NORTHERN ECONOMIST 2.0: 2025

Monday, 10 February 2025

Why Does Canada Exist?

Last evening in Paris, as Canada’s Prime Minister was exiting his vehicle and going into a building, a journalist shouted the question “Is Canada viable as a country” which really asks should Canada exist? This question has emerged in the wake of the ongoing verbal onslaught from the President of the United States with respect to tariffs, annexation and talk of Canada becoming a “cherished” 51^st State. One wonders if this journalist was Canadian or American. If American, not already knowing the answer to that question can be forgiven. If the journalist was Canadian, well that is also disappointing indeed because that question was answered a long time ago by Canada’s great economic historian Harold Adams Innis.

Whether or not Canada should exist as a separate entity distinct from the United States has long haunted Canadians – or at least English Canadians. Before 1763, Canada was Quebec and Quebec has never had any doubts that they constituted a distinct people and nation within their North American environment. English Canada was settled by refugees from the American Revolution – the United Empire Loyalists – and while they also constituted a distinct cultural group within North America, the similarity of language and culture with the United States has always led to questions of distinctiveness and identity.

These questions have been aggravated by the seemingly north-south geographic grain of the continent with only the Canadian Shield being apart from that grain. The Atlantic region appears to be but an extension of the New England states, southern Ontario essentially juts into the US northeast, the prairies are an extension of the Great Plains while British Columbia and its mountains are an extension of the Pacific Northwest. The bulk of Canada’s population is clustered along an east-west corridor within a day’s drive of the U.S. border and therefore Canada as an east west construct has seemingly been constructed in defiance of North American geography.

And yet, in his Fur Trade in Canada, Innis argued that Canada was indeed a natural rather than unnatural construct because its east-west orientation was rooted in geography and economic relationships. Canada became a country because of and not despite its geography and the fur Trade was instrumental in bringing that about. The fur trade waterways of the Great-Lakes-St. Lawrence system and the rivers of northern Ontario, the Prairies and British Columbia and even up to the Arctic provided the east-west canoe travel network of the fur trade first under the French, then under the traders of the Northwest Company of Montreal and finally those of the Hudson Bay Company.

As the accompanying maps illustrate, the routes of the fur trade penetrating the Canadian Shield were the first network traversing Canada A Mari Usque Ad Mare. And given their links southward via the Mississippi system or into the Washington-Oregon area, one could make as much a case that these regions are but an extension of Canada’s east-west waterways. Many of Canada’s towns and cities were originally fur trade posts on this east-west network and when the railway came decades later, it followed this east-west line. This east-west alignment of the country was natural according to Innis and facilitated the east-west extension of Canadian sovereignty into the west during the 19^th century.

As the famous passage from Innis’s The Fur Trade in Canada goes:

“The Northwest Company and its successor the Hudson’s Bay Company established a centralized organization which covered the northern half of North America from the Atlantic to the Pacific. The importance of this organization was recognized in boundary disputes, and it played a large role in the numerous negotiations responsible for the location of the present boundaries. It is no mere accident that the present Dominion coincide roughly with the fur-trading areas of northern North America. The bases of supplies for the trade in Quebec, in western Ontario and British Columbia represent the agricultural areas of the present Dominion. The Northwest Company was the forerunner of the present confederation.” (Innis, The Fur Trade in Canada, 1930/1971, p.392)

In other words, Canada was the path dependent outcome of a natural east-west economic network. Canada exists A Mari Usque Ad Mare for reasons that are rooted in its economic history and development and not as an artificial construct. The border with the United States is there for a reason.

Wednesday, 29 January 2025

Ontario's Physician Shortage: How Bad Depends on Where You Live

The Ontario election is now underway and despite the Premier’s belief that this election is about a mandate to deal with Donald Trump, the reality is that the dominant issue is likely to become health care. Given that Canada and by extension Ontario are both small open economies, aside from moral suasion,Trumpian tariff policy is beyond the direct power of Ontario’s Premier. Health care, on the other hand is a provincial responsibility and directly within the Premier’s mandate. Here, the picture is not pretty.

There are apparently 2.5 million people in the province without access to a family physician and the number has been growing because while total physician supply in Ontario since 2019 is up over one percent, population has grown by nearly 10 percent. The Ontario Medical Association already has a campaign underway highlighting the crisis in provincial health care and in particular the shortage of medical professionals and physicians. The province has indeed responded to this crisis with the unveiling of an additional $1.8 billion to ensure that everyone has access to a family doctor with four years. And yet, the nature of the crisis is such that the absolute number of physicians required is only part of the problem given demographic changes in the profession, changing workloads as well as the reality that the size of the shortage differs regionally.

Figure 1 takes data on total physician vacancies from HealthForceOntario for major Ontario cities (accessed January 29^th) and plots them ranked from highest to lowest. The number of vacancies range from highs of 683 and 204 for Toronto and Ottawa to lows of 21 and 16 for Barrie and Brantford. This ranking is in terms of absolute numbers and says little about relative vacancies which need to consider population. So, Figure 2 presents these vacancies in terms of vacancies per 100,000 population (using CMA population data from Statistics Canada for 2024) and ranks them from highest to lowest and the results show the physician shortage in relative terms varies considerably. The largest vacancies once adjusted for population are in Thunder Bay, Peterborough and Belleville at 34, 28 and 26 physician vacancies per 100,000 population. Meanwhile, the lowest vacancies per 100,000 population are in Oshawa, Hamilton and Windsor at 7, 6.6 and 5.8.

Two things come to mind with these results. First, a blanket or provincial level response approach to this problem is likely to be unsuccessful. Solutions for Thunder Bay or Peterborough cannot be the same as those for Barrie or Toronto given the size of the gap in terms of vacancies per 100,000. Indeed, the size of the problem in Thunder Bay, Peterborough and Belleville seems to be in a league of its own given the drop off in Figure 2 after Belleville. Second, for the time being, if you are indeed looking for a physician in a major Ontario city, given these numbers, your odds of getting access to one is greatest in Windsor and worst in Thunder Bay.

Thursday, 23 January 2025

Sorting Out Thunder Bay's 2025 Municipal Budget

Well, Thunder Bay’s budget season is well underway but the public interest to date has been somewhat underwhelming but that is perhaps because the tax levy increase has been advertised as being 3.7 percent which is below the 6.1 percent in last year’s proposed 2024 budget. However, this year’s budget process has also been a little different than the past and somewhat more confusing than usual. Until this year, both the capital and operating budgets were done together and the final tax levy reported consisted of the taxes going to fund the operating budget and the taxes going to fund capital spending. We can term this the total tax levy – which now has been broken apart into the operating tax levy (the subject of current deliberations) and the capital tax levy (which was done last fall).

Last year, the original proposed total municipal tax levy (which incidentally only funds about 40 percent of total capital and operating spending this year– the rest coming from provincial and federal grants, other user fees, the TBayTel dividend and reserves) came in at about 232 million dollars (of which 211.5 million was the operating tax levy and 20.2 million was the capital tax levy). The 232 million dollar proposed total tax levy represented an increase of 6.1 percent from the previous year’s total tax levy. Based on the revised numbers presented in this year’s budget, the total tax levy in 2024 seems to have come in at just under 230 million dollars of which 209.6 million dollars was the operating tax levy and just over 20 million was the capital tax levy. In the end, based on these numbers, the actual total tax levy increase last year was closer to 5 percent than the initially proposed 6 percent.

This year, the budgeting process is essentially the same in that there is a capital and operating budget, but they were discussed separately and the tax levies reported separately as a capital tax levy and an operating tax levy. So, the 2025 capital budget process that concluded in the fall reported:

“The proposed 2025 Capital Budget includes $22,642,600 financed from the tax levy.

The “base” tax levy amount of $19,906,900 (2024: 19,178,100) is 3.8% more than the

previous year’s “base” tax levy which is in line with City Council direction.”

This was of course reported as a 3.8 percent capital tax levy increase because rather than 22.6 million dollars as the capital spending amount, only 19.9 million was used in the percent growth calculation because 2.7 million dollars in the total of 22.6 million was the retirement of a debenture. If one compares the total capital tax levy amount this year of 22.6 million dollars to last year’s total of 20.2 million dollars (rather than last year's "base" of $19.2 million) – then one gets a capital tax levy increase of 12 percent – substantially higher than 3.8 percent. However, one should also factor in anything retiring debt etc.. for the previous year and if you do that last year's comparison amount would be $21.684 million. So, that woulds make the increase in the capital levy 4.2 percent. I suppose one can quibble on how to account for money in the capital budget being used to retire debt but, in the end, a tax dollar is a tax dollar, and the total capital tax levy numbers are what should be compared.

So, putting everything together: In 2024, based on the revised numbers to date this year, the total tax levy was $209.6 million dollars for the operating budget and 21.7 million dollars for the capital budget for a total of $231.3 million dollars. This year, the operating budget tax levy is $217.4 million dollars, and the capital budget tax levy is $22.6 million dollars (which incidentally is only part of total proposed capital spending with the rest coming from grants and reserves and borrowing) for a total tax levy of approximately $240 million dollars - up just over 10 million dollars from last year. However, there is also assessment growth of $1.693 which when added to the total levy brings it up to $241.7 million dollars. The percent increase in the operating tax levy increase is indeed 3.7 percent but based on how reporting used to be done in the past based on a total municipal tax levy, the increase from $231.3 million dollars to $241.7 million dollars is more like 4.5 percent - which by the way is still quite a bit lower than last year. However, the total tax levy increase this year is also indeed about 3.7 percent if you believe that the millions of dollars being spent in the 2024 and 2025 capital budget to retire debt as well as the assessment growth should not really be counted as part of the levy. However, a tax dollar is a tax dollar and if the money is being raised as taxes, then it should be part of the reported increase.

Sunday, 19 January 2025

Trump, Tariffs, The Economy and (Northern Ontario)

If tomorrow indeed brings the onset of US President Donald Trump’s tariffs on Canadian exports, there will be an impact on Canada’s, Ontario ‘s as well as northern Ontario’s economy. Ontario’s trade and investment profile shows that it exports hundreds of billions of dollars accounting for 36 percent of Canadian exports and of those the lion’s share – 85 percent go to the United States. The largest exports are motor vehicles and gold with the two in 2021 representing 20 percent of Ontario’s exports. Indeed, resource-based goods as a share of Ontario exports have grown over the last twenty years and account for about ten percent of Ontario’s exports.

Lumber, pulp paper and allied products are of course well-known traditional regional exports and the remains of the industry that weathered the forest sector crisis continues to export much of its output to the United States. Approximately two-thirds of Canada’s lumber is exported and of that, over 80 percent goes to the United states. Gold, along with nickel, palladium and nickel are mined in northern Ontario with major markets in the United States also. The United States imports about half of Canada’s nickel production and Ontario accounts for nearly 40 percent of Canada’s nickel production. And aside from the large resource producers, an array of northern Ontario business in general also export to the United States. At least one somewhat dated survey of northern Ontario businesses found that half of business sales were outside northern Ontario. Of those sales, half in turn were to the rest of Ontario while about 12 percent of sales (or just over 20 percent of exports outside the region) were to the United States.

It stands to reason that a broad-based tariff on those exports will have an impact on resource production and activity in the region. For Canada as a whole, there are any number of alarming estimates. For example, the Canadian Chamber of Commerce has estimated that a 25 percent tariff across the board on all US imports could “push Canada’s economy into recession” by shrinking GDP 2.6 percent. Scotiabank has estimated that:

“U.S. GDP could decline by roughly 0.2% for each 5% increase in tariffs, while Canada could see sharper declines of up to 1.1% with full retaliation or 0.8% with no retaliation. These losses of economic activity are higher the higher the tariffs are. Under 25% tariffs, albeit we don’t think this a plausible scenario, the loss of U.S. GDP could increase to up to 0.9%, and up to 5.6% in Canada with full retaliation or 3.8% without.” (Perrault et al., Rules of Thumb for Estimating the Impact of U.S. Tariffs on Canada, Scotiabank Nov 28, 2024).

However, the extent of employment and income impacts from a fall in our exports depends on the size of the tariffs, the sectors affected, the effects on the value of the Canadian dollar (a depreciation would counter the tariffs effect on exports but also make our imports from the US more expensive) and most importantly, just how vital those exports are to the United States in terms of their elasticity of demand. If the tariffs are across the board, then all US imports will rise in price given that cheaper substitutes will not be immediately available. If the goal is to favour domestic US producers, it will take time to ramp up their production capacity and in the case of resource products, if they are importing half of their oil from Canada and large proportions of their other mineral and energy requirements, it is because they are unable to meet their own needs. And of course, there is the possible political push back from US consumers if the price they pay on goods with a large Canadian export content goes up dramatically.

In the case of northern Ontario, the short-term effects will be mitigated by public sector activity. For example, in major urban centres like Thunder Bay and Sudbury, a lot of employment is already either directly public sector or is based on economic activity from government contracts. For example, Thunder Bay is in the midst of a construction boom driven by government housing money and a new provincial jail, and its transit car manufacturing just received another government funding boost. The long-term is another matter if the country and province go into recession.

So, we will have to wait and see what the ultimate impact will be. The more curious question is why President Trump is so set on such tariffs given the damage they will inevitably inflict on the economy of America’s closest ally and trading partner as well as the American consumer in general. My guess is he is gambling that Canadian exporters may lower their prices to maintain competitiveness and market share in the face of American tariffs thereby sparing American consumers much hard ship. Combined with this will be the inevitable further depreciation of our dollar that will also make our exports to the United States cheaper. The tariff revenue is probably expected to compensate for the drop in income tax revenues given that Trump wants to implement income tax cuts. And, inevitably with tariffs, more companies will relocate their operations from Canada and Mexico back to the United States thereby creating jobs for Americans.

Is this indeed Trump's master plan? We shall see.

Wednesday, 15 January 2025

Housing Starts: Sudbury and Thunder Bay

Housing availability and affordability remain amongst the most pressing issues in current public policy and the north's major urban centers are no exception given the rise in the average price of housing as well as rents. In response to provincial and federal incentives, both Greater Sudbury and Thunder Bay have seen a ramping up of housing activity. By late 2024, Thunder Bay had issued 310 building permits and 241 shovel ready housing starts were in progress and as a result had exceeded the housing targets set for 2024. Greater Sudbury has also seen an increase in housing activity with 2023 the strongest year in a five year period and by late 2024 had seen 610 housing starts of which nearly two thirds were rental units.

For both communities, 2024 marks a departure from recent performance given that Statistics Canada data suggests that for 2023, total housing starts were 263 in Greater Sudbury and 193 in Thunder Bay. However, as impressive as the current ramping up may be, a glance at historical performance suggests that there is still a ways to go if current construction efforts are able to match those of yesteryear. Figure 1 plots annual total housing starts from Statistics Canada (Series v42127460 andv42127445) for Greater Sudbury and Thunder Bay from 1972 to 2023 and for both communities recent housing start total are nowhere near the peaks achieved in either the 1970s or 1980s. Over the 1972 to 2023 period, Thunder Bay's peak was 1,620 housing starts in 1977 while Sudbury's best year was 1991 when it saw 1,758 housing starts.

The period since 2000 is particularly flat for Thunder Bay with the best year being 2012 which saw 380 housing starts while Greater Sudbury peaked in 2011 at 595 starts. And while the 1980s and 1990s were marked by stagnant population growth rates, the period since 2000 has seen some population growth (See Figure 2, Data source: Statistics Canada). Between 2001 and 2023, Greater Sudbury grew from 165,532 people to 185,230 - an increase of nearly 12 percent. Thunder Bay has not done as well on the population growth front but nevertheless still grew by 3 percent of the last period. A larger population but lower housing starts relative to the past means that population adjusted housing starts remain lackluster relative to even the recent past since 2000. In 2012, for example, Thunder Bay managed 300 starts per 100,000 population while in 2011, Greater Sudbury was at just over 350 starts per 100,000. By comparison, 2023 saw both communities at just under 150 starts per 100,000 population. While 2024 was better even on a population adjusted basis, it remains that neither community appears able to construct at rates approaching those of the 1970s and 1980s.

This is of course not just a northern Ontario affliction. In Canada as a whole but Ontario in particular, the last 50 years have seen an increase in assorted regulations and requirements that make rapid project approvals and construction harder to do. And, new homes built today - with the exception of apartment and condo units - at least anecdotally, often seem to be larger than they were in the past which all things given could also take more time. Combined with higher land prices, it is understandable that construction today is likely not to approach the rates of the 1970s. Then there is the fact that populations were much younger in the 1970s and 1980s meaning that labour was more abundant compared to shortages today especially in areas like skilled trades. The result is a definite slowdown in our ability to meet both demand and need.