Canada's Wheel of History

“So in the Libyan fable it is told That once an eagle, stricken with a dart, Said, when he saw the fashion of the shaft, ‘With our own feathers, not by others’ hands, Are we now smitten.”

― Aeschylus

 

The merger of the Northwest Company of Montreal (NWC) and the Hudson Bay Company (HBC) in 1821 led to the complete absorption and end of the Montreal based fur trade.  The negotiations in London ultimately pitted the western based partners of the NWC against the eastern based Montreal agents who were apparently unaware the other was negotiating with the HBC.  In the end, the HBC negotiators were able to extract better terms as a result of the lack of unity amongst the NWC shareholders.  The tension between the western based Wintering Partners in the fur resource hinterlands and the capital raising Montreal Agents eventually proved to be the Achilles heel of the NWC. 

As noted by Harold Adams Innis, the NWC, whose operations stretched from east to west along the waterways of the Canadian Shield, was essentially the forerunner of the Canadian federation.  The east-west tensions of the fur trade have also been replicated within Confederation with the western resource-based provinces in particular tugging against capital intensive central provinces of Ontario and Quebec.  While history does not repeat, itself, the similarity of circumstances and economic forces does lead to what can best be termed repetitive patterns of issues. In the case of western Canada, much of the tension is rooted in historical grievance given that unlike Ontario and Quebec, the west did not get control of its natural resources from the federal government until 1930.  Moreover, federal resource and energy policy – in particular the National Energy Program of the early 1980s – was seen as directly counter to the economic and business interests of energy producing western provinces.

Which brings us to the present day and the current desire by some Albertans to separate from Canada.  Despite a federal government that appears quite sympathetic to Alberta’s current energy interests, Alberta is embarking on a referendum to decide whether to hold a referendum on separating from Canada. It appears that Canada will again be consumed with fate of the nation debates, dilemmas and brinksmanship.  And, depending on what happens this fall in Quebec, there is the distinct possibility that the Parti Quebecois will form the government with the prospects of yet another sovereignty referendum in that province.  Needless to say, there will again be a market for assorted Captain Canadas to come to the rescue.  When not railing against Ottawa, there is nothing Canada’s Premiers like better than embarking on heroic cross Canada tours professing their love for the country.   After all, what better way to divert constituents from their provincial problems than by their dashing Premier helping to save the country.

Canada has always been one of the most fortunate and blessed of countries possessing abundant resources, oceans on three sides to shield us from adversaries and despite recent frictions, a largely benign southern neighbour that served as an economic partner and yet was generally oblivious of our presence.  Canada developed a high material standard of living and by the measures of a dangerous world, a rather open and unique approach to international relations that allowed us to underspend on national security while moralizing and lecturing others without worry as to the consequences. We became a nation of happy Hobbits, dancing away the long summer days and celebrating our good fortune while ignoring the dark Mordorian clouds swirling about.

Taking Canada’s blessed situation for granted afforded us the luxury of consuming ourselves with questions of national existence.  It also created situations that by world standards, were somewhat comedic.  After all, what other country could have pulled off the self-absorbed 1990s drama of having a separatist as the Leader of Her Majesty’s Loyal Opposition?  On the one hand, that Canada could undergo such tensions and stresses and remain a bastion of civil order and discourse, is an achievement in itself.  On the other hand, how many times can a country continually come to the brink and then retreat?

It is now Alberta’s moment in the sovereignty sun and its Premier in typically Canadian fashion has decided that it will be a referendum if necessary but not necessarily a referendum.    The Premier of Alberta is not a separatist and notwithstanding legitimate concerns regarding equalization, resource management and energy policy, neither are the vast majority of Alberta’s people. However, the Alberta Premier is a politician and is forced to balance diverse interests and constituencies with a referendum stand that in the end will likely satisfy no one.  However, wielding the separatism spectre might be a convenient cudgel in making sure Alberta’s energy sector is in no way compromised in the upcoming CUSMA negotiations and that the federal government does not retreat from its advocacy for new pipelines.  It is however a dangerous game.  When you light a fire, you do not always get a controlled burn.

Of course, there are some Albertans who would be happy to leave the most successful federation in modern history for a future as a landlocked country joining the ranks of Kyrgyzstan, Ethiopia and Uzbekistan. To be fair, these same Albertans probably see their future more as a unitary energy powered Switzerland or Austria.  Interestingly enough, these very successful countries are actually federations rather than unitary states and also not dependent on boom bust energy products for twenty percent of GDP and government revenues, as well as seventy percent of exports.  While Alberta has the highest per capita GDP in Canada and is riding a wave of prosperity, it risks creating investment uncertainty for itself and the rest of the country.  As economist Trevor Tombe has noted, a separate Alberta would be a poorer Alberta.  It is likely not a coincidence that never-ending threats of separation and referendums in Quebec until the 1990s were correlated with the stagnation of Montreal’s economy and the growth of Toronto’s.

Yet here we are.  This new wave of national torsion will come at a time not only of growing international political and economic uncertainty, but in the midst of what will likely be a most acrimonious and hardball renegotiation of our trading relationship with the United States.  Needless to say, Canada is the most self-indulgent of countries if it believes that internal divisions will not affect its role in the world and will not be taken advantage of by adversaries.  In the end, if we are unable to make our way in the world via improved trade arrangements and investment because of continued unfortunate distractions generating political and economic uncertainty, we will have no one but ourselves to blame.

 

 

 

 

Growth, Assessments and Municipal Taxation in the Northern Ontario Big Five

The economic narrative in northern Ontario has evolved in recent years.  From lamentations of stagnation and decline, the north is now talking about growth and development with visible construction booms in many of its major centers.  While the growth rates of population and the economy are not on par with what has occurred recently in southern Ontario, they are nevertheless a change from what was.  And this growth has also translated into growth in taxable assessment even despite assessment values being at 2016 levels. The municipal tax base has been growing.

It has been a decade of change for the five major northern Ontario cities, and an examination of growth over the 2015 to 2025 period using an assortment of sources (BMA Municipal Studies, Financial Information Return and Statistics Canada) allows us to piece together the dimensions of the changes.  Figure 1 plots population growth in the five cities with the most growth in Greater Sudbury at 11 percent, followed by North Bay at 10 percent, then Thunder Bay at 8 percent and the Sault and Timmins at nearly 5 percent each.  However, it should be noted that Ontario as a whole over the same period grew by 18 percent so northern Ontario’s population as a share of the province most certainly still declined over this period.

 

 

Figure 2 plots the growth in average household income growth over the 2015 to 2025 period.  For northern Ontario cities, growth rates during this period ranged from a high of 33 percent for Greater Sudbury to a low of 25 percent for North Bay.  Thunder Bay came in at 29 percent, the Sault and Timmins at 26 percent. Note that for Ontario’s 35 largest cities, the average household income growth during this period was somewhat better at 34 percent.  

 

 

Population and economic growth must inevitably result in a growing municipal tax base and Figure 3 looks at the growth in the per capita taxable unweighted assessment in these cities.  It is done in per capita terms (provided in the BMA Reports) because total assessments do not adjust for population and per person comparisons allow for this.  Unweighted rather than weighted assessment is used as actual current value assessment of properties are a better raw economic measure of the total assessment base. 

 

 

The growth in per capita unweighted tax assessment over the 2015 to 2025 period ranged from a low of 11 percent in Greater Sudbury to a high of 30 percent in Thunder Bay with Sault Ste Marie at 27 percent, Timmins at 19 percent and North Bay at 11 percent.  Per capita assessment value in Ontario’s 35 major cities grew an average of 21 percent over the same period which means that Thunder Bay and the Sault actually grew their per capita municipal tax bases faster. 

This is a remarkable achievement and in the case of Thunder Bay raises the question of the target property tax base growth target in its Smart Growth Action Plan. The property tax base growth target is set at 3 percent in the plan.  However, over the 2015 to 2025 period, per capita taxable assessment grew 30 percent (which averages to 3 percent annually) but given that population grew 8 percent during this period, it means total unweighted assessment grew 38 percent or 3.8 percent annually.  In other words, the plan was a success before it was even started.

Also of interest is how increases in the per capita tax levy compare to increases in the per capita tax assessment base.  In theory, a growing property tax base should afford the opportunity for relatively lower growth in future property tax rates.  Figure 4 plots for each city the growth rate of per capita taxable assessments alongside the per capita tax levy (Net municipal levy per capita from BMA Reports) and the evidence suggests all five cities are in a municipal property tax regime whereby per capita property taxes are rising faster than the per capita assessment base thereby outstripping the growth in assessments. 

 

 

Greater Sudbury seems to have the largest gap with its per capita tax levy growing 51 percent whereas the per capita assessment grew 11 percent – more than four times the resource base per capita.  Next is North Bay where the gap is 28 percentage points.  For the Sault, the gap is 18 percentage points while for Timmins it is 13 points.  Meanwhile, the smallest gap is Thunder Bay which had its per capita assessment grow 30 percent and the per capita tax levy grow 35 percent.

Where does this bring us?  Since 2015, the major cities of northern Ontario have grown substantially in terms of income, population and taxable assessment.  This growth has yielded additional taxable resources to municipal government in terms of expanded assessment bases.  However, despite an expanding tax base, the property taxes paid per capita have grown faster than the growth in the tax base.  Taxes growing faster than the resource base suggest a rising tax burden relative to the ability to pay.  Despite economic growth and rising taxable assessment bases, major municipalities in northern Ontario are raising taxes faster than the resource base. 

One could blame this on the need to compensate for lower growth in provincial grant funding.  One could blame it on rising costs of service delivery in the post pandemic era. Or it could be blamed on municipalities expanding spending oblivious to the rising burden being placed on ratepayers.  When it comes to municipal finances in Ontario’s north, there may not necessarily be a revenue problem but an expenditure problem.  Going into an election year, it is a situation that could use some explanation.

 

The Fork in the Road

  

“Two roads diverged in a wood, and I—

I took the one less traveled by,

And that has made all the difference.”

Robert Frost

 

As our glacial spring morphs into summer like weather, we are also approaching a crossroads of sorts, a fork in the road if you wish. Over the last year, Canada’s government has been navigating a somewhat delicate road between its vital economic relationships with a volatile and more aggressive United States and attempts to diversify our trade and security relationships with like minded middle powers.  At some point, most likely this summer, Canada will need to make some decisions that will require commitments. Moreover, despite the attractions of poetry, automatically taking the road less travelled may not necessarily be the best option as it could make a difference not compatible with our best long term economic interests. Yet, the more travelled road comes with its own challenges.

We are poised at the junction of two roads.  First, there is the continuation our North American trade zone as currently embodied in the Canada-US-Mexico (CUSMA) trade arrangement with new emphasis on our trade with Mexico.  This arrangement has been under siege of late with higher tariffs levied on our auto production, steel, aluminum and forest products.  Yet about 90 percent of our exports still flow tariff free into the United States and our economy has been surprisingly resilient over the last year. This economic arrangement is the result of over a half century of North American economic integration and has benefitted Canadian energy producers, manufacturers and business in general.  Despite the pronouncements of President Trump, it has also been of great benefit to the United States in terms of providing a market for its manufacturers, raw materials for its industries, and a secure fossil fuel energy source that is sold to them at a discount of between $10 and $20 a barrel known as the WCS-WTI differential. Indeed, Canada accounts for about half of the crude oil imported by the United States but it then re-exports some of it at the world price yielding a windfall to the US of nearly $20 billion annually.

The other approach is what can best be described as a New National Policy driven by the change and disruption in the US led world economic and security order.  Essentially, in this approach, Canada will pursue trade and export opportunities with Europe and Asia for its goods and resources to build an east-west flow to complement the north south flows of CUSMA.  This will be accompanied by investment in defence production and security arrangements with like-minded partners in Asia and Europe.  In essence, Canada and its Arctic become a Zone of Transit for these east-west global flows.  To some extent, the marathon trade and marketing trips undertaken by the Prime Minister to bring this about have been bearing some fruit.  For example, our investment drought has taken a turn for the better with foreign direct investment in Canada hitting a $93 billion high. However, nearly half of that has come from mergers and acquisitions rather than the financing of new productive activity. While such a successful metric may befit the efforts of an investment banker Prime Minister, it remains that investment in productive capital rather than asset ownership rearrangement is what is needed to improve Canada’s poor real per capita GDP growth performance.

Of course, which road we will take is uncertain.  On the one hand, Canada still relies on the United States for nearly three quarters of its export market and even without CUSMA, the fact is that the United States is a natural trade partner given we share the continent with them and the north south physiography of North America favours trade with the United States.  As well, despite our pronounced flirtation with the EU and even hints of membership, realistically, that will require a level of political and regulatory integration of social and economic policies that will be blocked first and foremost by Canada’s provinces who after 150 years of Confederation have yet to address inter provincial trade barriers.  At best what we are looking at is perhaps an  “Associate EU Membership” that will boost trade, investment and defence but even there the reality remains that all the members of the EU have yet to approve full implementation of the Canada-EU free trade agreement reached in 2017.

Prime Minister Carney is of course aware of these challenges which is why it appears he is hedging his bets.  On the one hand, he travels the globe making deals and dangling the prospect of Canadian military purchases of Korean submarines and Swedish fighter jets while maintaining that Canada must seek non-US trade partners.  On the other, he remains open to deeper integration with the United States in some sectors with the likelihood that current arrangements in energy and auto manufacturing are what he wishes to continue.  Of course, there was a time when some type of deeper common market arrangement with the United States with common external trade policies might have been the next step to deeper North American integration, but the actions and antics of the Trump administration have nixed that path with the Canadian public for the next fifty years. The point worth considering is that despite greater integration and a larger effective market, over the last few decades, our productivity has declined rather than grown with such advantageous access to the US market.

Ultimately, what Prime minister Carney seems to be signalling is that at this fork in the road, Canada will be travelling down both roads at once.  It will pursue greater integration with the United States, if necessary, along the lines of the existing relationships in energy, steel and auto manufacturing but it will likely not expand or create new ones in either those areas or even other areas.  At the same time, Canada will seek to expand trade with Europe and Asia especially with regards to energy and resource developments though even here, to put our money where our mouth is, we will need to build new pipeline and transport capacity.  Moreover, we will need to offer some tangible evidence we are serious about diversifying away from the United States such as buying Swedish fighter jets or Korean or German submarines.  Needless to say, the Americans will likely not take kindly to such impertinence given that their approach to trade with Canada seems to be “what is ours is ours and what is yours is negotiable”. How dare we spurn their wares.

Still, here we are and by summer’s end we are likely to get some answers as to whether or not Prime Minister Carney’s strategy is working. Stay tuned.

 

 

Explaining Canadian Gas Prices

  

Since the start of the U.S.- Iran war and the blocking of the Strait of Hormuz, gasoline and fuel prices around the world have soared.  As of yesterday, the daily national average gasoline price in Canada according to CAA was 184.8 cents per litre though of course it varies across the country.  For example, in Thunder Bay this weekend, it hit 203 cents per litre.  Reasons for variation in Canadian pump prices at least according to the CAA include seasonal changes, weather conditions, increased demand, geopolitical conflict, status of oil and gas reserves, refining capacity, and the value of the US dollar given crude prices are in USD.

Of course, despite having substantial supplies of domestic oil, in the end, Canada’s gasoline prices at the pumps are tied to the international price of oil and so what better comparison is there than looking at Canadian gasoline pump prices relative to the international price of a barrel of oil as measured the price of West Texas Intermediate Crude (WTI). For the period January 1990 to April 2026, Figure 1 plots the monthly 18 city average of Canadian self-serve unleaded regular gasoline prices in cents per litre calculated from Statistics Canada (Table: 18-10-0001-01 (formerly CANSIM 326-0009)) alongside the monthly price in USD of Cushing, OK WTI Spot Price FOB taken from the U.S. Energy Information Administration.

 

 

The two series certainly seem to move together.  However, simply eyeballing the movement does not really tell us how sensitive the Canadian price at the pump is to the international price of crude.  For that, linear regression is a better tool.  I took the log of the two series and then ran a very simple linear regression of Canadian gasoline prices on the WTI price.  For the period January 1990 to April 2026, there was an r-squared of 0.86 and a coefficient on the price of WTI of 0.54.  What this can be interpreted as given it was a log-log regression is that since 1990, a 1 percent increase in the price of a barrel of WTI in USD results in a 0.54 percent increase in the average 18 city price of Canadian regular unleaded gasoline at the pumps. 

Has this been a stable relationship over time?  Well, the data was broken up into two approximately equal time periods – January 1990 to December 2007 and January 2008 to April 2026 – and two more regressions were run.  The results were interesting as they suggest that the price of gasoline in Canada over time has become less sensitive to the international price of crude.  Moreover, the two periods separately are less sensitive to the price of WTI than when combined if one looks at the coefficients on WTI. For the pre 2008 period, the r-squared was 0.91 and the coefficient on WTI was 0.44 whereas for the post 2008 period the r-squared was 0.35 and the coefficient on WTI was 0.33.   

Essentially, the results seem to suggest that over time the price of Canadian gasoline at the pumps seems to have become less sensitive to fluctuations in the price of WTI with variations in the price of WTI explaining over 90 percent of the variation before 2008 and barely one third since.  What other factors might explain trends in Canadian gasoline prices?  Well, there is the list of variables provided by the CAA, alongside which one could perhaps also add any changes in fuel taxation by the federal and provincial governments over this period as well as the degree of competition in the Canadian retail gasoline market. Naturally, a fuller and more detailed analysis with more control of assorted confounding factors would be quite interesting.