Looking Ahead to 2018

Well, it is the New Year and as always it is a time of reflection and looking ahead to see what the New Year might bring for Canada, Ontario, northern Ontario and naturally The Most Serene Kingdom of Thunder Bay where there is always optimism. Of course, 2017 has been a pretty tumultuous year but 2018 is also looking turbulent given the changes poised to take effect as well as events around the globe. However, on the bright side, the global economy is expected to do reasonably well according to Goldman Sachs or then perhaps not if you listen to Morgan Stanley. At least, Canada will not be Venezuela which FocusEconomics expects to be 2018’s most miserable economy though Canada is expected to be in the top ten for nominal GDP.  

Nevertheless, this year will certainly be a test of the aspiring nature of current economic policy in Ottawa and Queen’s Park.  At the top of the list, the United States will dramatically lower business and personal tax rates effective January 1^st.  The last time this happened in the 1980s, Canada countered with the federal tax reforms that lowered rates and broadened the rates.  This time, no such response appears to be coming despite the fact the federal business tax rate in the United States is expected to fall from 35 to 21 percent.  A saving grace is that new US corporate tax rates will match rather than fall below Canadian ones.

If the US economy booms in the wake of its tax cuts, Canada might be expected to benefit from increased trade.  Yet, federal economic leadership is adrift on the trade front given the United States is playing hardball on NAFTA and talks with China and the Asia Pacific are stalled.  The aspirational tone of current trade talks is not bearing fruit given Chinese and American reactions. Indeed, the possibility is high that Trump will pull the plug on NAFTA early in the New Year.

On the plus side, we can take solace in the fact that while the United States is playing hardball on trade, Donald Trump considers Justin Trudeau a “friend”.  One can only imagine our trade talks with the Americans if Donald Trump was dealing with enemies. Perhaps we can look forward to a visit to Canada by President Trump in 2018.

At the federal level, we can also take cheer in the most recent Federal Department of Finance’s long-term projections (a few days before Christmas when no one is paying attention) that the federal budget is now expected to be balanced by 2045 compared to the 2050s as forecast in last year’s long-term forecast.  Given the international situation with North Korea, the United States, Russia, China, and the Mid-East, the world should last so long.  Where is Lester Pearson when you need him?

Added to all this are expected increases in interest rates for 2018 and the tightening of mortgage rules with a new stress test. The stress test will effectively function like an increase in the interest rate for home buyers without the added stress of implementing an actual increase for the Bank of Canada. These changes are anticipated to have a depressive effect on Canadian housing markets especially outside of Toronto and Vancouver.  As for Toronto and Vancouver, being in an economic world of their own, they should only slowdown a bit.

Things are marginally better when moving into Ontario. Ontario’s economy has done relatively well in 2017 though NAFTA talks are inevitably keeping Premier Wynne awake at nights. While Ontario is expected to balance its operating budget, debt will continue to grow based on the forecast capital spending ranging from public transit to high speed rail. Yet, it is also not a done deal that Ontario’s era of deficits is over given what appears to be a ramping up of spending with implications for the future.  Moreover, the increase in the minimum wage and other regulatory changes that are being phased in with respect to employment standards, scheduling, and overtime mark the debut of a massive experiment.  How much change can employers absorb before throwing up their hands and scaling down their operations?

Ontario is also on track to a June election and many of the progressive initiatives of the current Wynne government are designed outflank the NDP given the Conservatives under Patrick Brown have sailed into the centre of the political spectrum with their policies.   The Wynne government’s policies are aspirations for a more socially just Ontario with less weight placed on trade-off between equity and efficiency.  Along with the guaranteed annual income experiment, there is also a new youth pharma care program.  

In the end, all three political parties in Ontario appear to be placing themselves along a centre-left alignment meaning that Ontarians can expect government spending and debt to maintain their current trajectories no matter who wins.   

Of course, more government spending will be seen as good news for northern Ontario given the economic dependence on government. While the resource sector saw some marginal improvements in 2017, the development of the Ring of Fire still appears to be quite distant though 2018 being an election year one can expect to see a number of positive inspiring announcements with respect to its future.  As well, it will be interesting to see if there is any mention of the “success” of the Northern Ontario Growth Plan in the next provincial election campaign.  Any mention of the 25 year plan to boost the economy of northern Ontario that started in 2011 will likely mention the wonderful things yet to come - after all, we have yet to reach the halfway mark.

As for Thunder Bay, its economic engine is government activity as the core sector with subsequent commercial and retail activity an economic multiple of this core.  It is a recipe for stability that works given that the city’s economy has been static in terms of employment for several decades.  Rising public sector salaries and incomes provides a base for municipal taxation and further local public-sector employment and the process will continue until the flow of public money is constricted – which does not appear to be any time soon.

Why tamper with perceived success? This means the current batch of local politicians – provincial and municipal – will all be re-elected come June and October and everyone will go back to sleep.  The northern Ontario economy and Thunder Bay in particular have become a sort of economic Brigadoon – an isolated sleepy region coming magically to robust economic life every 100 years. 

Yet, despite the evidence of slow economic and employment growth from Statistics Canada and the Conference Board, its boosters have often maintained that Thunder Bay is one of the fastest growing cities in Canada and with some of the lowest unemployment rates in the country.  That the low unemployment rates in Thunder Bay's case also mean the labour force has been shrinking faster than employment is apparently not seen as a cause for concern. 

I suppose it depends on what indicators you wish to measure growth with and your interpretation of the evidence. I guess who am I to argue with Thunder Bay’s ruling political class when it comes to the interpretation of economic arguments and indicators. In the end, their attitude towards and understanding of economists is best summarized by the line once made by one city politician:"You want to listen to economists? They record history. They don't make history."

Given the last real boom period in northern Ontario was the resource commodity and baby booms of the 1950s and 1960s, we can expect the regional economy to again awaken circa  2050 – roughly the same time the federal budget is expected to balance again.  By then, perhaps the federal government will carry the public sector spending ball for northern Ontario and give the provincial government and municipalities a rest.

Happy New Year and may God save us all.

So What Happened to Free Trade with China?

Well, the news this morning was that the anticipated start of free trade talks between Canada and China has now been put off and the two countries will continue to explore whether to launch negotiations.  Given the hoopla that seemed to surround Prime Minister Trudeau's departure for China, it does seem a remarkable turn of events and somewhat of a loss of face.  According to the Globe and Mail, Mr. Trudeau declined to say what had stalled the free trade talks but said that Canada was holding out for a better deal.  Indeed, Canada may also be more wary in the light of reports that competition from Chinese manufacturing has had a negative effect on Canadian manufacturing employment and part of the delay is Trudeau playing to a domestic audience.

Of course, there is probably more to the story.  On the one hand, this could be the Prime Minister once again demonstrating to the Americans on the eve of the NAFTA talks in Montreal that Canada is prepared to walk away from a trade deal if it does not get a good deal.  Indeed, the Globe story noted that Canada wants a broader deal with China whereas China seems interested in a more "pared-down" deal.  If this is the case, then China will no doubt not be amused by being used as a negotiating ploy thereby making future negotiations more prickly. 

Still  perhaps the stumbling point was more on China's side.  From China's perspective, if they expect NAFTA to fall through then they may see it as improving their bargaining position with respect to Canada in any trade talks.  Waiting out the NAFTA negotiations to see if they fall through is a prudent strategy from their perspective and swooping in afterwards when Canada "needs" the deal more can be to their advantage if indeed what they want is a pared-down deal.

In any event, Canada is a small open economy and quite dependent on international trade.  Playing these type of negotiating tactics - if that is what they are - may actually make our life more difficult on the international stage.  On the other hand, what is going on here may simply be beyond Canada's control and Trudeau is simply reacting as best he can to moves on the part of both China and the United States acting in their own perceived best interests.

Homicide Rate Up Again in Thunder Bay

Statistics Canada released its 2016 homicide statistics yesterday and for Canada as a whole, the total number of homicides actually declined slightly with the national homicide rate falling by 1 percent to 1.68 per 100,000 of population.  Of course, when Canada's urban areas are examined, there is quite a bit of fluctuation around this national average.  For Canada's CMAs, the homicide rate in 2016 ranged from a high of 6.64 per 100,000 of population in Thunder Bay to a low of 0 in three cities: Trois Rivieres, Kingston and Greater Sudbury (See Figure 1)




If you look at the percentage increase in the homicide rate, the rankings change somewhat.  The largest percent increases in the homicide rate were in Ottawa, Gatineau and Thunder Bay.  Fifteen CMAs saw an increases in their homicide rate, two saw no change (Brantford actually had zero murders in 2015 and 2016) while the remaining 17 CMAs saw declines in their homicide rates. (See Figure 2).


Thunder Bay is up again after a decline in the homicide rate in 2015.  If you need a refresher on long-term trends in Thunder Bay's homicide rate, here it is down below.  Thunder Bay's homicide rate trended downwards from 1981 to about 2008 and then began to trend up.  For a local media take on this story, see here.






 

Bigger Deficits in 2016

Statistics Canada has released its 2016 Consolidated Government Finance Statistics and the combined deficit of all three levels combined – federal, provincial-territorial and local – was $18.1 billion in 2016 which was up from $12.9 in 2015.  According to Statistics Canada, the increase in the combined deficit was attributable to expenses rising faster than revenue.  Government spending in Canada in 2016 was up by 2.6% while revenues were up by 1.0 percent.  The accompany chart from Statistics Canada summarizes the picture nicely.

 

The federal government saw an especially pronounced deterioration.  The net operating balance deficit for the federal government was $10.0 billion in 2016, compared with a $2.1 billion surplus the previous year. Total federal expenses grew 4.2%, due to an increase in social benefits (old age and family allowances) and grants to provinces and territories expenses, while revenue actually was down 0.1%. A big component of that revenue drop incidentally was from income tax revenue – despite the increase in personal income rates on higher earners that kicked in.  For a longer term take on federal finances, you might want to check another post of mine here.

As for the provinces, net operating balances in deficit were reported in 9 of 13 jurisdictions with Alberta (-$9.9 billion), Manitoba and Ontario (each -$1.7 billion) having the largest deficits in 2016.  While still in deficit, Ontario's net operating balance improved the most, due to higher revenues from corporate income taxes and taxes on goods and services – but then Ontario’s economy in 2016 did see an improvement.  As for the largest surpluses – meet the new poster children for fiscal responsibility in Canada in 2016:  British Columbia (+$4.9 billion) and Quebec (+$4.4 billion).

Canada's Economy is Going to Cool Off But How Much is Not "Predetermined"

Focus Economics has just released its October 2017 Consensus Forecast for Major Economies and the numbers for Canada bear some consideration in the wake of our recent surge in real GDP growth.  Annualized GDP growth in the second Quarter of 2017 for Canada according to Focus Economics was 3.7 percent – the highest in all the G7-which averaged 2.2 percent.  The world economy grew at 3.2 percent; the United States came in at only 2.2 percent while Germany managed only 0.8 percent.  So, Canada seems to be on a roll.

However, looking ahead at the 3^rd and 4^th quarters and into 2018, the GDP growth rates start to come down.  Canada’s 3^rd quarter of 2017 is forecast at 2.7 percent while the 4^th quarter comes in at 2.5.  As for 2018, the 1^st quarter is forecast at 2.5 percent, the 2^nd at 2.1 and the remaining quarters at only 2 percent each.  Canada is still expected to outperform the G-7, which by the 4^th quarter of 2018 is expected to see only 1.8 percent average growth.  However, the gap between Canada and the G-7 narrows considerably.

Part of what is going to cool off the Canadian and G-7 economies is the anticipated rise in interest rates.  The rate for three month T-bills in Canada was at 0.54% in 1^st quarter of 2017 but is expected to rise to 1.72 percent by the 4^th quarter of 2018.  The average for the G-7 has it going from 0.54% to 1.14% suggesting that rates in Canada are currently expected to rise faster than other G-7 countries.  Over the same period, 10-year bond yields are expected to rise from 1.63% to 2.56% in Canada and from an average of 1.48% to 1.91% in the G-7. 

Of course, these interest rates are all still quite low by historical standards but think of them another way.  From the 1^st quarter of 2017 to the 4^th quarter of 2018, Canadian T-bill rates are expected to undergo an increase from 0.54% to 1.72% - a percent point increase of 1.18 points but a percentage increase of over 200 percent.  In other words, there is a doubling of debt service costs.  Moreover, this increase is greater than the average for the G-7. 

The coming slowdown in Canadian economic growth is going to be driven by two interest rate effects.  First, the rise in interest rates will affect borrowing and investment by Canadian consumers and businesses.  Second, Canadian interest rates rising faster than the United States and other G-7 countries means that all other things given, the Canadian dollar can also be expected to appreciate relative to other major currencies also affecting our exports. 

In the end, much depends on how quickly Canadian interest rates continue to rise.  Stephen Poloz, the Governor of the Bank of Canada in last week’s address in St. John’s remarked that there was “No predetermined path for interest rates from here” suggesting that future rate increase are by no means preordained.    Of course, this introduces a certain amount of variability into forecasts as well as some uncertainty into the expectations of consumers and businesses.  In the end, what this also means is that the amount of cooling off the Canadian economy may face over the next 18 months is also not predetermined. 

Thunder Bay Housing Coming Down

A report by Moody's Analytics reported in today's Globe and Mail says that higher interest rates, newer mortgage-lending rules and declining affordability are together going to put a damper on the growth of Canadian housing prices.  Indeed, the price of single family homes in Canada is forecast to only grow at 1.3 percent annually over the next five years but there will be considerable variation across the country.  Larger urban centers with growing populations particularly in southern Ontario will do better while many other cities will see declines.

As the accompanying graph constructed from data provided in the Globe article shows (July forecast), Toronto and Hamilton are still expected to lead the pack at growth rates of 7.7 and 5.8 percent respectively but after that the growth rates drop off and indeed move into negative territory. 

Thunder Bay is expected to see annualized declines of 5.4 percent.  Reasons for this are falling median incomes, slow population growth rates and slow rates of household formation - along of course with the fact that interest rates are on the way up. Other housing price reports on the Moody site also show that Greater Sudbury is forecast to have price declines.  The May 2017 report for example (the April forecast) noted Sudbury prices over the next five years would decline by 1.2 percent annually.  The same report also had Thunder Bay declining by 1.2 percent annually with a substantial revision now in the new report. What has changed over the last few months? Interest rates.


I think interest rates are really the big factor here given that Thunder Bay's housing prices managed to double over the last 10-15 years despite the weak economy and flat population growth.  Not quite the growth of the GTA but still quite remarkable given the local demographics and economic performance. 

Comparing Homicide Rates: Why Thunder Bay Has a Problem

From a peak reached in the early 1990s, police reported crimes rates in Canada have been on a downward trend.  This is also the case for homicide rates, which have been on a downward trend nationally since the early 1980s.  There is of course variation from year to year in homicide rates so some type of regression smoothing procedure is helpful in establishing what the longer-term trends over time are.  What quickly emerges from an examination of long-term trends is that Thunder Bay followed national trends in homicide rates until the early 21^st century but that since then there has been a substantial divergence.  It is not a “northern Ontario” thing because the Greater Sudbury CMA tracks provincial and national homicide rates quite closely.

Figure 1 presents LOWESS Smoothed homicide rates for Canada and major regions from 1981 to 2015.  LOWESS is a particularly useful smoothing tool because it helps deal with “outliers” – that is extreme observations that can often distort averages taken over time. The data source is from Statistics Canada (Table 2530004 - Homicide survey, number and rates (per 100,000 population) of homicide victims, by census metropolitan area (CMA), annually).  Canada as a whole has seen a steady decline in homicide rates going from smoothed values of 2.74 per 100,000 in 1981 to 1.51 by 2015 – a drop of 45 percent.  This decline is a feature of the West, Ontario, Quebec and Atlantic Canada though Atlantic Canada sees a sight upturn after 2006.  In terms of regional rankings, homicide rates are now the highest in the West, followed by Atlantic Canada, then Ontario and finally Quebec.
 

Federal Budget 2017 Analysis

Well, the 2017 federal budget is out and I have put together some comments in two parts: general and northern Ontario specific.

General Comments

Today’s federal budget addresses Canada’s economic uncertainty by stimulating spending without adequately addressing the long-term productivity growth of Canada’s economy.  Total spending is expected to rise from 315.1 billion dollars in 2016-17 to reach 371.8 billion dollars by 2021-22 – an increase of 18 percent.  The 2017 federal budget is disquieting given that revenues will still rise from 292.1 billion dollars to 356 billion dollars – an increase of 22 percent - over the same period and yet still result in the accumulation of more deficits. 

The federal debt is 637.1 billion dollars in 2016-17 and projected at 756.9 billion dollars by 2021-22.  Debt service costs will rise from 24.3 to 33.3 billion dollars over the same period. The deficit will be 23 billion dollars in 2016-17, 28.5 billion dollars in 2017-18, 27.4 billion dollars in 2018-19 and decline moderately to 18.8 billion dollars in 2021-22.

While the introduction of a contingency reserve is welcome, it still remains there is no long-term plan for addressing the fiscal deficit situation of the federal government.  This is of concern given the importance of private sector confidence when it comes to making investment and business decisions.  This is also worrisome given that interest rates are projected to rise as well as the economic uncertainty we still face given the trade and economic policies of the Trump administration in Washington.

Despite the increased spending, there is to date relatively little to show for promised federal infrastructure investment and the federal government’s promises of a bold and transformative agenda have fallen flat when it comes to actual implementation.  While today’s budget focus on social policies such as more skills training, better access to child care, innovation and infrastructure spending for First Nations is commendable, there is really no assurance that the government will be able to implement anything given its slow pace of implementation on the preceding year’s infrastructure and spending commitments.   

According to a recent report from the Institute of Fiscal Studies and Democracy, the federal government already spends nearly $23 billion on innovation, skills development and training across 147 activities and there is little available in the way of performance measurement to evaluate what works and what does not.  

In the case of assistance to the middle class, it remains that the recent reduction in middle class tax rates from 22 to 20.5 percent generally benefited tax filers making between $50,000 and $100,000 per year while nearly two-thirds of Canadian tax-filers report total income below $50,000 and saw no benefit from the tax decrease. Moreover, the increase in unemployment insurance premiums in 2018 to partly offset the government’s skills-training proposals and the increase in excise taxes constitute a tax increase on the middle class. However, the government is to be commended for not further increasing the tax burden via increases in capital gains taxation.

While the federal government has grand aspirations and seems willing to spend a lot of money it falls short on achievement and does not appear able to fully address concerns that it is generating the best value for money.  A budget must be more than an aspirational document that announces spending that is to be spread out over time.  It should set goals and then achieve them. 

Northern Ontario Comments

This is a government that has decided to run large deficits and add substantially to the public debt.  In the case of northern Ontario, one has to ask where the regional benefits of this increased spending are given the federal emphasis on infrastructure investment, the innovation agenda and assistance to the middle class?  In many respects, the budget is a disappointment with respect to some of the specific issues the northern Ontario economy faces.    Northern Ontario is still characterized by slower economic and employment growth relative to the rest of the country and given that its has substantial representation at the federal level both in terms of MPs as well as cabinet, one wonders where the federal growth agenda for northern Ontario is now that we are two years into the federal mandate?

Northern Ontario receives little in the way of specific mention in Budget 2017.  An extra 25 million dollars over five years for Fednor is not much in a world of multi-billion dollar spending projects.  Here is what I would have liked to see in the 2017 federal budget with respect to the economic future of northern Ontario. 

·      1. It is Canada’s 150^th anniversary.  Where is the federal vision that would see us embark on finally completing the Trans-Canada highway through northern Ontario up to a standard that is worthy of a nation as wealthy and developed as Canada?  When will there finally be a commitment to complete a four-lane national highway through the middle of Canada fully linking east and west?

·     2.  Northern Ontario municipalities have not had the increase in economic base characteristic of larger urban centers and their revenue is increasingly being borne by residential ratepayers.  At the same time, the physical infrastructure in northern Ontario municipalities is increasingly in need of repair and renewal.  Notwithstanding the announcements of investing in infrastructure, where are the federal infrastructure projects and dollars infrastructure in terms of roads, bridges and sewers here in northern Ontario?

·      3. Where is federal leadership when it comes to investing in the Ring of Fire?  Commodity prices have bottomed out and are in the process of starting an upturn.  What are the federal plans to providing the infrastructure investment to assist in development of mining resources in northern Ontario in advance of the coming upturn in commodity prices?

·      4. The federal government maintains it is committed to research and innovation and economic development.  When can we see some direct and more substantial federal investment in research directly related to northern Ontario economic development issues, to the analysis of the regional economy of northern Ontario, and the economics of natural resources, mining and transportation?  Where are the Federal Research Chairs and research support directly dedicated to these areas?

·      5. The 2016 Federal Budget said it planned to invest $8.4 billion over five years for indigenous people with $1.5 billion earmarked for 2016-17 and the 2017 Budget earmarks an additional 3.4 billion over the next five years.  The money was supposed to be spent on health, infrastructure, renovating and building schools on-reserve as well as improving water supply and treatment infrastructure.  How much of this in 2016-17 made its way to northern Ontario?  How much in 2017-18?

Some Federal Fiscal Highlights

I have a new report out by the Fraser Institute in celebration of Canada's 150th Anniversary.  It is titled A Federal Fiscal History: Canada, 1867 to 2017 and tracks federal government spending, revenue, deficits, debt and spending and revenue composition from 1867 to 2017.  You can get the executive summary and the full report here.  However, is a quick round-up of some federal fiscal highlights over the years:

Northern Economist Visiting NOSM

I will be visiting the Thunder Bay Campus of the Northern Ontario School of Medicine on January 26th to give a seminar in the Human Science Seminar Series.  My talk will overview trends in health spending in Canada over the longer-term and provide some recent estimates of aggregate value for money from this spending.  Looking forward to the visit.

The North and Population Aging

The 2011 Census results for population age are out from Statistics Canada today and Canada is indeed a much older place than the last census in 2006.  The proportion of population aged 65 and over is now 14.8 percent, up from 13.7 percent in 2006.  The results for Northern Ontario suggest that the North is older than Canada as a whole.  A ranking of Canadian CMAs (Census Metropolitan areas) and Northern Ontario CMAs and CAs (Census agglomerations) show the Sault is the oldest major city in the North with 19.3 percent of its population aged 65 years and older.  Thunder Bay is next at 17.2 percent followed by North Bay at 17 percent.  Sudbury is next at 16.1 percent with Timmins the youngest at only 13.8 percent.  For Canada's CMAs as a whole, the oldest is Peterborough at 19.5 percent and the youngest is Calgary at 9.8 percent.  Indeed, Calgary, Edmonton and Saskatoon, out in the booming west with its influx of young migrants - are the three CMAs with the lowest share of population aged 65 and over.  Additional note, I've left Elliot Lake (a northern CA) off of this graph.  Its proportion of population aged 65 and over is 35.1 percent but then it has become a retirement community.

The Slowdown in Net Worth

While I've always had an interest in wealth distribution, composition and growth from the perspective of 19th century economic history, recent evidence is also of interest.  I received a report on wealth in Italian households this week and posted a comparison of net worth to income estimates across G-7 countries on Worthwhile Canadian Initiative.  I decided to follow up with a look at data on per capita Canadian net worth for persons and unincorporated businesses.  Given the recent warnings about the rising level of consumer and personal indebtedness in Canada, it comes as no surprise that the last four years have seen a halt to rising net worth.  Between 1971 and 2010, real per capita net worth (in 2002 dollars) in Canada nearly tripled.  It peaked in 2007, then dropped,  but has yet to recover to its 2007 level.  Along with the shock of the financial crisis on investment portfolios, recent years have also seen growth in personal and consumer debt limit net worth growth.  Over the period 2007 to 2010, the average annual growth rate of net worth was 0.7 percent.  Compare that to 3.2 percent for the period 2000 to 2006 or 3.7 percent for the 1990s.  While the growth rate of net worth has slowed, we have not seen the steep declines of the United States where the recession was driven by a collapse in net worth brought about by the end of the U.S. housing boom and the drop in house values.  To date, we have been spared that type of "balance sheet" recession.  However, the February 4th issue of The Economist drew attention to Canada's housing market as being in a bubble of its own. The good news is that a soft landing was predicted.  Rather than a bubble, the Canadian housing market was referred to being more of a "balloon"  and balloons can deflate slowly - if not pricked by a pin.

Northern Economist in the Winnipeg Free Press

 

The View from the West

Harper seeking a sustainable Canada

By: Livio Di Matteo

February 13th, 2012

News headlines present what seem to be unconnected stories regarding government initiatives and yet there is an underlying strategy to what any government does. For example, recent weeks have seen the term "sustainability" being applied to describe federal government policies with respect to health transfers and pensions.
At the same time, there have been references to Canada forging new trade links with Asia and Europe. Coupled with all this is the looming federal budget, which is expected to unveil substantial budget cuts.
Linking all these items together is the agenda of Canada's present federal government, which can best be understood as a comprehensive strategy of national sustainability. That is, the pursuit of a strategy that will make Canada economically sustainable for the 21st century.
To borrow a Prairie metaphor, the government's vision is passing the farm on to our children via two policy pillars. First, is restructuring the public finances and second, the pursuit of an economic strategy designed to ensure long-term growth and opportunity by taking our trade eggs out of one basket.
Securing the public finances requires balancing the budget and making sure the national debt begins to decline as the prospect of rising interest rates and debt service costs may squeeze health and social programs.
The sustainability of government spending and elimination of the deficit in the long term requires government spending not rise faster than the resource base.
To this effect, federal health transfers will eventually rise at the rate of GDP growth. As for government pensions, there is ongoing discussion about reforms to Old Age Security to increase the eligibility age and thereby also limit spending. Eliminating the federal deficit primarily through expenditure reduction rather than revenue increases can also be seen as a calculated strategy of fiscal sustainability designed to keep our tax rates low for the purposes of international competitiveness.
Given that one third of our GDP is rooted in the export sector, Canada's economic viability also requires that we seek opportunities to grow our trading relationships. The pursuit of trade opportunities in Asia and Europe represents a long-term strategy to diversify our trade portfolio and is a departure from our monogamous historical trade patterns. First, we had Great Britain as our primary trade partner and directed most of our exports there. Then, we cultivated the United States as our trade partner, which at one point absorbed nearly 80 per cent of our exports.
Reliance on one major market for our goods makes us vulnerable to political and economic shocks. In the case of the U.S., while it represents a convenient and wealthy market for our wares, recent years have seen the Americans become increasingly inward looking and preoccupied with their border to the extent that trade with them has become increasingly more difficult. The shift away from the American market began during the world financial crisis and the Great Recession of 2009. Between 2005 and 2010, the value of exports to the U.S. dropped by 10 per cent and their share of our exports fell from 82 to 73 per cent. Over the same period, exports to the United Kingdom and Europe have grown as well as exports to other OECD countries, China and India. The pursuit of China as a market for Canadian energy also marks a departure from our previous continental approach to energy markets.
The federal government is following in the path of previous governments in crafting an economic strategy to secure Canada's sustainability as a nation. From 1867 to the Second World War, we were dominated by the national policies of land settlement, tariff protection and railway construction, which erected an east-west national space. The period from the end of the Second World War to the 1980s saw the pursuit of trade opportunities with the United States via agreements such as the Auto Pact with increasing dominance of the North American market leading to the 1988 Free Trade Agreement and NAFTA.
We are embarking on a 21st-century strategy of economic diversification with the pursuit of trade and investment opportunities with Asia and Europe. The continental economic vision of guaranteed access to the U.S. market has been increasingly under siege as a result of repeated lumber disputes, tighter border controls, and an economically weaker United States that is more inclined towards protectionism. In the face of these challenges to Canada's economic future, the government response is a strategy to balance the books and to make sure we will not be dependent on one international market for our future economic welfare. Who can really argue with that?

Livio Di Matteo is professor of economics at Lakehead University.

Republished from the Winnipeg Free Press print edition February 13, 2012 A10

New Health Fiscal Sustainability Report Released

A new report on the fiscal sustainability of public health care in Canada was just released by the Canadian Health Services Research Foundation.  The report is titled “The Fiscal Sustainability of Canadian Publicly Funded Healthcare Systems and the Policy Response to the Fiscal Gap” and is authored by myself and Rosanna Di Matteo and is available on the CHSRF web site.  For a summary of the results, see below:

Key Messages

• Fiscal sustainability generally refers to the extent to which spending growth matches growth in measures of a society’s resource base. Since 1975, real per capita government health spending in Canada has risen at an average annual rate of 2.3%, in excess of the growth in real per capita GDP, government revenues, federal transfers and total government expenditures.
• Five expenditure scenarios were constructed, using regression determinants and growth extrapolation approaches, for Canada as a whole, each of the ten provinces and the territories for the period 2010–2035.
• For Canada as a whole, real per capita public healthcare spending from 2010 to 2035 can be expected to grow anywhere from 78% to 115% and reach a level in 2035 in 2010 dollars ranging from $6,552 to $8,798 per capita.
• For the provinces, the average increase across the ten provinces from 2010 to 2035 in real per capita provincial government health spending ranges from 81% to 160%. Average estimated spending in 2035 ranges from a low of $6,711 to a high of $10,819 per capita.
• For the Yukon, real per capita public healthcare spending between 2010 and 2035 can be expected to increase from a low of 142% to a high of 652% – a range in 2035 of $14,316 to $41,089 per capita. For the Northwest Territories and Nunavut, low-end growth was 57% while the highest growth was 281%. Spending in 2035 would be estimated to range from a low of $12,423 to a high of $32,557 per capita.
• In terms of the fiscal gap, annual compound growth rates for forecast government health spending exceed those for government revenue growth for most scenarios and jurisdictions. For Canada as a whole, the public healthcare expenditure-to-GDP ratio could rise to as little as 9.5% or to as much as 13.4% by 2035 from the current 7.6%. The territories and most provinces generally also see increases in the public healthcare expenditure-to-GDP ratio by 2035.
• Under the extrapolation assumption that health expenditure trends for the 1996 to 2008 period continue but with lower economic growth, government health spending in Canada in 2035 would reach $8,798 per capita and the public healthcare expenditure-to-GDP ratio would reach 13.4%. This projected increase is equivalent to an increase in public spending today of about $2,797 per capita, possibly requiring up to a 15% increase in per capita revenues.
• Potential policy solutions to make public healthcare spending more sustainable include controlling and restructuring expenditure, raising additional tax revenues, creating a federal health tax to generate revenues for a national health endowment fund, and allowing for a greater private role in healthcare spending.