No quick fix for Ontario’s economic decline

 This originally appeared in the Fraser Institute Blog, August 13th.

 Ontario continues a decades-long economic malaise. From time-to-time economic analysts arise to point out the decline only for the news to be treated as so much water off a duck’s back. Indeed, the complete picture as measured by real per-capita GDP has evolved to the point where the response should be alarm rather than concern.

Moreover, the solutions now being advanced by the Ford government (and others) to move Ontario’s economy forward are quick big fix projects that do not address economic fundamentals. Despite an economy considered Canada’s powerhouse in terms of size, export intensity, and manufacturing depth, the trends are disconcerting. This is not a short-term aberration attributable to the tariff disputes with the United States but a sustained inability to effectively grow the economy.

The chart below plots Ontario’s real per-capita GDP (in 2020 dollars) along with the average real per-capita GDP of the rest of Canada from 1926 to the present using data from Finances of the Nation. For most of the last 100 years, Ontario has been the wealthiest province in the Canadian federation as measured by real per-capita income. Moreover, the gap has usually been substantial.

 

 

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For example, in the 1920s, the per-capita income of the rest of Canada was about two-thirds that of Ontario. This proportion persisted well into the early 1970s at which point it began to quietly erode. By the late 1970s, the average real per-capita GDP of the rest of Canada had reached more than 80 per cent of Ontario’s. The economic boom of the 1980s masked Ontario’s decline but the period since the 1990s has seen its relative decline continue and the per-capita GDP of the rest of Canada now is just over 100 per cent that of Ontario.

In 1960, Ontario has the highest real per-capita GDP of all 10 provinces. By 1990, it was in second place just behind Alberta but ahead of British Columbia. In 2005, Saskatchewan surpassed Ontario moving it to third place while by 2022 Ontario’s rank had moved to fifth place. Essentially over the course of just over half a century, Ontario went from the top province in terms of per-capita GDP to mid-ranked. Ontario is exhibiting more characteristics associated with the Atlantic provinces—Ontario received equalization for the first time in 2009—than the more dynamic western parts of the country. A province that once had hopes as high as the tallest tree, now is lucky to aspire to economic heights akin to a lilac bush.

What has happened to Ontario is more than a re-equilibration of the federation as resource rich provinces developed or the effects of adjustment to a more competitive free trade world in the wake of the FTA and NAFTA. Simply put, Ontario has experienced a productivity decline rooted in a failure to boost business investment. While Ontario is a mineral and resource rich province, it has been unable to bring resource projects online—the Ring of Fire a case in point. This has been accompanied by a governmental and business culture focused more on process and regulation than on trying to get things done and a cultural shift to gaining wealth through supply restraint and asset appreciation rather than hard work.

Nowhere is this more evident than in housing investment where population growth has outstripped additions to housing stock. The regulatory framework towards getting projects approved, permitted and built is generally a labyrinth. Large amounts of both suburban and northern land were environmentally sequestered from development without steps to ensure density development creating artificial scarcity particularly in the Greater Toronto Sarea (GTA). The effects on new supply were worsened by the fact that new housing began to be treated as an investment by the public and a revenue source by governments given the plethora of tiny investor driven condo buildings and the development charges accounting for a large proportion of the price of new housing.

While there are signs that the Ontario government is finally trying to overcome these past missteps, it’s an uphill struggle given the continual grasping at quick fixes designed to promote rapid economic growth. The passage of Bill 5 gives the Ontario government the powers to establish special economic zones to speed up mining and other development projects. One suspects the goal is to speed up development in the critical mineral rich Ring of Fire area which has been on the cusp of development for decades but has yet to really go anywhere. Yet it may be too little too late as critical minerals are considered crucial for electric vehicle production but the demand appears to be slowing.

The Ontario government does not have a coherent economic strategy designed to boost long term productivity and investment but rather is hitching its wagon to quick fix large scale investment projects and the attraction of federal investment dollars in the face of President Trump’s economic and commercial assaults on the Canadian economy. Among the nation building projects that the Ford government would like federal support for are a tunnelled expressway under Highway 401, all season road access to the critical minerals of the Ring of Fire, new nuclear generation projects, and a new deep sea port on James Bay.

Ontario is also supporting the idea of an east-west pipeline made with domestically produced steel that would connect to a not-yet-built port of James Bay as well as a new rail line from the mineral rich Ring of Fire to mineral processing facilities in Western Canada. Strangely enough, Ontario has not put forward the enhancement of the vital east-west Canadian highway link passing through its north as a major nation-building project which is a curious oversight, instead leaving it up to municipalities to advocate.

In many respects, this aspirational mega project vision of economic development for Ontario is a serious case of déjà vu as many of these projects resemble a wish list from the 1960s and 1970s. Even developing deep-water ports on James Bay is a concept with a history stretching back to the 19th century. Some of these projects—such as new pipelines—are tied to resource development and are welcome given Canada’s comparative advantage in resources but a return to simple hewers of wood and drawers of water is also not where we should be going.

How does Ontario invest in 21st-century resource extraction in a manner that boosts high technology and create backward linkages into our tech and AI industries? How can Ontario break through the regulatory morass slowing the construction of homes, new resource projects and economic activity in general—regulations that in total have been estimated at 386,000 requirements? What will Ontario do to create tax incentives for business investment and individual labour supply, given that highest marginal personal income tax rates are close to 54 per cent?

Getting on the quick fix mega-project bandwagon is easy. Putting in place the environment that might help some of these projects succeed is not.

 

Municipal Employment in Ontario's North

 

Municipal public finances are always of interest to the average city resident given that municipalities are the level of government closest to the public providing important and much needed services.  At the same time, municipal ratepayers are sensitive to the taxation of their property and are always interested in indicators that shed light on efficient provision of municipal services.  In northern Ontario, the concerns are amplified by generally weaker property tax bases and a greater reliance on both residential taxation as well as borrowing in order to get things done.

One important indicator is municipal employment given that wages and salaries often account for two thirds or more of city budgets.  In the case of Ontario, data is readily available from the Financial Information Returns of the Ministry of Municipal Affairs.  Figure 1 plots total municipal employment (FT, PT and Seasonal) for northern Ontario’s five major urban centers as reported in the FIR reports from 2001 to 2023 (only 2022 for Thunder Bay as at the time of putting this blog post together, it appears the report has not been filed yet).  

 

 

All municipalities except for North Bay have seen employment trend upwards but with some substantial differences.  Thunder Bay saw the largest increase at 44.7 percent followed by Greater Sudbury at 18.2 percent, Timmins at 15.8 percent, the Sault at 14.1 percent and finally North Bay at only 0.4 percent.  As well, of these five cities, Thunder Bay has the largest municipal workforce clocking in at 3,404 in 2022 compared to (2023 numbers) 2,647 for Greater Sudbury, 1501 for The Sault, 827 for North Bay and 957 for Timmins.

 

 

Of course, the total numbers can be misleading given that these cities vary in population size, so Figure 2 calculates the total number of municipal employees per 10,000 population and again plots them for the 2001 to 2023 period.  Here the numbers partially parallel Figure 1 given that Thunder Bay even after adjusting for population has usually had the most municipal employees per 10,000 population.  At the end of the time-period, Thunder Bay had 313 municipal employees for every 10,000-population compared to 158 for Greater Sudbury, 191 for the Sault, 157 for North Bay and 233 for Timmins.  Finally, Figure 3 plots the percent growth in municipal employees per 10,000 population since 2001.  Here, Thunder Bay again tops the list at 49.4 percent growth followed by Timmins at 24.7 percent, Sudbury at 24.0 percent, the Sault at 13.4 percent and North Bay at 2.6 percent.  

 

So, the numbers pretty much speak for themselves.  Of course, one might argue that some cities have much larger numbers of municipal employees than others because they provide more services or have chosen to structure the delivery of services in a manner that best meets the needs of their ratepayers and that requires more staff.  On the other hand, municipal politicians at budget time often lament that their hands are tied by provincial legislation that pretty much mandates everything that they do and as a result all they can do is pass the costs down to ratepayers.  The question that arises in that case is why such widely varying numbers of employees if everyone is providing similar services because of provincial mandates?  Of course, the answer is probably more complicated than this simple analysis allows for but one wonders what it is.

Housing the Homeless: Thunder Bay Edition

 

Thunder Bay’s ongoing decision-making process regarding the location of a tiny homes village to house the homeless took yet another turn this week with the final site selected – again – but not the 114 Miles Street East site.  It is now  the Hillyard site off Central Avenue in the intercity area adjacent to the off leash dog park.  Council has spoken but this has become a process of musical sites.  The site selection process has moved across several other tries at establishing a tiny homes village first on Miles Street (which is separate from another project by Alpha Court), then in Intercity, and then on Cumberland Street, then the Kam River Heritage site, then back to Miles Street and now the Hillyard site.  

In a 7-6 decision, this is the “final” choice “and will not need to come back to council. Unless staff discover barriers in the process of developing the site, which Collin said could include significant unanticipated objections from the public, the shelter village will be built at that location.” Needless to say, this is probably not over yet as one suspects that a treed area that contains a walking trail and off leash dog park using by local dwellers off Beverly Street and that is remote from the services the homeless are supposed to be able to access will be costly to develop. The area does not appear to have immediately accessible water, electricity or transit.  This will take time and given the other tiny homes project in the south core is being delayed, encampments will be around for quite some time. 

A couple of things come to mind about this process.  First, it is obvious that while everyone maintains that they wants to solve homelessness in Thunder Bay, no one wants a highly visible tiny homes shelter complex next to them.  When tucking it away on the Kam River Park did not work out, hiding it in the industrial/commercial urban wasteland that is intercity seems acceptable to many – for now. Whether or not it can actually work is a challenge for future decision making. We obviously do not want a future without challenges for our local councillors.

Second, when opposing these types of projects, it helps to have a strong neighborhood association or BIA (Business Improvement Area) to advocate for you.  While the traditional urban core areas such as Fort William, Port Arthur or Westfort, have BIAs, the intercity industrial/commercial nexus does not.  After all, they have never needed organized lobbying given that they were the central and natural economic hub in the wake of amalgamation.  I expect they will be organizing very soon. The business owners in the area were likely not consulted and one suspects that the assorted business interests in the area are not going to be amused by the additional security measures they will need to take to secure their grounds from assorted urban foragers in an area already prone to break-ins and trespassing.

In the end, even if these tiny homes are built – given their location away from services - one suspects take-up will be limited and encampments in their current locations will persist and even grow given the state of the expensive rental housing market in Thunder Bay.  There is actually not a shortage of housing in Thunder Bay given the numerous projects that have been springing up but a shortage of affordable housing.  Rents from one-bedroom apartments in these new builds which have no doubt received numerous incentive payments from government to build are in the $2000 a month range.

The ultimate solution here is not tiny homes but a program of social housing accompanied with more direct take up measures.  After all, once social housing is built and people have a place to go, it will be difficult to remain at large camping in public areas.  As outlined in a previous blog post: “Given the private sector does not appear to be either capable or willing to provide new build affordable housing and given the amount of money that is being spent simply for tiny homes, there can be a public sector role in longer term housing solutions.  There needs to be more social housing – administered by the District of Thunder Bay Social Services Administration Board (DSSAB) and funded by the City of Thunder Bay, the Provincial and the Federal governments with local groups (such as Alpha Court as well as Indigenous organizations) in partnership.  The partnership approach is key and has been noted by others.  Small apartment style buildings providing social housing and geared to income units need to be built in multiple locations throughout the city with city owned and other public land in the downtown cores and city being possible locations.” 

You are looking at 3-4 storey buildings with small apartment style units and the ground floor housing social support services and security. Such housing spread out across assorted urban core areas close to services will also blend in better with surroundings. Tiny homes are not a solution that appears palatable to people in Thunder Bay.  Social housing is the way to go even if probably more expensive.  In the absence of social housing, the only other approach would be for the city to use the funds it was planning for tiny homes to simply rent apartments for the homeless in existing buildings. Good luck with that.

 

The Canada-U.S. Trade War: Why No Recession Yet?

Despite the continual onslaught of announced American tariffs and what one would expect would be a major slowing down of our economy, Statistics Canada reports the June employment numbers have exhibited a surprising resilience. In turns out employment increased by 83,000 (+0.4%) in June and the employment rate rose by 0.1 percentage points to 60.9% while the unemployment rate fell to 6.9%.  For a country that is apparently undergoing the hardship of the Trump-Led War on Trade, this is not exactly an economic apocalypse.

This has of course already been noted by other economic observers such as RBC economics which has attributed the resiliency to “the USMCA, which shielded Canada from some of the harshest tariff measures—ultimately making it the least affected U.S. trade partner rather than one of the most, as was originally feared.”  Despite announcement of double-digit tariff rates, the effective tariff rate on Canadian goods prior to all of the tariff chaos was 2.5 percent and is now at 4.6 percent.  While not ideal, it is not the end of the world for Canadian exports to the United States.

The other thing that has been going on and is perhaps contributing to the increased resilience of the Canadian economy despite hits to sectors like aluminum and vehicle manufacturing is that Canadians themselves have been retaliating to U.S. economic actions in a pretty coherent self-organizing fashion.  Without any official central direction, Canadians have been more likely to shop and travel domestically and reorient their spending away from the United States and into Canada. 

For example, take travel to the United States. As noted recently by Statistics Canada “While Canadian-resident return trips from overseas countries increased 7.3% from June 2024 to 876,800 in June 2025, Canadian-resident return trips by air from the United States dropped 22.1% to 363,900.” As well, “in June 2025, the number of Canadian-resident return trips by automobile from the United States totalled 1.3 million, a steep decline (-33.1%) from the same month in 2024 … June 2025 marked the sixth consecutive month of year-over-year declines.” This is a major reorientation of travel expenditure away from the United States and back into Canada.  Moreover, there is apparently an uptick in European visitors who are choosing Canada over the U.S.

And then there is the matter of domestic consumer spending away from U.S. products which American visitors to Canada have noted even if the wide swath of the American public is oblivious to this type of shift.  Again, in a pretty much self-organizing fashion, many Canadians are making choices to not buy American when they can, which is a difficult activity given the plethora of American products in our stores after decades of intertwined economies.  As noted in the New York Times “A recent Ipsos poll found that three-quarters of Canadians surveyed said they intend to forgo travel to the United States, while 72 percent said they will avoid buying U.S.-made goods. American brands have even jumped on the bandwagon, with companies like McDonald’s stressing their Canadian ingredients.”

The danger here  to United States is that even if and when relations between the two countries go back to some semblance of “normalcy”, a disruption in patterns of behaviour is likely to have some long-term effects.  For example, many Canadians have traditionally equated travel with trips to the United States because it is an interesting place to visit and convenient to access relative to even their own country.  Now, that they have been given the opportunity to try something different, some of that change will remain afterwards.  Combined with attempts underway to shift trade patterns away from the U.S. not only in Canada but the rest of the world, some of these shifts are going to be permanent.

In the interim, spending more Canadian dollars domestically rather than on American imports of goods and services (which includes travel) means that our marginal propensity to import from the United States is falling and the marginal propensity to consume domestically is rising. Remember your simple first year economics macro model of income determination and the expenditure  multiplier with taxes and trade?

Y = A[1/(1-z)]

Where z = MPC(1-t)-m and with Y as national income or GDP, A as autonomous expenditure (exogenous consumption, investment and government spending and including exports), MPC as the marginal propensity to consume, t as the tax rate and m as the marginal propensity to import.  Using this, we can construct a simple example to show what happens when the MPC goes up and m goes down.

According to my ChatGPT query, Canada’s nominal GDP is currently at about 3 trillion dollars. It suggested a marginal propensity to consume of 0.8 is what the Bank of Canada often uses in its models and that a marginal propensity to import of 0.3 is reasonable. As for the tax rate, based on total tax revenue for all three levels of government to GDP, a rate of 0.35 is reasonable.  Plugging these numbers into the formula with a GDP of 3 trillion dollars, you get an expenditure multiplier of 1.28 and autonomous expenditure of 2.34 trillion dollars.

Suppose that the propensity to import goes from 0.3 to 0.25 while the marginal propensity to consume domestically goes up to 0.85. The value of the multiplier goes up to 1.43 and given the autonomous spending of 2.34 trillion, GDP now rises to 3.36 trillion dollars – an increase in GDP of over 11 percent.  Naturally, rising economic output should  be accompanied with a fall in the unemployment rate. It should also be noted that our exports to the United States (which is in the autonomous spending component) have been taking a hit so this would somewhat counter any rise in GDP from the effects of increased domestic spending.

My point is that lowering our marginal propensity to import and redirecting it towards consumption of domestic items is likely going to have an effect that at least partially counters the drop in our exports and therefore helps stabilize the Canadian economy during the impact of the tariff and trade dispute with the United States.  The extent to which this may or may not be happening is of course an empirical question but the evidence to date suggests that Canada’s economy has been more resilient in the face of tariffs than expected meaning that there may indeed be such an effect underway. The clearest evidence is that tariff war or not, there is no recession yet.

Even more important, this resilience is not the result of direct government actions, but a result built on the responses of individual Canadians.  It really is the most effective response of all.

 

Long-Term Municipal Debt in the Northern Ontario Big Five

 

Well, I have been reacquainting myself with municipal debt in Ontario over the last little while culminating in this short piece for the Fraser Institute and a discussion with Jonathan Pinto’s Up North focusing on northern Ontario and Sudbury in particular. There is also this interesting item regarding Farquier-Strickland which suggests that some smaller and more rural Ontario municipal governments are under quite a bit of stress and that large debt loads can have an impact on the long term financial sustainability of municipal finances.  In any event, municipalities going bankrupt in Ontario is something out of the 1930s and most of the current regulations governing municipal finances were a response to the financial turmoil of the Great Depression. 

It turns out that during the Great Depression: “By 1935, 20 percent of Ontario municipal debt was in default (Hillhouse 1936). During the early 1930s, more than 40 Ontario municipalities and school boards defaulted on their obligations.” [Cote and Fenn, 2014]. It is this historical context that haunts some of us as municipalities take on debt even though current debt burdens are well within the debt service requirements of provincial regulation in Ontario and for the most part (Farquier-Strickland excepted I suppose) Ontario municipalities have built up substantial reserves. 

Nevertheless, it is worth monitoring municipal debt levels and the accompanying figure presents the total long-term debt of the big five northern Ontario municipalities from 2000 to 2023 with data obtained from the multi-year reports of the Ontario government’s municipal Financial Information Review.  In 2000, the total debt burden of these five municipalities was relatively closely clustered with Greater Sudbury at $13.3 million, Thunder Bay at $45 million. The Sault and North Bay at $26 million respectively and Timmins close to zero. Things have progressed since then, though for the longest time it was Thunder Bay that was the long-term municipal debt outlier zooming ahead of the others such that by 2008 it peaked at $230 million before coming down somewhat.  Nevertheless, until 2019 it still had the largest total debt of any of the northern Ontario big five.

 

 

Starting in 2019, Greater Sudbury began to ramp up its municipal debt– after a more modest ramping up from 2014 to 2019 – and from 2019 to 2020 went from $70 million to $262 million.  By 2023 it had reached $325 million and is apparently poised by 2027 to reach $600 million. As of 2023, the northern Ontario big five collectively had nearly $700 million in Ontario debt.  With Sudbury’s ramping up to $600 million along with other anticipated expenditures in these other major northern Ontario cities, the total should surpass $1 billion by 2027.  Debt service costs on this debt in the case of Sudbury will likely double from the current 3-4 percent of total own source revenue but remain well within the provincial guideline of no more than 25 percent. Still, all other things given, more money for debt service means less money for current programs.  It is a trade-off that needs to be considered.