Canada: Economic Outlook for 2026

 

It is that time of the year and every good economist should offer their thoughts for the coming year’s economic performance.  However, forecasting the outlook for Canada’s economy in 2026 is ultimately an exercise in caution given the large number of domestic and international economic moving parts.  The trade and tariff situation between Canada and the United States including the future of CUSMA is an important variable as is the large number of proposed infrastructure and nation building projects and increased defence spending all which are sources of stimulus.  Then there are the efforts at export diversification and the role of prices for Canadian resource commodities. At the same time inflation and economic uncertainty may dampen consumer confidence and spending along with the headwinds of flat home construction and population growth which have been major drivers at least in terms of overall though not per capita economic growth.

A worst-case scenario would see CUSMA falling apart and a new set of higher tariffs shocking the Canadian economy and prompting capital outflow.  New tariffs would further depress exports.  If planned national infrastructure projects are bogged down, then that source of stimulus would not be there.  The economy would likely enter a recession with the loss of several hundred thousand jobs and the unemployment rate rising to the 8-9 percent range though inflation would likely moderate to below the 2 percent target.  On the plus side, lower inflation would result in downward movement of the Bank of Canada Overnight Rate to below 2 percent. 

Real GDP growth in this worst-case scenario would be negative but hopefully not catastrophic given the large amount of fiscal stabilization government spending is already injecting into the economy and the self-directed efforts by more Canadians to spend and travel domestically.  However, the Canadian political situation could be a factor in further making a worst-scenario case worse if the minority government falls plunging the country into the uncertainty of a federal election and both Alberta and Quebec announce they are going to hold referendums on separation leading to additional outflows of capital and investment.

However, there are reasons to be optimistic that 2026 will be at least as good as 2025 if not better.  Indeed, the recent update of GDP growth numbers by Statistics Canada suggests the Canadian economy has more steam than one might expect.   In the face of trade disruption and uncertainty, Canada’s economy in 2025 has been more resilient than one initially might have thought. High government spending for the time being is already injecting stimulus into the economy and the self-directed efforts by more Canadians to spend and travel domestically has been its own domestic stimulus program.  In the end, while there has been an impact of U.S. tariffs on specific Canadian sectors such as autos, steel and aluminum, it remains that most Canadian trade with the United States that is under CUSMA remains tariff free.

Going forward, despite President Trump’s rhetoric, the United States does need Canadian exports and there is eventually going to be some type of trade agreement that will ensure reasonable access to the American market.  If all goes well in terms of resolving trade issues with the United States, there is no major international crisis that disrupts trade, there is a start on one or two major infrastructure projects, some stimulus from defence spending, continued export diversification and commodity prices strengthen, then one might even see robust real GDP growth in the 2-3 percent range with the unemployment rate falling to the 5-6 percent range as hundreds of thousands of new jobs are added to the economy.   Indeed, faster than expected growth may put inflation well above the Bank of Canada target range resulting in higher interest rates and even a higher exchange rate relative to the U.S. dollar.

So, economic outcomes in 2026 are uncertain but the evidence suggests that when push comes to shove, the U.S. will have to negotiate some type of arrangement with Canada and Mexico if it does not want to harm its own economic welfare.  Even a cross between the best- and worst-case scenarios outlined here would be a reasonable economic outcome in terms of growth and employment.   I think guarded economic optimism is a good way to sail into the New Year. 

 

 

What Is Thunder Bay's Population?

 

During the last Thunder Bay City Council Meeting, the discussion over the city’s new Smart Growth Plan included a few remarks by the mayor that the city was growing and that according to conversations that he has had, it is probably around 150,000.  Of course, while it cannot be denied that Thunder Bay has seen its population grow over the last few years based on even anecdotal observation, the 150,000 number is vastly at odds with any estimate provided by Statistics Canada or even the City itself in its annual submissions of municipal data to the Ontario Government via the Financial Information Return (FIR). This type of mixed messaging and confusion on what Thunder Bay’s population is, including the usual casting of doubt on Statistics Canada, does not do anyone any favours.  This becomes even more problematic given that Thunder Bay is engaged in long-range financial planning that also presents population and household numbers. 

Thunder Bay will soon be dealing with a Long-Range Financial Plan for the 2026 to 2035 period, and the current draft presents population estimates (Plan starts at page 32 of December 9th Agenda for Finance and Administration Standing Committee) taking the city from 112,330 in 2020 to 117,003 in 2025.  Over the same period, the same draft has the number of households in Thunder Bay growing from 47,180 to 48,405.   In other words, the City of Thunder Bay says it has added 1,225 households since 2020 and 4,673 people.  However, it should be noted that average household size in Thunder Bay is approximately 2.2 people so the additional households should probably only be associated with only an additional 2,695 people.  Or perhaps it could be that our current population increase is also being accompanied by an increase in household size.  In addition, the household number in the draft plan is also out of whack with the household number and population in the finally submitted Thunder Bay FIR report to the provincial government for 2024 which says Thunder Bay has 50,995 households and a population of 108,843.

This range of estimates – none of which incidentally approach 150,000 - begs the question as to what then the population of Thunder Bay is?  Part of the issue is that there is a distinction between the population of Thunder Bay as contained within the city limits – the City of Thunder Bay – and the population of the immediate surrounding area as defined by Statistics Canada as the Census Metropolitan Area (CMA).  The accompanying map shows that the city itself is contained with a much larger CMA which in turn is within an even larger District which according to Statistics Canada in 2024 had a population estimated at 157,293.   Perhaps this the source of so much confusion among our elected officials in that they conflate the population of the district (which essentially stretches from Fort Frances to Wawa) with the population of the city itself which is anywhere from 108,843 to 117,003 or perhaps even the CMA at 133,063.  That Thunder Bay is a service centre for a regional population of 157,293 that accesses its government, health, retail and education services is a reasonable statement but saying that our city itself is swarming with 150,000 people is not.

 

 

The accompanying figure plots three population series: the CMA and City populations from Statistics Canada and the City population according to the annual FIR reports - which I again must note, are filed by the City of Thunder with the provincial government.  For the CMA, the StatsCan numbers show a decline from 2001 to 2011 from 126,696 to 124,926 followed by a flat population that starts to increase after 2016 and in 2024 is estimated at 133,063.  For the city itself, the Statistics Canada numbers show a pattern like the CMA but the numbers are larger than the numbers the city itself seems to be using in its annual FIR reports.  The City of Thunder Bay’s population according to this series declines from, 113,298 in 2001 to 110,861 in 2016 and then starts to grow and in 2024 was estimated at 117,100.  According to the StatsCan estimates, between 2016 and 2024, the Thunder Bay CMA grew 6.6 percent and the city itself 5.6 percent.  However, the FIR numbers say the Thunder Bay had a population of 115,419 in 2001 which shrank to 107,909 in 2016 and has since grown an anemic 0.9 percent to 108,843.

 

 

If the city is making the case that its population numbers are underestimates that affect the grants it receives from the federal and provincial governments, a key part of the problem is that the city itself seems to be submitting numbers in reports that are much lower than the StatsCan estimates.  On the other hand, the provincial government probably has a good handle on how many people live in the city of Thunder Bay versus the surrounding area based on Driver’s License and OHIP usuage data and does believe the population of the city itself is closer to 108,000 with a large percentage of the CMA population outside the city. Indeed, based on the FIR estimate, 20 percent of the CMA population lives outside the city limits and is probably a factor in all the traffic being generated as they come in and out of town accessing city services.

Of course, rather than blame someone else, the solution here in part is that the city of Thunder Bay needs to get its act together in terms of getting a handle on its own numbers.  For a city with 3,207 employees (2,165 full time, 995 part time and 47 seasonal), Thunder Bay seems unwilling or unable to hire a couple of graduate school level trained economists and statisticians who could provide a more disciplined and consistent approach to compiling and analyzing its economic and population data to make its case with both higher tiers of government and its own municipal ratepayers.  Instead, we are left with plans, pronouncements and submissions that have conflicting data and population estimates that seem to emerge out of thin air.

Measuring the Trump Travel Effect

 

Travel by Canadians to the United States has undergone a significant decline in 2025 while other international travel both to and from Canada is up.  According to recent numbers released by Statistics Canada, when it comes to air travel, “In October 2025, 1.3 million passengers were screened for international flights (outside the United States), up sharply compared with one year earlier (+12.0%). Moreover, international passenger traffic was significantly higher in October 2025 (+20.4%) than the pre-pandemic level posted in October 2019. Conversely, transborder passenger traffic (to the United States) in October 2025 decreased year over year for the ninth consecutive month, down 8.9% to 1.2 million, and was 5.7% below the October 2019 level.” Land traffic is also down especially when it comes to the annual snow bird migration to warmer parts of the United States and is expected to continue falling. Moreover, the decline has received substantial international media attention given that it represents a remarkable reversal in the perceived travel relationship between the two countries.

The question that inevitably arises is how much of this drop in Canadian travel to the United States is the result of a deliberate boycott and shift in preferences as a result of the words and actions of U.S. President Donald Trump and how much is due to the usual determinants of cross border travel which include variables like the Canada-US exchange rate. Past surges and declines – the most famous being the late 1980s/early 1990s cross border shopping phase were strongly affected by changes in the exchange rate.  However, after the travel peak reached in the early 1990s, one can also argue that there has been a longer-term decline in total trips by Canadians to the United States.

 

 

Figure 1 plots monthly data stretching back all the way to 1972 on the total trips by Canadians returning from the United States (Data Source: Statistics Canada v1296956586).  Also plotted on the chart is the monthly exchange rate in terms of US dollars per Canadian dollar with a rise indicating an appreciation of the Canadian currency relative to the US dollar and a decline a depreciation. In 1972, the Canadian dollar was near parity with the US dollar and began a depreciation that by the mid 1980s had brought about a 75 cent US Canadian dollar. There then began a rebound that saw the dollar peak at just under 90 cents US that was also accompanied by the massive cross border shopping surge from about 1987 to 1993.  Incidentally, this also coincided with the introduction of the much-despised GST in 1991.  In general, there do seem to be periods of increase in travel during periods of appreciation and decline during periods of depreciation.  However, the Canadian dollar approached parity again briefly circa 2010 and while travel by Canadians to the United States increased, it did not approach the levels of the early 1990s.

A more useful approach to try and sort out the effects of the exchange rate from those of the presence of the US President would be a regression approach. The accompanying table presents results from a quick regression of the log of the monthly level of all return trips from the United States by Canadians from 1972 to 2025 on a set of variables (with STATA as the estimation package).  First, there are quarterly dummies with the first quarter omitted.  Traditionally, trips peak in the summer months and are lower in the winter months particularly for automobile trips, so the months of the winter quarter are omitted. The 12 months in 1991 that coincide with the onset of the federal Goods and Services Tax (GST) are included as a variable.  The exchange rate defined as US dollars per Canadian dollar is included (Source: FRED CCUSSP01CAM650N and Bank of Canada).  One expects that as it goes up (an appreciation), the level of trips should also be greater.

I then include several additional qualitative variables that try to capture shocks that may have affected travel in the 21^st century including a dummy for the September to December period in 2001 that was marked by the 9/11 terror attacks in New York.  The Covid-19 pandemic variable takes on a value of 1 for the months from April 2020 to November 2021 and of course zero otherwise.  President Trump’s first term from January 2017 to January 2021 gets its own dummy variable and of course so does his second term starting in January of 2025.  

 

 

The results? Well, oddly enough, the exchange rate does not appear to be a statistically significant determinant of Canadians travelling to the United States when the span of monthly data from 1972 to 2025 is considered.  This does seem a bit odd though I should add that if the regression is only run from the 1972 to 2000 period (on the seasonal dummies and exchange rate and omitting all the 21^st century shocks) then one gets the expected relationship.  This suggests that Canadians over time may have perhaps gotten used to a 70-cent dollar and their behaviour became more inelastic with respect to its fluctuations when travelling to the US. 

More interesting are the other variables.  The onset of the GST was associated with a 64 percent surge in monthly trips all other things given.  The months associated with the 9/11 Terror attack saw a 36 percent drop.  The COVID-19 pandemic was associated with a collapse in trips in the order of 230 percent, all other things given.  The first Trump term which did not come with as belligerent a tone towards Canada as the second term was not statistically significant in affecting Canada-US travel.  On the other hand, President Trump’s second term to date after controlling for the exchange rate and seasonality is associated with a statistically significant 34 percent drop in total monthly trips by Canadians to the United States.

Of course, this is a very simple specification, and one might want to add things like income and gasoline prices and perhaps even a time trend but as it stands, it explains about 70 percent of the variation in the monthly level of total Canadian trips returning from the United States.

Ontario Government Health Spending Trends: It’s Complicated

 

The 2025 CIHI National Health Expenditure trends are out with the key national findings being that total health care spending in Canada is expected to reach $399 billion in 2025, or $9,626 per Canadian with that expenditure representing 12.7% of Canada’s gross domestic product (GDP) in 2025. Total health care spending in Canada is expected to grow by 4.2% in 2025 following a 6.1% increase in 2024 and 7.4% in 2023.  I will be dealing with the national numbers elsewhere but my interest in this post is Ontario provincial government health spending which for 2025 is estimated at $93 billion up 3.3 percent from the year previous and not as large an increase as 2024 at 6.3 percent.  While the provincial government makes much of its spending increases being at historic levels, a 3.3 percent increase does not keep up with inflation and population.

Figure 1 plots real per capita Ontario government health spending in 2025 dollars (deflated with the CIHI’s Total Health Care Implicit Price Index) along with the spending to GDP ratio for the 1975 to 2025 period and while the overall trend is upwards, the period since the pandemic is particularly noteworthy.  After the pandemic surge in real per capita provincial government health spending of 8.5 percent in 2020 and 4.9 percent in 2021, each subsequent year has seen negative growth with 2025 declining just over one-fifth of one percent. However, at $5,750 per capita ($2025), spending in 2025 remains nearly 10 percent above the 2019 amount of $5,233 ($2025) implying average spending growth since 2019 of approximately 1.7 percent annually.

 

 

What is more interesting in Figure 1 is that while real per capita provincial government health spending has been trending down since 2021, its share of provincial GDP has been going up.  How can that be?  As anemic as provincial health spending growth has been relative to inflation and population, it turns out Ontario’s economic growth has been even more anemic.  This is not the greatest news.

Figure 2 illustrates that despite slightly negative real per capita growth in provincial government health spending; there is considerable variation across categories that may signal what the government’s priorities are.  Real per capita hospital spending declined 3.5 percent in 2024 but is expected to rise 0.5 percent in 2025.  After a 5.3 percent increase in 2024, real per capita other institutions (i.e., long term care) will decline one fifth of one percent with a similar pattern for physicians at 5.1 percent in 2024 but -1.4 percent for 2025.  Other professional (e.g. optometrists) drugs, public health and administration are being hit with consecutive declines in real per capita spending.  Other health spending including home and community care is seeing an increase in 2025 while real per capita capital spending will rise nearly 20 percent in 2025.  While renewing capital infrastructure in provincial government health spending is welcome, all that shiny new equipment and buildings will need hospital and physician services as well as drug spending down the road.

 

 

And if you are interested in something different, Figures 3 and 4 present provincial government health spending by age categories to look at what an aging population has been doing to provincial government health spending.   Figure 3 plots per capita provincial (nominal dollars) government spending by age group for four years spanning the 2000 to 2023 period and they show the typical expected u-shaped cost curve with spending highest at the very early ages of birth to about 4 years, then rising gradually and growing more dramatically after the late 50s.  In 2023, the per capita spending for a person under 1 year of age averaged $17,591 dollars, for a 25–29-year-old it was $2,594, for a 55–59-year-old it was $5,037 and for an 85–89-year-old it was $29,415.  Indeed, health care costs can rise dramatically over the later years of the life cycle.

 

 

However, the astute gentle reader will note that the profiles by age have been shifting upward over time.  That is, spending has been going up for all the age categories and figure 4 plots the percent changes in per capita provincial government spending from 2000 to 2023 by age category. While spending per capita is highest for the elderly, growth over time has been the greatest in much younger demographics.  The greatest growth was in the age 10-14 category at 207 percent, followed by the below 1-year category at 204 percent, then 194 percent for those aged 5-9, 172 percent for those aged 15-19 and 169 percent for those aged 1-4 years.  After that come 35–39-year-olds at 153 percent, 40–44-year-olds at 151 percent, and 45–49-year-olds at 145 percent.

 

 

The smallest increases over the 2000 to 2023 period?  At the bottom are 80–84-year-olds at 90 percent, next highest are 75–79-year-olds at 94 percent and then 70–74-year-olds at 96 percent.  Health spending does rise with age, and much more is spent per capita on the elderly than the young.  However, in percentage terms, the greatest increases have been in the population aged 19 years and younger followed by the population aged 30 to 64 and 90 plus.  Lowest increases are in the 20-29 age groups and the 70-89 age groups.  This is an interesting and somewhat counter intuitive results given the conventional wisdom is that health care costs are being driven largely by an aging population.  It would appear the drivers of provincial government health care spending are more complicated than one might imagine.

Note: Livio Di Matteo is a member of the CIHI NHEX Advisory Panel. 

How Thunder Bay Wastes Both Taxpayer Money and Urban Core Development Opportunities

 

The City of Thunder Bay is engaged in budget season and striving to keep its total tax levy increase to 2.6 percent.  As part of its new two-part budgeting approach, the capital budget two-year plan is now underway with initiatives including $34 million in road improvements in 2026 with another $26 million in 2027 as well as initiatives in waste diversion and transit. The proposed capital budget for 2026 amounts to $160 million while 2027 is going to be lower at $148 million. January will see the operating budget and with the 2025 total levy at $241.7 million, a 2.6 percent increase could bring the levy up to $248 million.

The proposed 2026 tax levy increase is indeed modest by recent historical standards as the accompanying figure shows as  the 2025 increase was 5.2 percent and 2025 was 4.5.  However, the proposed 2.6 increase is also below the average increase over the 2015 to 2025 period which comes in at 3.4 percent.  Of course, increases need to be balanced against what the needs are and keeping rates low for their own sake is not necessarily the ultimate policy objective.  Rather, the aim should be to provide the best public services desired at the lowest costs possible which implies efficient and not wasteful spending, which brings me to the main event.

 

 

Whether the City of Thunder Bay will come in with a tax levy increase of 2.6 percent or not remains to be seen.  However, what is more important is what often seems to be a lack of strategic direction with how Thunder Bay seems to allocate its spending and projects by doing them in a manner that often works at cross purposes.  A case in point is the recent moves to build density housing in the City of Thunder Bay to address the housing shortage and provide affordable housing. 

The City of Thunder Bay is preparing to sell municipally owned land to developers to build density housing.  The pieces of land are:  300 Tokio Street, 144 Fanshaw Street, 791 Arundel Street, and the land between 211-223 Tupper Street and 224 Camelot Street.  Despite the oft stated claim to want to provide affordable housing, the City has apparently rejected a developer’s affordable housing bid for the land that included transitional housing because it was not dense enough. The City of Thunder Bay wishes for: 400 units on Tokio Street, 200 on Fanshaw Street, 600 on Arundel Street, and 185 on Tupper/Camelot streets for a total of about 1,385 units.

Now, Thunder Bay municipal politicians are very good at using the right words and as one councillor was quoted:

<<"There is no question that we are in a housing crisis, not only in the city of Thunder Bay, across the province and across the nation," Foulds said. "We're also in a climate crisis."

"In order to deal with those two huge issues, we do need to have a focus on intensification and increasing the density of our cities, building on existing infrastructure. With that said, we do need to make sure that the infrastructure can handle it. We also must make sure that the developments are appropriate and safe.">>

The problem here is that Thunder Bay’s idea of increasing density in a climate crisis apparently includes cutting down swaths of green space to build density development in areas often removed from where density either already exists or should be promoted.  Moreover, the constant dispersion of new development results in the new residents of these “density developments” having to rely mainly on automobile transport rather than public transit which is not convenient or timely given the dispersed nature of the city.

As noted in an earlier post:

<<Of these four proposed locations, three are essentially going to be plonked on available space – often green space – in the midst or immediately adjacent to existing residential areas.  Only one – the Camelot Street location is going to be placed near a downtown core area.  And that is the point.  To date, the large builds on Junot and Fulton have been built in or adjacent to existing lower density residential areas and often at the expense of nearby green space.  Except for Camelot – which is a good location if one is planning to build up core area density – these are all scattered willy-nilly in places where the only option is to drive somewhere to get anything done.>>

As noted in the same post, the logical place to target density developments in Thunder Bay should be the two former downtown cores areas of Port Arthur and Fort William and the corridor connecting them that runs along and immediately adjacent to Water/Fort William Road/Simpson Streets and Algoma/Memorial/May Streets.

So, how does this come back to my point about wasteful spending? Thunder Bay is constantly trying to revitalize its core areas – the former cores of Port Arthur and Fort William - with initiatives that cost millions of taxpayer dollars.  For example, the recently completed north core/Port Arthur streetscape project clocked in at about $13 million.  Currently underway is the south core/Fort William Victoria Avenue revitalization project which is going to kick in at $18.4 million.  Then there is the Simpson Street redevelopment cost from the end of Victoria Avenue to the Ogden/Dease Street area which is approaching the $8-$9-million-dollar cost. 

In total, this is almost $40 million dollars in capital spending and rather than being additionally leveraged into a denser set of core urban areas with the tens of millions of dollars in federal housing infrastructure money, it is going to be left to mainly its own devices to attract residents.  And beyond these four proposed projects, there is the proposed Central Avenue Development Lands project which while ostensibly in the “center” of the city will build over 40 acres of largely wooded area eliminating much of the green corridor that runs from Lakehead University through to the College and ultimately Chapples Park. 

Thunder Bay’s development motto is essentially “density if necessary but not necessarily urban density.”  Thunder Bay equates urban density as simply the act of putting multi-residential units on anywhere the city has surplus land rather than working with owners in existing brownfield areas to consolidate derelict and underused properties. Infill is not always the same as creating urban density.  Thunder Bay wastes taxpayer money by providing business owners in the former core areas with beautification baubles but then does not follow up with real strategic investment in those areas.  It is the type of short-term thinking that has led to the creation of a dispersed and costly to service city with an over-reliance on automobiles.  Enjoy the short-term construction benefits from all the new housing projects as the future costs to both the taxpayer in servicing costs and the environment will be substantial.

Thunder Bay Is Missing Its Chance for Strategic Urban Density

 

After decades of low growth, Thunder Bay has been experiencing a period of growth that affords it an opportunity to reshape its urban landscape.  Historically, Thunder Bay has allowed its urban footprint to expand in a low-density highly dispersed web that is more costly to service and provide efficient infrastructure such as water and sewer as well as public transit.  The recent spate of population growth as well as the availability of provincial and federal money for housing means that Thunder Bay could be making some major strides building density in its core urban areas.  This of course would complement the rather large dollar amounts that have recently been expended for urban redevelopment projects in the downtown cores such as the North Core Streetscape Project and the Victoria Avenue Revitalization.

Alas, in its haste to meet federal and provincial housing targets and obtain government money, Thunder Bay is on the verge of yet again squandering the opportunities that have presented themselves by engaging in short term decision making that will build scattered density developments that will sprout like toadstools after a summer’s rain. City officials have noted that they are only 32 percent of the way in meeting their housing targets and must build an additional 1200 units by February 2027 to meet the target of 1,755 housing units. The proposed locations for density development are at 300 Tokio Street, 144 Fanshaw Street, 791 Arundel Street, 211-223 Tupper Street and 224 Camelot Street. 

Of these four proposed locations, three are essentially going to be plonked on available space – often green space – in the midst or immediately adjacent to existing residential areas.  Only one – the Camelot Street location is going to be placed near a downtown core area.  And that is the point.  To date, the large builds on Junot and Fulton have been built in or adjacent to existing lower density residential areas and often at the expense of nearby green space.  Except for Camelot – which is a good location if one is planning to build up core area density – these are all scattered willy-nilly in places where the only option is to drive somewhere to get anything done.

Thunder Bay needs to use this opportunity for growth to be more strategic in how it does its housing if it wants to truly build density.  The density housing projects in this city should be designed to concentrate population near services and amenities, not encourage more time-consuming commuting in the long run, to meet short term funding targets. The density build locations in Thunder Bay should be the two former downtown cores areas of Port Arthur and Fort William and the corridor connecting them that runs along and immediately adjacent to Water/Fort William Road/Simpson Streets and Algoma/Memorial/May Streets.  It is up to the mayor and council to provide this type of directive to its administration because simply asking them to come up with sites for density build will generate the quickest solution rather than a methodical plan for infill.

 

What might such a density corridor look like?  A good example is rooted in the urban renewal studies of the past.  Plate 20 of the 1968 Proctor and Redfern Downtown Fort William Urban Renewal envisioned a Simpson Street with density rental housing as the accompanying figure illustrates. Many of those apartments or condos would likely have sweeping views of the lake and provide for a mix of both premium and affordable units with room for shops, stores and offices on the street level.  Indeed, the recent redevelopment of Simpson Street's road and sewer infrastructure should have presented an opportunity for the consolidation of derelict and underused properties to build the multi-unit buildings the city seems to so desperate to ram through existing residential neighbourhoods and green space.

This opportunity is going to be short-lived and if we simply build things in an erratic short term pattern, we will have to live with the costs for decades to come.  Our municipal politicians need to actually step up and lead for a change by providing direction rather than hide behind bureaucratic processes.  This window of opportunity will not last long.

Thunder Bay Reaches Employment Peak

Thunder Bay has hit an employment milestone.  Data from the Statistics Canada October 2025 Labour Force Survey shows that for the month of October, Thunder Bay hit an employment level of 68,200 jobs.  This was an increase of 700 jobs from September 2025 and 2,100 jobs from October of 2024.  Annualized October to October, employment in Thunder Bay was up 3.2 percent.  Moreover, October 2025 was the highest monthly employment total ever going back over nearly 40 years to 1987.  The accompanying figure plots the monthly ebbs and flows of employment since 1987 (along with a 5th order polynomial smooth to illustrate trend) and while there have been other notable peak periods such as June 2003 (67,400), April 2023 (67,100) and June 2018 (66,200) it remains that 68,200 is the largest yet.  

 

There has definitely been an upswing in employment since 2015, notwithstanding the pandemic drop. Thunder Bay has seen substantial economic activity over the last couple of years particularly as a result of numerous construction projects for housing along with highway work and some major institutional projects such as the one billion dollar new correctional facility, the art gallery and most recently the start of the multiplex turf facility. Of course, whether this can be sustained over the long term is an important question and Thunder Bay's peak employment figures have largely fluctuated between 65,000 and 70,000 jobs but have never been able to break out of this corridor.  Depending on what the impact of federal and provincial infrastructure money is down the road, as well as whether the region's mining projects for critical minerals indeed come to pass. 

Nevertheless, good news for the time being 

The Road Ahead: Pictures of Federal Budget 2025

 

With Tuesday’s federal budget receding into history, the opportunity for more reflection emerges and the best way to do that is to look at some charts that consider the budget's projections going forward.  In terms of overall impressions, the mantra of this budget was simply “to spend less so we can invest more”.  After looking at the numbers, the reality is really “to spend less on some things so we can spend a lot more on some other things”.  It bills itself as a transformative budget to address a changing economic world that will build a confident, secure Canada though generational investments in infrastructure and defence and does so largely by adding significantly to the national debt through a series of large deficits. 

The expenditure trajectory is largely a continuation of what was.  However, there is a compositional shift in that spending away from spending on social infrastructure and towards physical infrastructure.  In essence, the federal budget seeks to grow the economy by investing in a lot of public infrastructure projects and national defence and then providing incentives to encourage the private sector to join in. The broad dimensions of both the spending and the outcomes are summarized in the following charts.

Figure 1 plots total federal revenues, expenditures (left axis) and the deficit (right axis) starting from 2010-11and going forward to 2029-30.  As well, each series is fitted with a linear trend.  By 2029-30, total revenue is projected at $583.3 billion and total expenditure at 639.9 billion for a deficit of $56.6 billion.  From 2025-25 to 2029-30, total revenues will grow by 14.1 percent, total expenditures will grow 16.9 percent and there will be $321,7 billion in accumulated deficits. Note the linear trends.  The deficit over the long term is growing as the gap between revenues and expenditure is rising.  

 

A lot is going to be borrowed and servicing the debt will become more expensive over time.  Figure 2 plots both the nominal value of debt charges ($mm) as well as the total expenditure share of debt charges (percent) and does so over a much longer-term perspective starting from 1966-67.  Staring in 2020-21, debt charges began to increase dramatically because of both increased debt (due to COVID) as well as rising interest rates to service the debt and trend will continue.  On the bright side while the debt charge share of total spending is also rising and is projected at 12 percent by 2029-30, it is well below the peaks attained during the 1990s when nearly one third of every dollar of federal spending went to service the debt.

 

Figure 3 also provides a long-term perspective on the net debt both in nominal dollars as well as a share of GDP.  The upward trajectory of the nominal debt after 2018-19 is quite startling with the net federal debt expected to hit 1.798 trillion dollars by 2029-30. Indeed, the period from 2024-25 to 2029-30 will see $404 billion dollars added to the net debt representing over one fifth of the total net debt accumulated in just six years.

 

Of course, all this spending is targeted at dealing with the turbulent world we live in and is being justified as the big transformative spending we need to build Canada’s economy in the face of global competition, tariffs, and the erosion of our relationship with the United States.  Ultimately, the payoff is supposed to be a robustly growing and productive economy.  The next few years however see nominal GDP pretty much close to its historical average of about 4 percent and even assuming population grows at a more historic one percent annually, real per capita GDP is not poised to take off any time soon.  

 

Figure 4 plots real per capita GDP (deflated using the CPI by the way) and its percent growth over the long term.  Notice our productivity dilemma nicely summarized by the long-term downward trend of the growth rate.  Based on nominal GDP growth as forecast in the budget, population growth at one percent annually and inflation at two percent, real per capita GDP is projected to nudge upwards going forward from 2024-25.   It is going to be a tough few years.  It is a gamble to spend all this money with the long-term success predicated on the private sector joining in.  Hopefully, it will work.

Thunder Bay, The Conference Board and Smart Growth

 

The Major City Insights for Thunder Bay by the Conference Board of Canada was released October 15^th and the report essentially summarizes the economic situation in Thunder Bay as “Local economy treads water” with the key points being as follows:

· Thunder Bay faces a tepid economic outlook featuring mixed performances from the various sectors of its economy. Ongoing work on the city’s $1.2-billion jail remains an economic bright spot, but other important sectors face a range of difficulties.

 

· Plans for at least two local lithium plants remain in play, but faltering demand for electric vehicles (EVs), which use lithium in their batteries, and the recent removal of the federal EV mandate could scupper them. The big drop in lithium prices since 2022 is a bad sign for the industry.

 

· Modest recent improvements in lumber and pulp prices spell some optimism for the long-suffering local forest products industry, although this year’s big jump in U.S. softwood lumber tariffs to a total of 35.19 per cent is a setback.

· Thunder Bay’s real GDP has largely floundered against this uninspiring backdrop. We forecast no change in 2025 following a 0.2 per cent easing in 2024, then a 0.7 per cent rise in 2023. Fractional 0.7 per cent growth is our call for 2026, followed by annual advances just above 1 per cent in 2027–29.

 

· The window of migratory opportunity might have closed for Thunder Bay due to sharply lower federal immigration targets that are limiting the number newcomers from abroad. Rising return-to-office orders from firms and governments, meanwhile, will eventually limit other Ontarians’ ability to take advantage of very affordable local housing.

Out of 24 CMAs covered in the Conference board reports,Thunder Bay ranks 24^th in terms of real GDP growth forecast for the 2026 to 2029 period.  Total employment is expected to remain flat going forward and while population for the CMA is forecast at 134,000, it will remain at that level for the foreseeable future. On the other hand, low growth is not negative growth and business owners in Thunder Bay appear to be well adjusted to a low growth environment given that the most recent survey results out of Thunder Bay Ventures find them cautiously optimistic amid economic challenges.

Needless to say, it is not the most auspicious backdrop for the unveiling of the City’s Smart Growth strategy.  What the ultimate plan to address the City’s economic future will be is interesting to say the least and community input is being solicited on the draft as well as being subject to review by assorted City Standing Committees.  Despite what seems to be some robust construction activity underway in the city in terms of residential and hotel activity, it appears that this is not sufficient to offset what the Conference Board views as “tepid” economic performance.

Indeed, while the City seeks to address growth, a lot of the emphasis to date seems to be on assessment growth and growing the property tax base which are usually not the main targets of economic growth inducing policies.  It would be like next week's federal budget making the case that moving Canada's economy forward requires more people paying more income taxes. The aim should be growing the city’s level of economic activity to increase  both real total and real per capita GDP through private and public sector investment in productive job creating activities.  The City of Thunder Bay Smart Growth plan proposes two key measures to guide growth over the next decade:

• Grow the property tax base by 3% annually

• Grow the population by 1% annually

It would appear that in the end, this is not really an economic growth plan per se but a plan to try and grow Thunder Bay’s municipal tax base that is accompanied by a lot of social and quality of life and community goals masquerading as economic targets.  Indeed, the entire approach resembles a much earlier initiative by Thunder Bay Ventures circa 2005 called Thunder Bay Fast Forward concerned with growth in the midst of the forest sector crisis which also generated sets of indicators. Nevertheless, this latest effort at growth and measurement will probably go over well given the general level of economic literacy in the community. One suspects that perhaps such an approach also works well in a city where one-third of employment is broader public sector and public sector construction projects have been key drivers for the last few years. 

Of course, growing both the economy and the municipal tax base are not mutually exclusive goals but it is odd the performance indicators for successful growth do not include real GDP (which incidentally looks somewhat flat going forward) though employment and labour force indicators as well as building permits which are correlated with overall economic growth are included.  However, as the report states, the “key performance indicators such as tax base and population growth are priority metrics”.  In other words, as long as there are more people on public sector incomes paying more property taxes, this plan will be declared a success.

In light of the Conference Board Report, one suspects the response of our civic leadership to square the Smart Growth Plan with the Conference Board report will be to remark they are measuring different things and growth is more than about just measuring economic output – the perennial apples and oranges comparison. They may even claim the Conference Board report is missing the real sources of economic growth and performance just like Statistics Canada is missing the true size of our population with their numbers.  All we can do is wish our municipal leaders good luck on this one.

 

Finances of the City: Hamilton Edition

 

Municipal budget season is underway in cities across Ontario.  Hamilton is a particularly interesting case this year given that the initial start of the 2026 budget season saw an 8.9 percent potential property tax increase presented. Hamilton’s Mayor Horwath has waded into the debate with directions to staff to hold the tax increase to 4.25 percent by finding operational efficiencies that do not involve staff cuts.  However, according to one report, nearly half of the 2026 operating budget increase is being driven by employee costs with the City of Hamilton’s head count up 12 percent since 2022 and now stands at 9,449. 

Getting a grasp on Hamilton’s current municipal finances requires more of a historical perspective.  So, what do Hamilton’s finances look like and how have they evolved? Well, that is a good question and an attempt to provide a long-term perspective on Hamilton’s municipal finances is in order. Data for Hamilton is available for 2000 to 2022 from Ontario’s Ministry of Municipal Affairs Financial Information Return. Hamilton – like quite a few other municipalities – appears to have fallen behind in filing their financial reports with the provincial government so 2023 to 2025 must rely on Hamilton municipal budgets. 

However, these budgets present financial information in a dizzying and confusing array that overwhelm the reader with detail that make the big picture difficult to see.  They are also not standardized in presentation and vary greatly in length with Budget 2023 clocking in at 51 pages, Budget 2024 at 365 pages and Budget 2025 at 434 pages.  Trying to make sense of them can be a slog even for an economist and if there is anything the provincial government should do, it is to speed up the reporting of financial information on FIR so the public can maintain a consistent grasp of the numbers when it comes to municipal finance across Ontario.

Figures 1 to 5 provide a limited overview of some of Hamilton’s key long-term municipal finance indicators.  Figure 1 plots total operating expenditure and total tax revenues for the 2000 to 2025 period.  Total tax revenue grew from $486 million in 2000 to $1244 million while total operating expenditures went from $985 million to $2,163 million.  There is of course no cause for alarm regarding the gap because tax revenues only fund a portion of operating expenditures with the rest coming from provincial and federal grants, user and licensing fees, investment income, etc.…However, as Figure 2 illustrates, the share of total expenditure accounted for by property tax revenues has grown over time with the linear trend showing an increase from an average of about 45 percent to nearly 55 percent – growth of nearly 10 percentage points.  Essentially, municipal ratepayers in Hamilton have been bearing a larger share of municipal operating expenditure over time with average tax revenue per household nearly doubling since 2000 going from $2,544 to $4,863.

 

 

Figures 3 and 4 plot the annual growth rates of total tax revenue as well as total operating expenditure and fits trend lines to the data as well as provide the average growth rate for each series over the 2001 to 2025 period. Both tax revenues and total expenditures exhibit rising growth rates from 2001 to about 2010 and then a decline in the wake of the 2008/09 economic slowdown and then an uptick in growth rates after 2019 to the present.  Over the entire 200 to 2025 period, tax revenues have grown at an average annual rate of 3.8 percent while total operating expenditures have grown at 3.3 percent.  This differential growth has been driven by the rising reliance on taxes over slower growing grants and other revenue sources.

 

 

Finally, Figure 5 looks at the evolution of the municipal headcount as well as the wage and salary cost per employee.  While the recent increases in head count may seem alarming, it turns out that the current numbers have been  higher in the past particularly in the wake of the 2001 amalgamation.  The period from 2005 to 2022 has been relatively stable in terms of municipal employment going from lows of approximately 7,300 to highs of about 8,200.  The period since 2017 has seen steady growth with employment rising from 7,502 to 9,449 at present – an increase of 26 percent.  Since 2017, the number of households in Hamilton has only grown about 12 percent while population has grown nine percent.  As well, between 2000 and 2025, the wage and salary cost (benefits not included) per municipal employee has grown from approximately $36,000 annually to nearly $113,000 in 2025 – essentially a tripling of the cost per employee.  It should be noted that while the average annual rate of increase of wages and salaries per employee in Hamilton form 2001 to 2025 was 4.9 percent, the average CPI inflation rate for Ontario over the same period was 2.3 percent.

 

 

Pulling everything together, it appears that the fiscal challenges affecting the City of Hamilton this year have been brewing for some time.  Tax revenues have been growing as a share of total operating expenditure due to slower growth of other sources of revenue.  While the average annual growth rate of total tax revenues since 2001 has averaged 3.8 percent, since 2021, the percent increases have ranged from 4.5 to 8.1 percent.  Tax revenues have been growing faster than the growth of total operating expenditure but increases in wage and salary costs per employee in particular have been rising faster than tax revenue growth, total operating expenditures, as well as the CPI inflation rate.  Whereas in 2000, employee wage and salary costs accounted for 34 percent of operating expenditures, by 2025 they accounted for nearly 50 percent. Indeed, since 2017, the average wage and salary per employee has been over $100,000 and this does not consider the costs of pensions and other benefits.

While Hamilton is not unique in facing municipal fiscal challenges, the increases of the last four years have been particularly large making this year's budget exercise especially challenging.