Tracking Deficits: 2026 Canadian Edition

  

Along with the release of the federal budget last week, there also appeared the 2026 edition of the Fiscal Reference Tables. While there is much about the workings of the Canadian federation in this fiscal resource to digest, of particular interest are the numbers with respect to deficits.  As we appear to have embarked on a new era of large deficits at both the federal and provincial levels, it is only natural that we take a retrospective look at deficits in our fiscal history.

 

Figure 1 plots the federal and provincial-territorial deficits for the fiscal years from 1990/91 to 2025/26.  The best year for the federal government – the largest surplus – was 2000/01 which saw a surplus of $19.9 billion while the worst year – the biggest deficit – was of course the pandemic year of 2020/21. When one examines the combined provincial-territorial deficits, the best year was 2006/07 at a surplus of $18.5 billion while the worst year was again the 2020/21 pandemic year at -47.7 billion. 

 

Figure 2 plots the combined federal-provincial-territorial deficit by fiscal year as well as the total as a percent share of GDP. The best year for a combined surplus was 2006/07 at $32.2 billion, and the largest combined deficit was again the 202/21 pandemic year. As a share of GDP, the worst year was again 2020/21 at -17 percent while the best combined year was a surplus of 3 percent of GDP achieved in 2000/01. 

 

Also, of importance is what the accumulated deficits of these respective governments are.  Figure 3 plots the accumulated deficits over the 1990/91 to 2025/26 period and the grand total over this 36-year period for the federal government is $957.9 billion while for all the provinces and territories combined it is $315.9 billion.   However, there are some fiscal entities that managed to accumulate a surplus over the long term.  Alberta managed an accumulated surplus since 1990/91 of $4.1 billion while the Yukon, Northwest Territories and Nunavut (only from 1999/00 to 2025/26) all managed an accumulated surplus ranging from $677 million for the Yukon to $1.9 billion for Nunavut.

 

Finally, Figure 4 takes the 36 fiscal years and presents the percentage of those years in which a deficit was incurred.  The federal government ran a deficit 69 percent of the time.  The provinces and territories had a rather varied performance ranging from a high for Ontario -the “winner” at 83 percent of fiscal years with a deficit – to a low of 4 percent for Nunavut which appears to be a model of fiscal rectitude when it comes to its budgets.  Nova Scotia and Alberta are the best provincial performers in terms of years without a deficit.  After Ontario, Prince Edward Island and Newfoundland and Labrador are the worst performances with deficits 75 percent of the time. 

As for government debt, that is another story for another time.   

Federal Budget 2026: Overview

  

With the 2026 Federal Budget out, it is time for a quick overview.  The “Masters of Our Destiny” budget lays out as its main theme a spending program designed to create an investment super cycle via a productivity mega deduction, an entrepreneurship capital gains reinvestment incentive, and a billion-dollar strategic response fund for large scale research and development projects.  Time will tell as to its success. There is a lot in the budget, but a survey of the main fiscal indicators provides one with a pretty good indication of where we are headed fiscally.  In brief, from 2025/26 to 2030/31, total revenues are projected to rise from $526.4 billion to $629.1 billion, program spending will rise from $489.5 billion to $600.2 billion, while total spending will rise from $565.5 billion to $682 billion.

 

Figure 1 plot the key expenditure and revenue variables going back to the 2014/15 fiscal year and they show that by 2030/31, total federal spending will surpass the peak set during the COVID-19 pandemic. The good news is that according to these numbers, total revenues will more than cover program spending by 2030/31.  The bad news is that once debt charges are factored into the mix, total spending and total revenues are embarked on upward parallel paths that show no prospect of intersection. We are looking at a long and sustained period of deficits and subsequent increases in both the net debt and debt charges.  Indeed, the net debt is expected to rise from $1.45 trillion in 2025/26 to $1.9 trillion by 2030/31.

 

Figure 2 plots the annual average growth rates of the key indicators mentioned.  The good news is that the average annual growth rate of total revenue going forward matches that of program spending and is only slightly below that of total expenditure.  The bad news is that of these five indicators, the fastest growing are debt charges and the net debt at 8.2 and 5.5 percent respectively.  How can that be?  As a result of separating out capital spending from operating spending, the additions to the net debt far exceed the accumulated deficit.  The rising stock of debt in turn is generating larger debt service costs that by 2030/31 are expected to total nearly $85 billion annually and account for about 13 percent of federal revenues.Of course, if interest rates rise more than expected, we are looking at interesting times. 

Trade, Tariffs, Integration and Productivity

This post originally was featured on the Fraser Institute commentary page, September 30th, 2026.

Tariffs, trade, integration and productivity—the Canadian conundrum

As Canada continues in its trade dispute with the United States, its dalliance with the European Union, and its efforts to boost investment, the reality remains that the fundamental issue is not market access but Canada’s long-term productivity malaise as measured by the decline in the growth rate of real per-person GDP. Despite being an open economy with low effective tariff rates and access to and integration with the largest and wealthiest market in the world, Canada’s productivity performance waned in recent decades.

Moreover, Canadian real per-person GDP declined relative to the U.S. in the 21st century. Against the U.S. is how we have always tended to measure ourselves. While Harold Adams Innis maintained that Canada and its institutions are fundamentally a product of Europe, our geography has meant sharing a continent with the U.S. with whom we have both cooperated and competed economically even in the days before Confederation.

The immediate aftermath of Confederation saw Canada mired in stagnation as the Great Depression of the 1870s affected the world. Afterwards, a program of economic nation-building via Prairie settlement and railroad building linked the manufacturers of the east with the resource producers of the west under the protection of the National Policy tariff wall. This saw an investment boom and rapidly growing real per-person GDP (as illustrated below). It’s noteworthy that from 1880 to the eve of the First World War, our real per-person GDP growth exceeded that of the U.S.

The First World War and the Great Depression were periods of poor real per-person GDP growth punctuated by the boom of the 1920s, which again saw Canadian growth rates surpass American. The Second World War saw average annual real per-person GDP growth top 4 per cent and this was followed by the high growth rates of the 1950s and 1960s. Those of the 1950s were muted only by the fact that this was an era of rapid population growth. However, since the 1960s, our average annual real per-person GDP growth has declined steadily with the 2020s the most dismal period since the Great Depression and our real per-person GDP growth eclipsed by the U.S.

While advanced economies saw a slowdown in productivity growth in the wake of the 1970s oil price shock, the Canadian decline is particularly noteworthy in comparison with the U.S. The era of Prairies settlement and the wheat boom saw Canadian real per-person GDP growth outperform the Americans. The 1960s and 1970s also saw Canadian growth outperform the U.S. While both countries saw a productivity decline after the 1960s, since 2000 the Americans appear to have reversed theirs. Despite our economy and export sector being increasingly linked to the American market first via the 1988 free trade agreement and then NAFTA and rising exports, we have generally not performed well when it comes to per-person income growth.

The reasons for weak Canadian productivity performance both current and historical are numerous and extensive. There’s relatively weaker investment in productivity enhancing capital investment, which has worsened during the age of information and communications technology. There’s the generally smaller Canadian market fractured by interprovincial trade barriers, which has restricted economies of scale. Then there’s the combination of large governments, cumbersome regulation, as well as oligopolies in transport, telecoms, agriculture, airlines, banking and energy, which have reduced competition, innovation and adoption of new technology. There’s the effect of high personal and business taxes, which has had incentive effects on investment, work effort and resource allocation.

Then during the post-2000 housing asset boom, the emphasis on residential investment rather than plant, machinery and equipment was augmented by the fact that the construction sector had some of the lowest labour productivity of all Canadian sectors. And of course, one can always blame reliance on our natural resource sector intensity, which when times are good dampens the incentive to innovate and when times are bad bemoans the lack of resources to innovate.

It’s not that Canada has stopped growing, it’s that Canada is growing at a much slower rate than its nearest and most important competitor (the U.S.). Canada seems to have settled into a comfortable low growth equilibrium despite all the supposed advantages being conferred over the last 50 years by increased access to and integration with the U.S. market and economy. Falling effective tariff rates in the wake of the Second World War and the General Agreement on Tariffs and Trade (GATT) and access to the large American market should have increased competitive pressures fostering both more innovation, investment and cost-reducing economies of scale. Indeed, one might have expected convergence of Canadian and American productivity levels. Yet paradoxically, Canada’s productivity slide relative to the U.S. coincides with the increasing integration of the two economies.

Figure 2 plots Canadian to U.S. real per capita GDP as a percent share from 1870 to 2025 and accompanies it with a weighted scatterplot smooth to illustrate longer term trend. It combines this with the effective Canadian tariff rate over the same time as well as denotes the three key events in the 20th century integration of the Canadian and U.S. economies: The Auto Pact (1965), the Free Trade Agreement (1988) and NAFTA (1994). Note that our effective tariff rate prior to World War II was seldom below ten percent but declined steadily afterwards.

Canada’s real per-person GDP relative to the U.S. rose for the first century after Confederation. Canada’s real GDP closed the gap more rapidly from 1890 to the First World War and again from post-Second World War until the mid 1970s. However, somewhere between the signing of the Auto Pact and the first free trade agreement, Canada’s real GDP began to consistently grow more slowly than the U.S. From a height of nearly 90 per cent of U.S. real per-person GDP, it has now fallen to below 70 per cent.

There’s a rather large economic literature as to why increased integration and trade with a larger economy might paradoxically lead to divergence of per-person income and growth rates rather than convergence. Alwyn Young argued that under a free trade agreement between a large developed country with a higher stock of knowledge and a smaller less developed country, the less developed country would receive conventional gains from trade but the long-term dynamic implications were that the less developed country could experience falling technological progress and GDP growth compared to autarky. Of course, one might argue that Canada by mid-20th century was a highly developed economy, but then one might not guess that from the state of its national highway system compared to the U.S.

Devereux and Lapham maintained that in a world with two economies, under trade liberalization, the country with the higher stock of knowledge could increase its share of human capital in research and development while the other will systematically reduce its share with the end result being concentration of research and development (R&D) in the country with the initial advantage. While Canada has been able to innovate and conduct R&D, it has always borrowed technology and innovation from the U.S. and elsewhere, and under trade liberalization this practice may have worsened.

Of course, there are always counterpoints and Trefler finds that in the wake of the first free trade agreement, the Canadian industries that saw the largest tariff decreases did see industry-level labour productivity rise at comparable levels to those American industries receiving the largest tariff reductions. This of course raises the question as to why if productivity in affected Canadian industries did go up, it did not ultimately translate into higher rates of real per-person GDP growth. Where did the productivity gains go if not ultimately to raise our living standards?

The point of all this is as follows. Whether we renew a trade agreement with the U.S. and Mexico or craft a new one with the EU or China or India or CANZUK or anyone else, Canada’s productivity performance must be addressed. If the last 50 years have taught us anything, it’s that a free trade agreement and continuing to simply export as we always have is not enough to ensure our future standard of living.

Without resolving our interprovincial trade barriers, boosting our research, development and innovation and translating it into outcomes, making our tax system more competitive and less stifling of work and investment effort, and addressing the cozy oligopolistic nature of our markets, all the market access and trade in the world will apparently not reverse our productivity decline. Neither will simply boosting our infrastructure investment to move more exports to the world market. By not addressing the fundamental structural and institutional problems facing Canada’s economy that hamper reaping the benefits of markets and trade, we will continue to be the economic frog in a slow boiling global pot of water.

Are We Over Reacting to July’s GDP Growth Rate?

  

Today’s release of July’s real GDP growth of close to zero by Statistics Canada has been interpreted as Canada’s economy stalling and a portent of ominous things to come as the trade dispute with the United States worsens.  However, it is only one month’s result and needs to be put in some comparative perspective.

Figure 1 plots monthly real GDP growth since January of 2024 and compared to the previous three months July does look like a precipitous drop. However, if one goes back for several years, there have been other very low growth months (March 2024, August 2024, June 2025, March 2026) not to mention several months of outright decline (November 2024, February 2025, April 2025, May 2025, October 2025, January 2026).  Indeed, over the entire 1997 to 2026 period, average monthly real GDP growth has only averaged 0.2 percent with the highest being June of 2020 at 5.8 percent and the lowest April 2020 at -10.4 percent – both during the initial phases of the pandemic.  

 

Figure 2 provides another comparison.  The real GDP growth rate for July of every year since 1997 is provided along with aggregate statistics for every July as well as for all the months the entire 1997 to 2026 period. At 0.02 percent, July 2026 is effectively zero but there was negative growth in the July of 1998 2001, 2007,2017 and 2023. Of these 30 Julys, July of 2026 is near the bottom, ranked at 24^th place. However, there have been six other July real GDP growth rates lower than July of 2026.  

 

In other words, there is no point in overreacting to one month’s poor result after three months of consecutive growth.  As Statistics Canada itself notes: “The goods-producing industries grouping was essentially unchanged in July as increases in construction and utilities were offset by declines in the other sectors comprising the aggregate. The services-producing industries aggregate was essentially flat, as increases across several sectors were offset by declines in retail trade and wholesale trade. Overall, 10 of 20 industrial sectors expanded in July.”

In general, summer in Canada is short and maybe more people than usual took time off and production slowed. Moreover, July of 2026 also saw wildfires peak in several parts of the country and this may also have been a factor especially when it comes to the service sector as more people remained indoors.

The Weakening of Canadian Per Capita GDP Growth

Lost in all the angst of our current trade dispute with the United States and the push to diversify Canada's export partners is the fact that despite what were very favourable market access terms via free trade arrangement with the United States and the subsequent growth in our exports, our real per capita GDP performance has been moribund.  Our only saving grace has been that we entered the period of decline in per capita GDP growth rates marking the last fifty years from an exceedingly high base.  Figure 1 plots IMF-WEO data on per capita GDP in constant prices ($2021) for Canada and a select number of important important countries and trade partners.  As hard as it might be to believe, in 1980, once adjusted for purchasing power parity, real per capita GDP in Canada was higher than the United States and the E.U.  

 

If one then moves forward, what is remarkable  is our performance against these - albeit cherry picked - comparison countries. Most of them are either  important trade partners for Canada or have the potential to become more important (especially in the case of the E.U. and the UK) in the wake of the current trade dispute with the United States. Our real per capita GDP is still high by world standards in that we are well above China, India, South Africa, Mexico and Brazil, not to mention New Zealand and Japan. However, the U.K. and the E.U. have nearly caught up with us.  Australia and the United States surpassed us some time ago.  Our real per capita GDP has grown but just about everyone else has grown faster.

Figure 2 presents the ranked implied annual growth rate of the real per capita GDP numbers in Figure 1 and also includes those for the World economy as a whole.  China and South Korea are the prime examples of the Asian miracle with annual growth rates since 1980 at 7.6 and 4.8 percent respectively.  This has allowed per capita income in China to double nearly every ten years which is an impressive performance even if they are still at an average per capita GDP that is half of Canada's.  South Korea started from a higher base than China but also has had a stellar performance with its per capita GDP doubling every 15 years since 1980 and at 98 percent of Canadian per capita GDP has essentially reached parity with us. 

 

The world has developed rapidly since 1980 with the world per capita GDP growth rate being a bit below South Korea's and that has been driven by two of its largest economies - China and India.  The United States and Australia and the U.K. in the end have seen their real per capita GDP expand by just under 2 percent annually while the E.U. and Japan are closer to 1.5 percent.  Canada clocks in at 1.1 percent in terms of its annual implied annual growth rate - below New Zealand at 1.3 percent but above Brazil, Mexico and South Africa.

For all the talk about the E.U, as a sclerotic trade partner for Canada given its productivity issues,  it has grown faster than Canada and its per capita GDP is also for all intents and purposes on par with Canada.  These types of growth numbers should be a wake up call for Canada.  We have only done as well as we have because of inertia and that cannot last for ever.

 

The Trade War and Employment: So Far So Good

  

The current trade war between Canada and the United States has been now underway since March of 2025 with the imposition of 25 percent tariffs by the United States on Canadian steel and aluminum which then saw our own retaliatory tariffs.  Since then, there has been back and forth tariffing culminating in the latest onset of 50 percent U.S. tariffs on a range of Canadian goods (including toilet paper of all things) followed by our September 8^th retaliation of 15, 25 and 50 percents counter tariffs on a range of U.S. products.  Since then, the Americans signalled that there are some products they need from Canada more than they are willing to admit (like toilet paper) and has removed tariffs on them – road salt, cement and bottoms up everyone – toilet paper.

What the impact of the tariffs and trade disruptions have been on the Canadian economy is an important consideration and to date the Canadian economy appears to have been relatively resilient based on the latest GDP growth numbers as well as the employment numbers.  In term of GDP growth, there was second quarter growth of almost 1 percent in the most recent release led in part by higher exports of all things.   There seems to be some diversification of our exports underway given that trade volumes with the U.S. are flat. 

As for employment, August 2026 did see a monthly drop in employment relative to July of 42,000 jobs but what is important is not month to month but more annualized numbers.  Over the August 2025 to August 2026 period, employment in Canada has grown, notwithstanding the trade war.  However, the composition of that employment change is interesting.  Moreover, Ontario has fared better than one might have expected given its manufacturing exposure via the automobile sector.

The accompanying figure plots the percent change in employment for Canada, Ontario and Canada minus Ontario over the August 2025 to August 2026 period.  At the left of the figure, employment growth is provided for total employment, goods sector employment and then service sector employment.  After that, employment growth is also provided by class of worker and industry (Statistics Canada Table 14100376). To start, total employment (not seasonally adjusted) over the course of twelve months has grown by one percent in Canada – almost 213,000 jobs. Of these, 23,500 were in the goods sector while 189,400 were in the services sector. Ontario added 119,100 of these jobs with 4,700 in the goods sector and 114,400 in the services sector.  The trade dispute with the Americans has certainly slowed the growth of goods sector employment but not so much the service sector. If one looks at Canada minus Ontario, total employment grew by 93,800 jobs with goods accounting for 18,800 and services 75,000 jobs.

 

 

 

When broken down in more detail, the results are also quite interesting. The agricultural sector is not doing as well with employment shrinking by 5 percent in Ontario and 2 percent in the rest of the country.  Natural resources (fishing, hunting, mining, quarrying, oil and gas) is down nationally overall but grew by 12 percent in Ontario or 5300 jobs while it shrank by 7100 jobs in the rest of the country.  It seems Ontario’s northern mining sector is finally getting some traction. Employment in utilities is down pretty much everywhere while construction employment is down in Ontario but up in the rest of the country. 

Paradoxically, over this twelve month period, manufacturing employment is up in Canada by 1.5 percent nationally (28,500 jobs), 1.8 percent in Ontario (15,200 jobs) and 1.3 percent in the rest of the country (13,300 jobs) outside Ontario. Transport and warehousing employment is up everywhere but wholesale and retail trade are down.  The finance, insurance and real estate sector is up in Ontario but down in the rest of the country. Then there is public administration which is down everywhere and likely reflects federal government downsizing of employment which one certainly cannot blame on tariffs.  As well, education sector employment is down in Ontario but up slightly in the rest of the country while the health and social assistance sectors as well as the information culture and recreation sectors appear to have gained a lot of jobs in percent terms.

So, what is one to make of this? While despite the language of there being a “Trade War” in progress, it needs to be realized that most goods being exported and imported between Canada and the United States are not subject to tariffs and business is continuing as usual.  Jobs losses are not concentrated where might one expect them to be with the losses in agriculture, education, public administration and utilities not easily attributable to tariffs.  The effect on manufacturing has been muted though perhaps there has been some effect on wholesale and retail trade but certainly not transport and warehousing.

In short, things seem to be going better than expected for now.  Despite the rhetoric, the trade war seems to be in its phony war phase.

120,000 Could Be the Tip of The Iceberg

  

A CBC story this morning stated that “applications from people around the world seeking Canadian citizenship certificates have been rising rapidly in recent months, fuelled by thousands of applications from the United States.”  Under Bill C-3, those who can prove they were descended from a Canadian ancestor even if that ancestor left several generations ago can now apply for citizenship.  Apparently, half of the applications are from the United States and the number of applications in general has soared to the point where there are now about 120,000 applications for citizenship waiting to be adjudicated and processed.

This is potentially just a drop in the bucket given that since the mid 19th century, literally several million Canadians emigrated to the United States.  The period from 1867 to 1896 prior to the opening of the Canadian west, was a period of relatively anemic economic growth in Canada and many residents of Canada crossed the border into the opportunities offered by the larger US economy.

Indeed, by the 1910 US Census, Canadians were one of the largest categories of foreigners in the United States. As estimated by G.E. Jackson in a 1923 article in the American Academy of Political and Social Science, between 1850 and 1920, 1,890,000 Canadian born citizens moved to the United States.  Figure 1 provides a chart of the numbers on Canadian net emigration to the United States provided by Jackson in his article. Note the decline after 1900 as the Canadian wheat boom era and prairie settlement and the industrialization of central Canada offered more opportunities and slowed the outflow.

 

In 1910, there were 1,204,637 Canadian born residents living in the United States.  One imagines that their descendants easily number ten-fold today.  If there are 10 to 12 million Americans of Canadian ancestry, then potentially, there could be many more applications to come regarding the recovery of lost Canadian citizenship.

Of course, it is unlikely that there will be ten million applications for lost citizenship from the United States, but the ultimate numbers could be more substantial than one might think.  In any event, this story certainly helps highlight what for many Canadians is a forgotten aspect of our past.

A Trade Agreement or Economic Anschluss?

  

As the interminable trade negotiations between Canada and the United States continue, in the absence of inside information from being at the table, one is left with trying to figure out what is going on by relying on the snippets and reports that make their way into media stories.  One of the most recent accounts as to where we are at in the Globe and Mail paints a picture of Canada that runs contrary to the public “elbows up” domestic rhetoric.  Essentially, according to this report “Canada and the United States are negotiating a deal in which Ottawa would concede on a long list of Trump administration trade demands in exchange for some relief on sectoral tariffs, as talks intensify less than two weeks before another round of threatened American levies.” Indeed, the tendency towards concessions was noted in another less flattering Globe and Mail piece.

Essentially, Canada would remove its retaliatory tariffs, return U.S. alcohol to the shelves, agree to Washington’s views on dairy quotas and in return get lower tariffs on steel and aluminum, some relief on auto and forest product tariffs and avoid the August 19^th tariff increases.  However, there is going to be a baseline set of tariffs on all Canadian goods no matter what, which will be part of continuing negotiations into the fall and we are expected to make good on our purchase of F-35 fighter jets as well as make additional commitments to joint North American security which will inevitably involve more purchases of U.S. military goods. Any new United States-Mexico-Canada trade arrangement down the road will essentially be an assortment of separate managed deals as dictated by the United States united by a continued tariff albeit one that probably favours us relative to countries outside North America. 

In some respects, one would have to say that we should not be surprised if this is the outcome.  A country with 75 percent of its exports going to a single market does not have the leverage it might imagine unless it wants to play hardball on crucial exports like oil, gas, potash and electricity and the Prime Minister has already given up that card.  Ultimately not using it is one thing but stating in advance that it will not be used is something else. The Americans want tariffs because they see them as both a way to onshore production as well as a potentially lucrative source of revenue.  And whose exports are a better source of revenue than Canada and Mexico given the sheer volume of trade.  The Americans will certainly not want to reduce their “tax base” by exempting either us or Mexico. As for the fact that tariffs on our goods are paid for by American consumers – well, it is a de facto consumption tax on Americans and if Americans want to avoid it, they can consume American products.  From the Trumpian perspective it is a win-win situation despite the fact that the evidence to date suggests that this is not working as well as they would like.

Currently, what the Americans seem to be proposing is a world where they levy tariffs on us in terms of whatever goods they want and at whatever rate they choose while we continue to admit all their products tariff free as well as spend Canadian tax dollars on American military goods. After all of our elbows up rhetoric, this is the deal it would appear we are on the road to accepting.  The real question is can we come up with a better approach?  Obviously, the best approach is multilateral free trade given the shared economic and geographic space occupied by Canada, the US and Mexico but this is now not on the table.   

 I would have to venture once again that what Canada should pursue with the Americans is essentially a deal modelled in part on the 1854 Reciprocity Treaty.  Both sides would let in raw natural resource and raw agricultural imports duty free. This would satisfy our commitments as reliable providers of the goods the Americans seem to want from us.  It would also help keep food costs down for consumers on both sides.  However, all imports of non-raw-natural resource and raw agricultural imports – anything value added - could have tariffs levied on them by either side.  (For example, oil and natural gas duty free but gasoline and petroleum products could be tariffed. Milk duty free but butter and cheese can be tariffed) The rates can be jointly negotiated, or they can simply be left up to each side based on what they think their consumers can bear and what revenues each side thinks that they think they can get. It all sounds so very 19th century but these seem to be the times we are in.

Naturally, this is a not very good outcome but think back to the period between 1870 and 1930 when Canada had a much smaller domestic market and was behind a tariff wall.  There was still economic growth and while growth in an environment of free trade would have been greater, it was not an available option.  We now have a market of 40 million people and if we combine it with a set of tax reforms that lower corporate and personal income tax rates, that could help compensate for the higher costs imposed by tariffs on American imports. Add in further reductions of inter-provincial trade restrictions and we may actually achieve the internal common market that should have been brought into existence in 1867.

Freer trade with the United States was something that was achieved over several generations and when it worked it worked well for both sides. Again, it does not seem to be an available option.  Think of it another way.  If we simply accept an outcome whereby the Americans dictate all the terms and tariffs as well as well as continue to direct our military purchases towards their goods and then arbitrarily change the terms whenever they feel it is to their benefit, well in a sense you have indeed become the 51^st state but without any of the benefits.  If the Carney government negotiates a trade deal in which we essentially grant the Americans everything they want and we obtain only what they deign to grant us, then we will have negotiated an economic capitulation and Anschluss and not a trade agreement.  The choice facing the Carney government is either a smaller and slower growing protectionist Canadian economy (which some might argue we have already partly achieved with the economic policies of the last decade) or Economic Anschluss with the Americans in which the Americans receive all the economic benefits of Canada as an American territory without any of the political costs.

 

Crime, Ontario and Thunder Bay

  

Statistics Canada released the police reported crime statistics for Canada in 2025 last week and the overall trends were a decline in both the conventional Crime Rate (CR) as well as the Crime Severity Index (CSI).  According to Statistics Canada, in 2025 the national CSI dropped by 5 percent while the CR declined by 2 percent.  In other words, both the number of crimes per 100,000 population (excluding traffic violations) fell as well as the seriousness of those crimes. Relative to their historic peak in the early 1990s, crime rates are still down dramatically though they are up from 2015 which marks the start of a reversal of the long-term downward trend. However, since 2023, both crime severity and crime rates appear to have declined.

Ontario reflects the national trends with crime severity in 2025 down 6 percent from the year previous (though still up 12 percent from 2015) and the crime rate down 4 percent from the previous year but up 20 percent from 2015.  The Ontario numbers vary when its major CMAs are examined with quite a few CMAs up while others are down.  However, the largest cities – Toronto and Ottawa – are both down and they of course affect the provincial totals dramatically given together they account for well over half of Ontario’s population.  As for northern Ontario CMAs – Greater Sudbury in 2025 saw a 2 percent decline in its CSI but a 3 percent increase in its crime rate while Thunder Bay saw a 3 percent increase in its CSI and an 18 percent rise in its crime rate – the largest increases across Canada’s 41 CMAs. However, Thunder Bay did not have the highest total crime rate in the country as that dubious distinction went to Chilliwack, B.C. (at 11,455 crimes per 100,000) while Thunder Bay was a bit further down the list in 6th place (after Kamloops, Red Deer, Nanaimo and Kelowna) at 8,373 crimes per 100,000.

Comparing Thunder Bay to the other major Ontario CMAs is done in Figure 1 and Thunder Bay definitely stands out when compared to other Ontario cities.  Thunder Bay is first at 8,374 crimes per 100,000 with Peterborough second at 5,386.  At the bottom are Toronto and Barrie at 3,950 and 3,777 respectively.  In terms of growth (Figure 2), about half of Ontario CMAs saw their crime rates decline and the other half saw an increase.  Thunder Bay is not only growing in terms of population, housing, construction and retail but also unfortunately with respect to crime.  Thunder Bay saw the largest increase at 18 percent followed by Brantford at 10 percent and then London at 7 percent.  Toronto and Windsor saw the largest declines at 5 percent and 10 percent respectively. 

 

 

A logical question is what policing resources are available to these Ontario cities to fight crime and Figure 3 presents police officers per 100,000 using data from Statistics Canada (TABLE 35100077).  Here it should be noted that the crime figures correspond to CMAs, whereas the police statistics are for municipal police services whose boundaries may not exactly correspond with the CMA boundaries. Nevertheless, the rankings proceed and here Thunder Bay is again at the top of the rankings of these Ontario municipal forces with 197 police officers per 100,000 in 2025. Next highest is Windsor at 172 followed by Toronto at 171.  At the bottom of the rankings are London, Ottawa and Kitchener-Waterloo-Cambridge (Waterloo Region Police) at 143, 135 and 118 officers per 100,000 respectively. Thunder Bay has the highest crime rate across major Ontario cities and it has the highest policing resources per capita.

 

However, Figure 4 looks at the policing resources in a somewhat different way.  It looks at the growth in police officers per 100,000 and does so between 2023 and 2025 (because Statistics Canada’s annual data does not have an entry for 2024). Here the numbers show that while the majority of Ontario municipal police forces saw growth in police officers per 100,000 – about one third did not.  Those showing a decline are Sudbury, Windsor, Kingston, Thunder Bay and Brantford. Of these five cities showing a decline in policing resources per capita, four also saw an increase in crime rates in 2025 with the exception being Windsor.

 

So, is there a relationship between policing resources and crime?  Simple correlations between police numbers and crime rates are probably not the best way to evaluate this type of relationship and a regression approach where confounding factors like demographics, community income and land area are considered are better.  Some might argue that wealthier communities with better socio-economic conditions can both afford more police as well as have the determinants for lower crime rates.  Some might argue that more police simply means more crime gets reported and could paradoxically result in a positive relationship between crime rates and policing. Nevertheless, it can be done simply and Figures 5 and 6 are presented together because they show an interesting feature of the data when you plot the crime rate against the number of police officers.  

 

Figure 5 plots the crime rate per 100,000 for all the Ontario CMAs against the number the number of police officers per 100,000 and the correlation is positive when a linear trend is fitted. However, that trend is heavily influenced by one observation in the northeast corner of the chart which "pulls" the line upward.  That is Thunder Bay.  If you remove Thunder Bay and redraw the chart with linear trend (Figure 6) you get the more conventional result that more police officers per capita are correlated with lower crime rates.  Thunder Bay is what one can refer to as an “outlier”.  It is not like the others.

Of course, it might be that using levels is not the way to do such a comparison and what might be better is to plot the recent growth in the crime rate against the recent growth in police officers per 100,000.  This is done in Figure 7 and the result is (including Thunder Bay) more conventional and in line with the expectation that if the number of police officers per 100,000 population is growing, the crime rate should see lower growth rates or even declines. Thunder Bay in this chart is in the northwest quadrant with a decline in per capita police resources in 2025 and an increase in crime rates.

 

Still, Thunder Bay even if its recent policing resources per capita have declined, nevertheless has the most police officers per capita of the Ontario cities in this comparison.  Does this mean there is an efficiency or effectiveness problem? Again, one way to look at this is to take the statistics and compute the reported crimes per police officer.  Figure 8 does this and the ranking shows that Thunder Bay has the third highest reported crimes per police officer of these Ontario cities.  In other words, there are a lot of crimes being reported by the police.  If one wants to use crimes reported per police officer as a productivity or effectiveness measure, then the Thunder Bay Police Service is one of the most “productive or effective” in Ontario.  They are catching a lot of crime.

 

What does this mean for crime in Thunder Bay?  Why are crime rates in Thunder Bay so high despite having one of the largest police forces in per capita terms?  It is because Thunder Bay simply has a lot of crime and it is getting worse and overwhelming the resources available.  If one may hypothesize, Thunder Bay is indeed unique in some of the economic and social forces that have shaped its past and continue to shape its future.  It is located at the crossroads of the country which means it is a transport node not only for grain, potash and transport trucks but also for criminals and criminal activity. 

In terms of social elements, Thunder Bay is a community that has always had a frontier edge and that includes an element of independence that can often border on lawlessness.  While it is true that Canadian cities have all become a bit more lawless in the wake of the COVID pandemic, Thunder Bay seems further along the path when compared to even the GTA. Lawlessness progresses in degrees.  Not following parking bylaws for snow removal or walking your dog across other people’s lawns is the start and suggests a lack of concern for others and the public good.  Indulging in rolling stops at stop signs, speeding and then running a red light is the next step.   I have seen vehicles doing U-turns on the Thunder Bay expressway seemingly oblivious to other traffic.  Increased theft in stores is yet another progression and then there is the infiltration of Thunder Bay by increased numbers of drug dealers coming from Toronto due to it being both a captive and lucrative market in its own right as well as a gateway to northern reserves.  Then comes the litany of domestic abuse and household violence largely springing from drug and alcohol abuse which also consumes police resources.

The police in Thunder Bay are essentially being overwhelmed.  They are being asked to solve not only Thunder Bay’s crime and social problems – which are substantial in their own right - but to deal with a wider range of provincial and national crime trends due to Thunder Bay’s location as a transport crossroads. Do you want to see crime rates in Thunder Bay come down?  Additional resources from the O.P.P. and the R.C.M.P need to be deployed outside the city limits along the highways leading to the city as well as the airport, port and railyards.   Sniffer dogs going through luggage at the airport and a more visible police presence there is needed.  There should be a lot more “seat belt” checks and “speeding enforcements” on the 11/17 and Highway 61 corridors leading to the city as well as more transport truck “safety inspections.”

It is not just the resource available but how they are deployed and used.  Moreover, crime fighting requires cooperation across jurisdictions and better coordination of efforts between the assorted policing levels.  Thunder Bay’s crime rate can be reduced but given the national and regional spillovers of the problem both into and out of Thunder Bay, it is not just the responsibility of the Thunder Bay Police Service.  In some ways, Thunder Bay’s role as a transport choke point is both the source of its crime problems and can facilitate its potential solution. At least, that is what the numbers are telling me.

An "End" Game in the Trade War?

  

As Canada processes the new Trump tariff threat and considers its options, assuming the tariffs are actually implemented, one imagines that retaliatory measures will eventually be employed.  These can consist of either tariffs on American imports or export taxes on Canadian export goods in high demand by the American market.  What is interesting in the list of proposed American tariffs released yesterday is the 50 percent tariff on “Toilet or facial tissue stock, towel or napkin stock and similar paper used for household or sanitary purposes, in rolls or sheets not of cellulose wadding” imported from Canada. The United States is a very high per capita consumer of toilet paper using annually an average of 140 rolls or 12.7 kgs per person.  It seems odd that in the age of affordability, the American government would make such a vital commodity more expensive for the average American but then above average Americans have probably been corrupted by bidets and are oblivious to the sanitary expenses of their lower income citizens.

A tariff on toilet paper can of course lead to an immense amount to low brow humour especially in the wake of the current deluge of diarrhea plaguing the United States. It does lead to the question of how much leverage Canada might have over the United States when it comes to toilet paper.  According to statistics from the World Bank, in 2023 the United States imported 186,304,000 kgs of toilet paper of which Canada supplied 96,957,900. As Figure 1 illustrates, Canada is the largest supplier of toilet paper to the United States accounting for over half of its imports.  The next largest is Mexico at 18 percent followed by China (14 percent), Indonesia (8.3 percent) and Vietnam (4.1 percent) with the rest of the world accounting for just over three percent.  On the surface, it looks like Canada has an intestinal stranglehold that it could play to its advantage.

 

However, this analysis is misleading because while Canada accounts for over 50 percent of U.S. toilet paper imports, imported toilet paper accounts for anywhere between 5 and 10 percent of American toilet paper consumption.  In other worlds, any leverage from being such an important supplier is lost in the sheer size of total American consumption most of which is domestically supplied.  Given that Canada supplies at best a few percent of total U.S. toilet paper consumption, a more expensive Canadian product either via tariffs or export taxes will be replaced either with more domestic production or cheaper imports. 

Retaliating via an export tax or export ban on toilet paper to the United States is at best a tongue in cheek approach to resolving our trade disputes with the United States.  However, the toilet paper case is an important illustration of the dilemma that Canada faces when it comes to retaliation.  While we are the largest foreign supplier of many imported goods for the Americans, our share of their total market consumption is often so small as to be negligible which of course reduces our leverage.  There are only a handful of commodities whereby Canada has a noticeably significant share of the American market, and these are mainly resource products such as oil, natural gas and potash.

For example, about 60 percent of American crude oil is produced domestically with the remainder imported and of that imported share, Canada accounts for nearly two-thirds.  In other words, the United States relies on Canada for 20 to 25 percent of its oil.  The United States also relies on 85 to 90 percent of its potash supply from Canada which is a critical input into American food production.  Export taxes on these commodities would indeed get noticed in the United States but one wonders if even that will have any effect on decisions made by the Trump administration. After all, the United States gets over 50 percent of its aluminum from Canada and yet they have still put heavy tariffs on its import.

In terms of the end game here, should the Americans continue on their current path of tariffs, there are two alternatives. Canada could accept whatever terms the Americans want given our export dependence and lack of diversification which, based on their current position seems to be a deal that includes tariffs, will lead us to losing employment in many value added industries.  Or, we can respond with our own broad based tariffs on our imports of U.S. value added products which will raise costs to Canadian consumers but preserve a larger share of our non-resource based industries. Neither is an attractive economic option, and the deciding factor will be which alternative is most acceptable to the Canadian public.  In the interim, we wait to see if they actually follow through with the tariffs.

The Road(s) Ahead

  

The United States under President Trump has taken yet another jab at Canada’s economy with the announcement of new 50 percent tariffs on range of goods.  This is a negotiating tactic, designed to extract leverage in the upcoming negotiations but the move also sends important messages about the ultimate aims of the United States with respect to its relationship with Canada that we ignore at our peril.

If implemented, given that oil, gas, potash, fish and critical minerals are exempted, these tariffs will have little to no effect on Canada's resource sector and exports - which are about 40 percent of our exports to the USA. The duties are actually narrowly targeted at manufactured and consumer goods such as chemicals, plastics, electronics, alcohol, dairy and hockey sticks of all things.  These are actually all together a relatively small portion of our exports to the United States. Auto parts - a crucial part of the integrated supply chain are also exempt – for the time being.

So, the overall impact on the macroeconomy would be relatively small but those specific targeted products would be relatively hard hit.  Alberta and Saskatchewan are the least impacted. Ontario and Quebec are more heavily impacted.  More importantly, these new tariffs are a violation of CUSMA and raise the question as to whether the United States can be relied upon to adhere to any deal even if struck entirely on their terms. Moreover, it is clear that the American version of a new Canada-U.S. trade agreement is not going to be what we are looking for.

The American negotiating vision is for deals with Canada and Mexico that emphasize their roles as input providers to the U.S. economy and value-added chains of production rather than trade partners and on terms always favouring the United States. In the case of Canada, our role in the American input chain is oil and gas (provided to them at a discount), as well as potash, critical minerals and any other resource product they require but that makes room for their producers first, such as lumber. 

Despite the mutual gains from trade, they see our value added manufactured and consumer products as direct competition to American manufacturers given the similarity of the high-wage employment generated.   Despite our ongoing attempts at trade diversification, our current dependency on the United States market for three quarters of our trade reduces our bargaining power. 

In the case of Mexico, the American preference is also mainly for their resource products such as petroleum, minerals, and food and agricultural products but they will tolerate manufactured products such as electronics and medical devices and even auto parts made with cheaper Mexican labour  - that of course stays on their side of the border.  Canadian labour does not provide the American consumer market with cheap manufactured goods and so we are out of luck there.

It is unlikely that CUSMA is going to be renewed in its current form, and any future trade arrangement will see tariffs on Canadian goods that are both negotiated as well as imposed unilaterally on spur of the moment. The Americans seem to want the deal that they last got in 1854 under the Reciprocity Treaty whereby there was free trade in resource products and raw materials but continued tariffs on manufactured products – on both sides one should add. Oddly enough, the Americans ended that deal for an assortment of reasons including lobbying by American resource producers in what was then a more resource intensive United States, American perceptions that Canada benefitted more from the deal than they did (sometimes it seems nothing changes) and Britain’s tolerance for the Confederate side in the Civil War.  Canadian merchants advocated joining the United States if they did not get a trade deal in 1854 but once it ended, Confederation and creation of an east-west economy behind a substantial tariff wall followed.

So, what are our options? Well, one option is simply to throw in the towel and give the Americans everything they want on their terms and hope that ends it and we get on with our lives. Of course, the resulting impact on the Canadian economy would be a return to a more resource intensive economy in terms of our exports and the loss of some employment in value added manufacturing and consumer goods production. Our auto sector would be smaller but after adjustment more competitive as would a lot of other small business manufacturers.  Alberta, Saskatchewan and to a lesser extent the Atlantic region would be relatively unscathed. On the other hand, the remaining provinces would be hit hard.

Of course, that outcome qualitatively does not seem much different from a world where the Americans levy tariffs on all our non-resource exports to the United States and we levy tariffs on all of our non-resource imports from the United States.  Oddly enough, this almost sounds like an updated version of the 1854 Reciprocity Treaty which in the end was abrogated by the Americans because they thought we derived greater benefits from it.  Yet, President Trump does appear to be a 19^th century thinker when it comes to trade and tariffs so maybe this is where we should go. Free trade in natural resource and agricultural products but tariffs of our choice on everything else would as in the 19^th century protect smaller and less efficient Canadian producers – extensive as opposed to intensive economic growth.

The best outcome is one without tariffs and free trade between Canada and the United States and Mexico whose economies have a lot of complementarities and stand to gain substantially from freer trade.  Alas, for that to happen it takes two willing partners to tango, and the Americans currently prefer not a tango or a pas de trois but more of a freestyle solo dance performance.  If the Canadian economy was able to generate income and employment under a tariff regime when it was a small and dispersed market of 8 million people, surely it will survive a tariff trade world when it has a market of 40 million people.  Will we have to get by with less?  Sure. But, as a country, our declining productivity means that we have been getting by with less for a long time now.  If it is any satisfaction, the Americans will also be poorer with tariffs.