the tenure of Premier McGuinty a decade later in 2013, the number of list members had grown to nearly 98,000 for a salary total of $12.5 billion.  Between the departure of Premier McGuinty and the departure of Premier Wynne, the list grew yet again to reach just over 151,000 employees and $19.3 billion in salary spending. Since the end of the Wynne premiership, the number of employees on the list has nearly doubled to just over 300,000 and an accompanying  total salary bill of $38.1 billion.  

 

 

 

The growth in the public sector wage bill at least as represented by the public sector disclosure list has been driven more by quantity than by price.  In 1996, the average salary earned by those on the list was $121,495 whereas by 2023, that average had grown to only to only $126,941 – a nominal increase of under 5 percent and well below the overall rate of price increase.  Essentially, $100,000 today has about half the purchasing power in had in 1996.  The number of people on the list, however, grew from approximately 4500 to just over 300,000.  It may be time to look at updating this metric to consider both changes in the overall size of broader public sector employment as well as the effects of inflation on thresholds if one is to draw meaningful comparisons.

 This post originally appeared on the Fraser Institute Blog, March 25th, 2024.

Ontario government’s fiscal history drenched in red ink

— March 25, 2024

The Ford government will table its next budget on Tuesday. But a longer-term perspective on the evolution of Ontario’s government finances provides some important context for today. Since Confederation, Ontario has seen a massive expansion of its revenues, expenditures and debt. And its fiscal performance in terms of balancing its finances has oscillated over the years. Using data from the Finances of the Nation database, assorted Ontario budgets, and the Fiscal Reference Tables, a picture of change and variable fiscal responsibility emerges.

With revenues of $2.3 million and expenditures of $1.2 million in 1868, Ontario had a substantial surplus and no debt. Indeed, substantial surpluses marked much of the pre-Second World War era. By 2023, the Ontario government had spending of $199 billion and revenues of $193 billion for a deficit of nearly $6 billion and a net debt of $400 billion. Ontario government spending on a real per-capita basis was relatively modest from 1867 to 1913 (despite province-building activities such as roads and railroads) and was financed primarily by federal government grants and natural resource revenues from forestry and mining. The period after 1914 saw an expansion of both government spending and revenues that was quite dramatic compared to the prior period, but which paled in comparison with the post-1957 expansion into health, education and social services.

With respect to revenue composition, Ontario gradually shifted from a reliance on natural resource rents and government grants to own-source revenues from income, consumption and other assorted taxes. When compared to the federal government—the only other Canadian government larger than Ontario in terms of total revenues or expenditure—in real per-capita terms Ontario spent less than the federal government until the early 1990s surpassing the Ottawa in 1993 for the first time. By 2020, real per-capita Ontario government spending was actually more than federal real per-capita spending, though the pandemic years saw a reversal.

What’s truly remarkable about Ontario’s finances is its growing reliance on deficit financing since the 1970s. Over the entire 1867 to 2023 period, Ontario ran an operating deficit in 70 out of 157 years or approximately 45 per cent of the time. However, in the first 100 years from Confederation (1867 to 1967) Ontario only ran 22 deficits—that’s 22 per cent of the time. In the fiscal years from 1968 to 2023, Ontario ran 48 deficits in 55 years—or deficits 87 per cent of the time. Deficits have gone from being a temporary departure for exceptional times to a near permanent device.

The accompanying charts plot Ontario’s deficits, its deficit-to-GDP ratio, its net debt and its net debt-to-GDP ratio from 1960 to the present. The first chart illustrates that Ontario maintained its largely balanced budget approach to its finances for most of the 1960s but incurred deficits in the 1970s.

Its three largest deficits were in 2010 ($19.3 billion), 2011 ($17.3 billion) and 2021 ($16.4 billion). As a share of GDP, the second chart illustrates that Ontario’s three largest deficits were in 1992 (3.7 per cent), 1993 (4.1 per cent) and 1994 (3.5 per cent). Ontario’s pandemic deficit peak in 2021 came in at 1.7 per cent placing it lower than some of the deficits of the 1970s and early 1980s.

Deficits plus interest eventually result in accumulated debt and Ontario like other provinces has added to that by borrowing for capital spending on top of its operating deficit. As the final chart shows, in 1960 Ontario had a net debt of $994 million and net debt-to-GDP ratio of 6 per cent. Today, net debt tops $400 billion and the net debt-to-GDP ratio is about 36 per cent. The profiles for net debt and net debt-to-GDP suggest Ontario’s net debt has grown in three phases.

The accumulation of net debt takes off in the mid 1970s, then accelerates in the 1990s and accelerates yet again after 2008. These periods of acceleration have all coincided with periods of economic slowdown or recession in the province—the low growth stagflation era of the 1970s, the recession of the early 1990s and recession/financial crisis era of 2007 to 2009. In each of these periods of distress, deficits mounted, yet even when the economy and revenues began to recover, spending growth and deficits continued. In essence, the Ontario government ran deficits during bad times and better times, giving a fiscal dimension to the provincial motto “Loyal She Remains.”

As Ontario moves forward from the pandemic era, it remains to be seen if the government will rein in perpetual deficit financing and halt debt accumulation, or if the government will embark on yet another cycle of mounting debt. In many respects, the government has continued to spend at a rate well above its economic ability and performance. Key to the issue is Ontario’s productivity lag, which has resulted in slow growth relative to the rest of the country. If the Ford government continues to spend as if Ontario was still experiencing the high growth rates of an earlier era, that’s not a sound recipe for fiscal responsibility.

What is a Provincial Government to Do?

 

Ontario is coming up to Budget Day next week on March 26^th and it will be interesting to see what the provincial government does on a number of issues because quite frankly the provincial government is in a bit of a pickle when it comes to economic and fiscal policy.  Over the last decade, Ontario has been hit by a productivity decline that has translated into slower economic growth.  Since the pandemic, this has been combined with a bout of inflation and a surge in population growth.  When you start looking at Ontario fiscal and economic indicators in real per capita terms, there are going forward disturbing implications for our standard of living.

 

If one compares the 2023-24 fiscal year forecast from the Fall Economic Update with the 2018-19 fiscal year, total provincial government revenues and expenditures are up approximately 30 percent respectively.  Health expenditure is up 33 percent.  The size of the provincial economy is up 22 percent.  On the surface, this is seemingly good news in the wake of the pandemic.  The problem is that over the same period, population in Ontario has grown by an estimated 12 percent while prices have risen nearly 19 percent.  Put another way, the combination of population and inflation at nearly 30 percent has outstripped nominal GDP growth while essentially matching the growth of government revenues and expenditures and in particular health spending.

 

The best way to visually illustrate these effects is to create an index.  Figure 1 uses data from Statistics Canada, the Fiscal Reference Tables and the 2023 Ontario Fall Economic Outlook and Fiscal Review to create real per person indices of economic and fiscal performance setting 2013/14 as 100.  Figure 1 plots real per capita (deflated using the CPI-All Items Index) Ontario provincial government Own Source Revenue, Federal Transfers, Total Revenue, Program Expenditure, Debt Service Costs and Total Expenditures.  Note that 2023-24 is an estimate.

 

 

 

In real per capita terms, debt service costs have been a bright spot in that despite the continuing rise in both the provincial net debt and interest rates, inflation and population growth have served to reduce the real per capita burden of servicing Ontario’s debt.  Indeed, the drop-in debt service has probably been able to free up resources for program spending. On the other hand, compared to 2018/19, real per capita revenues and expenditures are now below where they were.  In other words, provincial government revenue and spending have not kept up with inflation and more importantly population growth.

 

 

 

Figure 2 illustrates the decline in the Ontario way of life a bit more succinctly.  Does the health care system feel strained?  Real per capita provincial government health care spending after the surge of the pandemic is back to where it was in 2018/19.  Indeed, it has not changed much since 2013/14.  During that time, one imagines that labor costs for health care have gone up pretty dramatically which means there are indeed fewer doctors and nurses available to service a growing population. And to top it all off, real per capita output in Ontario has not kept pace with either inflation or population growth.  While real per capita GDP in Ontario grew somewhat from 2013/14 to the pandemic, it has since declined.

 

Looking at Figure 2, if the average Ontario had to ask themselves am I better off than a decade ago when it comes to my real per capita income and health spending, the answer is one that should concern the provincial government.

Will Thunder Bay Meet Its Housing Targets?

 

The Mayor’s State of the City Address last evening highlighted  housing construction in Thunder Bay particularly touting that Thunder Bay within Ontario had met its target so far and ranking tenth amongst Ontario centers (See here for a ranking).  The Mayor reiterated once again that in response to coming economic development and demand, Thunder Bay needed more housing and has a target of 1,691 new homes over three years.  Naturally, the question that arises is whether or not Thunder Bay can indeed meet this target. Much depends on the ability of the local construction sector to actually build that many homes in three years as well as whether the demand will materialize.

 

Forecasting the future these days is a pretty perilous exercise but some insight on the ability of Thunder Bay to build what amounts to nearly 600 new homes a year can be garnered from past performance.  Figure 1 plots monthly Statistics Canada total residential permit data by dollar value and number of permits from 2011 to 2023.  The numbers fluctuate seasonally though there is a spike in 2023.  However,  there are similar spikes in earlier periods.  If you want to smooth things out by taking a average - Thunder Bay has averaged monthly over the 2011 to 2023 period approximately 25 residential permits with an average value of 6.5 million dollars.  Converted  annually, that 25 permits a month translates into 300 units - a bit short.

 

Perhaps rather than permits issued, a better indicator of Thunder Bay’s capacity and ability to build nearly 600 units annually is a longer-term total housing starts series.  Figure 2 plots this from January 1990 to January 2024 and includes a polynomial smooth to highlight trends.  The results suggest that Thunder Bay is indeed capable of building 600 units a year as we have done so in the past.  Indeed, the early 1990s resulting in over 1,000 new housing starts annually.  However, the major obstacle is likely to be not building capacity or ability but demand for new units.  As the smoothed series points point, we are on an uptick that can see about 400 new homes being built in the next year.  Reaching 600 is possible based on the recent past given the smoothed numbers going into the pandemic.  However, as noted, the result is going to be driven also by our economic growth.  Thunder Bay has been doing well economically over the last year but will require sustained performance at this level to generate the needed demand for housing.

 

 

 

Ranking Recent CMA GDP Growth in Canada

 In the wake of the pandemic, with inflation, lagging productivity growth and a slowing economy, it is sometimes useful to look back on what economic performance was like in the "before time" particularly amongst Canadian urban areas.  Statistics Canada currently provides GDP estimates for Canadian CMAs for the period 2009 to 2020.  While 2020 sees a dip in GDP for everyone, the 2009 to 2019 period provides a snapshot of which parts of the country were growing the fastest prior to the pandemic.  The accompanying figure provides the growth rate in nominal  GDP from 2009 to 2019 for Canada's 36 CMAs and ranks them from highest to lowest. 

The expansion of GDP over ten years across these 36 CMAs averaged 45 percent and ranged from a high of 66 percent for Guelph, Ontario to a low of 16 percent for Saint John, New Brunswick. Three of the top five CMAs are in Ontario - Guelph, Kitchener-Cambridge-Waterloo and Toronto.  At the same time, four of the bottom five CMAs are also in Ontario - Thunder Bay, St. Catharines-Niagara, Peterborough and oddly enough, the Ontario portion of Ottawa.  Western Canadian CMAs in general did quite well with the exception of Victoria and Edmonton which placed in the bottom third.  In northern Ontario, Sudbury fares substantially better than Thunder Bay while in southern Ontario, the worst performers are Peterborough and St. Catharines-Niagara along with London, Windsor and Kingston.  

 

 

What happens as we continue to move forward from the pandemic will be interesting.  Vancouver and Toronto until the pandemic were major areas of GDP growth with their economies also totaling over 600 billion dollars or over one-third of Canada's economy.  If you add in Montreal, these three CMAs account for about half of Canada's economy.  With the run-up in housing prices and rents during the pandemic as well as general labor shortages in pandemics wake, one wonders how successful they will continue to be as urban growth leaders in Canada's economy.

 This post originally appeared on the Fraser Institute Blog, February 24th, 2024.

Ontario’s housing woes—a supply-side problem

Housing prices in Ontario, like in much of the rest of Canada, have soared because of several factors including supply constraints combined with rising demand fuelled by robust population growth. The most recent installment in this ongoing saga is the federal government’s move to cap international student visas to which Ontario has announced measures requiring universities and colleges to guarantee student housing—though how this is to be done is a good question.

These short term reactive regulatory actions at both the federal and provincial level will ultimately do little to solve the problem of scarce and expensive housing because they do not address the root of the problem—the supply side, particularly the high cost of building new homes, which results in meagre efforts to build new housing stock.

Aside from the recent labour shortages and run-up in construction costs in the pandemic’s wake, there are two additional facets to the supply and cost-side issues of housing in Canada in general and Ontario in particular.

First, there’s the role of government in driving up the cost of new housing through regulatory actions at the provincial and municipal level. Housing in early 21st century Ontario has been treated not as an investment but as a source of cash for governments, which always seem to need more money. According to a CMHC report, government charges on new housing development via warranty fees, municipal fees, development and permit fees easily add 20 per cent to the cost of building a new home. Indeed, the regulatory charges for a new home in a place such as Markham can easily add up to $180,000 with some of the higher costs imposed on higher density row homes and high rise units relative to single-detached homes. This is not an inconsequential amount given housing prices in Markham average about $1.3 million.

Second, housing supply has not kept up with population growth. This is not a new story—the addition of new per-person housing stock in Ontario peaked in the 1970s. The chart below plots total housing starts for Ontario from 1955 to 2023. While there have been cyclic highs and lows, the overall trend has been upwards. Even so, the total number of starts peaked in 1973 at 110,536 starts. By way of contrast, 2023 saw 89,297 new home starts. In 1973, Ontario’s population was 8.1 million people whereas by 2023 it was estimated at 15.8 million.

When one calculates the number of new starts per person and constructs an index with 1955 equal to 100, it becomes clear that new housing starts per person have been on a long-term decline. Compared to 1955, we’re building 45 per cent fewer new homes per person. If you compare it to the per-person peak in the 1970s, Ontario in 2023 built nearly 60 per cent fewer new homes per person.

To add to the stock of affordable housing, the Ontario government has set the target of 1.5 million homes to be built by 2031. To this end, it created a Building Faster Fund that would provide up to $1.2 billion to municipalities that meet or exceed the government housing target set for that community and provide strong mayoral powers to municipalities to help cut through municipal red tape and speed up construction. The government has also set housing targets for municipalities to meet to receive the funding.

Keep in mind that to reach a target of 1.5 million new homes by 2031, Ontario would need to add 187,500 new homes a year until 2031. As the first chart illustrates, since 1955 there has not been a single year where Ontario has come close to that number. Indeed, if one compares housing starts as a per cent of the target set by the provincial government across municipalities based on data from its Housing Tracker (see chart below) it’s clear that as of late-January 2024, barely one-quarter of municipalities had met their 2023 housing target. Not the most auspicious start.

What’s Ontario to do? The province’s housing availability and affordability problem will likely get worse before it gets better. Along with boosting the supply of skilled trades people to help construct more homes, it must reduce the regulatory and zoning barriers that slow down the construction of multi-unit residential projects, reduce the governmental development charges particularly on “missing-middle” density builds that emphasize family-sized units, and provide further tax incentives geared to building high-rise multi-unit builds with family-sized units. Governments should also increase efforts to leverage surplus public lands at the federal, provincial and municipal levels to help construct affordable housing as the current approach has paid little attention to having a constant and ample supply of shovel-ready sites.

Only such a multi-pronged approach will have any hope of meeting the housing needs of Ontarians over time.

Municipal Spending Evolution in Thunder Bay

 

As the 2024 municipal budget season wraps up, it is worth looking at where Thunder Bay has been going over the last decade in terms of the composition of its total municipal expenditures (all spending, tax and grant supported, capital and operating).  Using multi-year financial data (2002 to 2022) from the Ontario Ministry of Municipal Affairs Financial Information Review, one can obtain an overview of the trends.  In 2012, total municipal expenditures in Thunder Bay were 505.4 million dollars and in 2022 they were 599.8 million making for an increase of 19 percent.  Compared to some other municipalities, this was actually a rather modest increase as over the same period, Greater-Sudbury saw an increase of 41 percent, Windsor 26 percent, Barrie 29 percent and Kingston 41 percent.  At the same time, over this entire period, Thunder Bay nevertheless still managed to have the largest municipal expenditure to GDP ratio of these cities.  

 

What is more interesting is the evolution in functional composition.  Figure 1 illustrates that in 2012, the City of Thunder Bay spent 5 percent of its budget on general government, 14 percent on protection of persons and property, 12 percent on transportation, 12 percent on the environment, 5 percent on health and emergency services, 13 percent on social and family services, 9 percent on cultural and recreation services, 2 percent on planning and development and 28 percent on "other".  This last category reflects Thunder Bay’s ownership of its municipal telecom utility (TBayTel) as well as differences in the way Thunder Bay approaches social housing given we have a district board – the District of Thunder Bay Social Services Administration Board.

 

 

 

Figure 2 presents the 2022 composition.  General government showed a decline to 4 percent, protection to persons and property rose to 21 percent, transportation remained at 12 percent as did the environment.  Meanwhile, health and emergency services grew to 7 percent, social and family services declined to 7 percent, and both recreation and culture and planning and development remained the same at 9 percent and 2 percent respectively.  Meanwhile, the "other" category's share declined to 26 percent.  

 

 

 

Of course, for the composition to change, it means that these categories have grown at different rates and so Figure 3 presents the percent change in total spending by category over the 2012 to 2022 period.  In accord with general local perceptions, the largest increases in spending have indeed been in protection services and health and emergency services at 76 and 73 percent respectively.  Next is recreation and culture at 25 percent, followed by the environment at 14 percent, planning and development at 13 percent, "other" at 12 percent and transportation at 11 percent.  There were two categories that saw declines in total spending: general government fell by 6 percent (there have indeed been some administrative economies) while social and family services fell by 32 percent.  

 

 

 

Given that social issues have been front and center in Thunder Bay over the last few years, this allocation does provide some insight into how Thunder Bay is dealing with some of its social issues.  Resource allocation appears to have targeted the more direct outcomes and fallout of the assorted social ills afflicting the streets of Thunder Bay.  This is to be expected.  What is somewhat more disturbing is that there has been an expenditure drop in family and social services which one might expect would be a longer-term spending approach to addressing some of the causes of social issues.  Whereas, in 2012, 64.4 million was being spent on family and social services, this has declined to 44 million by 2022.  

 

It is interesting to note that of the five cities mentioned at the start of this post, between 2012 and 2022, Thunder Bay saw the largest percent increases in dollars spent on protection to persons and property as well as health and emergency services.  With respect to spending on family and social services, only Barrie saw a decline while Greater-Sudbury, Windsor and Kingston all saw increases.  Windsor, Barrie, Greater-Sudbury, and Kingston also all  increases in social housing spending (though Greater-Sudbury's was quite small). However,  in the case of Thunder Bay it is difficult to tell from these numbers if we are indeed spending more in social housing in the "other" category.  Ultimately, such differences across urban centers will provide an interesting laboratory experiment on how municipalities are dealing with issues like poverty, addiction and crime.

Measuring Municipal Public Sector Size

 

Public sector size and its impact on the economy is a long-standing research question in public finance.  In the case of Canada with its federal system of government, measures of public sector size often focus on either total public sector size or break it down into measures of federal and/or provincial public sector size.  These measures commonly take government spending or government revenues as a share of GDP to estimate the size of the public sector footprint.  Less common are attempts to related municipal public sector size to the size of their local economies.

 

Data is always an issue when trying to get an empirical handle on measuring things like public sector size.  Fortunately, in the case of Ontario municipalities, it is possible to get annual data on total municipal government expenditures and revenues from the Ontario Ministry of Municipal Affairs Annual Financial Information Returns which are filed by municipal governments.  Also fortunate is that Statistics Canada now provides some estimates of GDP for major census metropolitan areas going back to 2009.  While the data is a bit onerous to compile and put together, the preliminary results for Thunder Bay and three other Ontario municipalities are interesting.

 

Figure 1 plots total municipal expenditure as a share of CMA GDP from 2009 to 2022 for Thunder Bay, Greater Sudbury, Windsor, and Barrie.  These are relatively smaller Ontario urban centres well outside the GTA/Niagara region with two in northern Ontario.  Greater Sudbury is always an automatic comparison for Thunder Bay on many levels given that it is the largest city in northern Ontario with Thunder Bay second.  Also, note that for 2021 and 2022, GDP was estimated using the annual average growth rate of GDP for the 2010 to 2020 period.

 

 

 

The results reveal that total municipal expenditures in these four cities as a share of GDP reveal that Thunder Bay has a larger municipal footprint than the other three.  Over the entire period 2009 to 2022, Thunder Bay’s municipal expenditure to GDP ratio averages 9 percent while Sudbury is at 6 percent, and Windsor and Barrie each at 5 percent and 4.7 percent respectively.  In terms of trends over time, since 2011, Barrie has been trending slowly downwards, Windsor is stable, Sudbury has been growing while Thunder Bay managed a small decline that was reversed during the pandemic.  Indeed, the two end points of this chart are both associated with economic trauma in that the start is marked by the aftermath of the Great Recession and Financial Crisis and the end by the COVID-19 pandemic.

 

Nevertheless, the results suggest that based on this albeit limited sample, the two northern Ontario municipalities have larger municipal public sectors than ones in southern Ontario. Even within the north, Thunder Bay is certainly in a league of its own when it comes to the size of its municipal footprint.  Some of these differences across the cities can of course be ascribed to the generally more robust southern Ontario economic environment and better economic growth performance which naturally spills over into GDP.  At the same time, Thunder Bay is different, and the question as always is why?

 

One might argue that the municipal public sector in Thunder Bay is larger than these other cities because it has a weaker economy.  Given that so much municipal spending is mandated or guided by the province, Thunder Bay does not spend more per se but does relative to the size of its economy.  This is the “province makes us do it defence”.  On the other hand, one could argue that more spending is also a choice and Thunder Bay and the Lakehead cities that preceded it have always because of their isolation engaged in more municipal spending to provide services they feel ought to be available.  In this regards, part of the difference between Thunder Bay and other cities lies in municipal utilities given that the City of Thunder Bay essentially owns TBayTel- its own municipal telecom utility.

 

In some sense, neither explanation is terribly flattering in explaining why Thunder Bay’s municipal public sector can be nearly twice as large as that in some other southern Ontario cities.  We have a weak economy which despite all efforts continues to be weak and our municipal government plays the role of an economic stabilizer.  Or, ownership of TBayTel aside, we may simply like to spend more than other cities and are quite comfortable with the City of Thunder Bay being as large an economic driver as it is.  One suspects both these explanations are potentially inconvenient truths no one in Thunder Bay really wants to hear.

Ontario Economic Decline is Real and Substantial

 This post originally appeared in the Fraser Institute Blog.

A spectre is stalking Ontario, and it’s the spectre of decline. For most of post-war Canadian economic history, Ontario has had a per-capita real GDP substantially above the Canadian average. At the same time, Ontario has had real per-capita GDP growth relatively close to the Canadian average.

This dominance was rooted in Ontario’s role as Canada’s industrial heartland that developed in the wake of Confederation. Ontario was indeed a beneficiary of Canada’s national economic development policies based on development of the Canadian prairie wheat economy, a tariff wall to protect domestic manufacturing and an east-west railway transport corridor. At the same time, Ontario’s economy was also marked by prosperity driven by market-based economic development best described in the words of economic historian Ian Drummond as “progress without planning.”

Ontario’s performance can be summarized in two charts using data from the Macro-data Base of Finances of the Nation. The first chart below plots real per-capita GDP separately for Ontario versus the rest of the country (Canada without Ontario) from 1990 to 2022.

 

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The second chart plots the average annual growth rate for Ontario, the rest of the country and all of Canada for the 1990 to 2022 period and the approximately 30-year period preceding it. The evidence suggests that during the 1990s, Ontario fell dramatically below the rest of the country in terms of its real per-capita GDP growth. In 2006, the rest of the country surpassed Ontario’s real per-capita GDP and remained higher for a decade before converging from about 2015 to the pandemic era. However, in the immediate post-pandemic era, Ontario has once again fallen behind the rest of the country.

 

 

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During the 30-year period prior to 1990, Ontario’s real GDP per-capita growth was quite close to the overall Canadian average and that of Canada without Ontario. What’s remarkable is what’s happened since.

Ontario’s average annual growth rate of real per-capita GDP fell from 2.6 per cent to 0.6 per cent. To be fair, a productivity decline has also marked the rest of the country. Indeed, Ontario and the rest of Canada appear locked as partners in a long-term productivity and growth decline, but Ontario’s performance is both dire and unique. The rest of Canada since 1990 saw its per-capita income growth rate cut in half. While hardly a sterling performance, compared to Ontario it was a veritable boom given that Ontario’s post-1990 average annual growth rate was barely one-quarter that of its 1960 to 1990 growth rate. One can argue that Ontario is dragging down the overall Canadian growth rate.

One can construct all kinds of palatable and soothing stories to explain why this has happened and why it’s not as unflattering as these statistics suggest. For example, one can argue that convergence of income is a good thing as it provides for a more economically balanced federation and is a logical outcome of economic development spreading across the country. At the same time, convergence could also mean that once per-capita incomes have equalized, growth rates should be similar, too, which is not the case here.

One could argue that Ontario was exceptionally hard hit by the economic adjustment its manufacturing base underwent during the 1990s in the wake of the 1998 Canada-U.S. Free Trade agreement and then NAFTA. Yet most of that adjustment was done in the 1990s and a breakdown of growth rates in the 1990 to 2022 period shows 1990 to 2000 had higher per-capita income growth than afterwards. One could also argue that the real per-capita slowdown is an illusion fuelled by rapid population growth. This of course ignores the reality that Ontario’s population has been growing about the same as the rest of the country and its share of total Canadian population today remains pretty much the same as 30 years ago.

Another potential argument is that the relatively better performance of the rest of the country is the result of natural resources with Alberta, Saskatchewan and Newfoundland and Labrador doing much of the heavy lifting. Yet this ignores that Ontario, and especially its north, is resource rich with abundant minerals and hydropower resources. Yet Ontario has been planning for more than two decades to access its Ring of Fire and little yet emerged. If the early 20th century could be characterized as “Progress without planning” then the early 21st may as well be “Planning without progress.”

Finally, one could argue it’s all just a rough patch for Ontario and that things are about to turn around. At the 1960 to 1990 growth rate, Ontario’s per-capita income would double in about 30 years. At the post-1990 average annual growth rate, the next doubling will take more than a century.

These are all ultimately unconvincing stories strung together to provide a comforting and bearable account as to why we shouldn’t worry and indeed shouldn’t do anything at all. Yet the first step to a solution is acknowledging a problem exists. Unfortunately, Ontario seems serene in the confidence it does not have to worry. Ontario needs to wake up and realize it has a problem.

 

Ranking Thunder Bay's Tax Levy and More...

 

It is municipal budget season in  Ontario and Canada and this year’s proposed budget increases appear to be quite large.  Toronto, for example, has proposed a 10.5 percent tax increase while Hamilton initially was looking at a 14 percent increase. Vancouver is going up 7.5 percent while Montreal seems set to go up 5 percent which while seemingly modest given the comparisons described here is nevertheless Montreal’s largest increase in 13 years. And then there is Thunder Bay which for 2024 is proposing a 6.1 percent increase in the total tax levy which “after growth” will be 5.5 percent. 

 

While one might argue that Thunder Bay's increase seems modest compared to these other metropolises, much like the case of Montreal, the more apt comparisons are with the past rather than other cities.  Even in the case of Ontario municipalities, there are differences in municipal structure with Thunder Bay as a single tier municipality not always directly comparable to other cities – the famous apples versus oranges argument city administrators usually bring up at budget time.  Ultimately, one needs to look at how Thunder Bay’s tax levy and proposed levy increase stacks up against past ones.

 

Figure 1 plots a two-axis chart of the total tax levy as well as the dollar change in the levy from year to year going from 1990 to the proposed 2024 figures.  In 1990, the tax levy was 63.4 million dollars while today the proposed amount for 2024 is 231.7 million dollars.  And of course, this is just the tax levy and not the total budget which is funded by both tax levies and government grants and comes in including operating and capital at a combined total of approximately 538 million dollars.  The trend has been upwards with an increase every year with the exception of 1995 which appears to have seen a drop in the levy of 1.3 million dollars.  The proposed increase for 2024 is 13.3 million which is well above the average annual increase for the 1991 to 2024 period of 4.95 million dollars.

 

 

 

How does this year’s percentage increase in the tax levy stack up to past ones? Figure 2 plots each percent increase in the total tax levy from 1991 to 2024 ranking them from highest to lowest and at 6.1 percent, the proposed 2024 levy increase is the 5^th highest in over thirty years (but second highest in strict absolute dollar terms). The increases range from a high of 21.8 percent in 1998 to a low of -1.7 percent in 1995.  All other things given this year’s proposed increase is at the higher end of the range in percentage terms.

 

 

 

Of course, it is often argued that the reason taxes go up apart from new needs or mandated responsibility increases from the province is a general rise in costs driven by inflation. Inflation certainly has been in the headlines the last year, so it is worth checking out the correlation between the CPI inflation rate for Thunder Bay and the percent change in the tax levy.  Oddly enough, when a linear trend is fitted to the scatter plot of tax levy increases versus the inflation rate, the relationship appears to be slightly negative – that is, higher inflation rates were correlated with lower tax increases. 

 

However, one could argue that these results are driven by 1998 with its 21 percent levy increase (If you recall the late 1990s was an era of municipal restructuring with changes in how taxes were allocated between residential and business and also local education and of course social service downloading).  However, if you omit that year as an outlier, what you get is essentially a flat curve.  That is, the rate of inflation does not seem to drive the rate increases.  They are being driven by other factors and since we don’t know what we don’t know, those factors are best left up to city administrators who are in the know about what they may or may not know.  Nevertheless, do not expect a straightforward answer as the factors over and above inflation are indeed complicated.

 

 

 

Many people find the budgeting process of the City of Thunder Bay (and indeed municipal governments in general) rather arcane and overly complicated.  Indeed, even those of us with a public finance background find municipal budgets particularly confusing and exasperating as they are indeed laid out in a manner that does not inspire clarity.  They look nothing like a federal or provincial budget which a least provide a one- or two-page table easily summarizing revenues and expenditures.  Now one may argue that this is not good for local democracy if ratepayers do not understand municipal finances because they are not readily transparent. 

 

This is where the ratepayer errs.  This is actually not about democracy.  It is about the needs of the corporation and corporations are perpetually lived entities with limited liability and interested in their own financial preservation.  They respond more often to the money rather than to voter pressure.  The phrase “You Can’t Fight City Hall” does not exist for no reason.  Remember, like other municipalities, our city government is The Corporation of the City of Thunder Bay.  Despite popular sentiment and belief, municipalities in Canada are not independent tiers of government but creatures of the provinces.  Local service provision has essentially been contracted out by provincial governments to municipal corporations.  The democratic accountability for municipal government ultimately lies in provincial elections rather than local ones. 

 

City councils are essentially boards of directors, and they serve to demonstrate responsibility for corporate direction but little else in terms of day-to-day finance and operations.  True, ratepayers engage with the corporation by selecting the board of directors in elections and participating in numerous surveys and public consultations but then any corporation worth its salt always is doing customer satisfaction surveys.  The real business and complex operations geared around the financial operations of the corporation is conducted by its officers and employees and generally behind closed doors. 

 

The members of the board - our councilors – are essentially a large focus group attempting to promote public relations engagement in a theatrical setting for the people the corporation ultimately derives its revenue from and provides services to. That usually explains why so much of council meeting’s time is usually taken up by discussion of minor manners that galvanize emotions (time to change street names again anyone?) and complicated large multi-million-dollar decisions seem to occur quickly on the advice of administration. There are exceptions when fate delivers exceptionally persistent and informed councilors - witness the turf facility debate to date - but corporate administrations play the long game and eventually wear out the opposition.

 

Even the current review of the size and structure of Thunder Bay City Council is largely designed to create a sense of public engagement with the process rather than any actual decision making.  Remember, Thunder Bay was created by an act of the provincial government.  Thunder Bay can certainly try and change its system of municipal representation and structure, but the province will have the ultimate say and the corporation will implement that.  Remember Toronto in 2018?  The number of wards  (and councilors) was reduced nearly 50 percent in the middle of a municipal election but not as a result of a grass roots consultation but by the provincial government because they wanted to and they could.

 

The point of all this?  The City of Thunder Bay needs a 6.1 percent in the total tax levy to fund its operations and tinkering around the edges aside, will get most of that increase.  And will we get a revamped municipal ward and councilor structure? Certainly. But only if the province goes along with it.