Getting Ready for Budget Season: A look at Thunder Bay Municipal Indicators

 

Municipal budget season is well underway in Thunder Bay, but the main public theatrics over the 2025 budget should be transpiring over the next few months.  The most recent indication is that City Council is expected to target a 3.8 percent municipal tax levy increase.  There are budget pressures underway not the least of which is apparently an additional $5.6 million to cover wages and benefits. Putting budgets into context is always more useful if a long term is taken and fortunately the Ontario government does provide resources to track municipal spending.  Here, a useful tool are the multi-year financial reports provided from the Financial Information Returns which provide standardized reporting of a municipality’s financial activities as well as additional statistical information.

 

Figure 1 presents municipal property taxes per household and water and sewer charges per household since 2000.  While many other municipalities appear to have filed their 2023 returns, Thunder Bay appears to be lagging and therefore this long-term snapshot only goes to 2022.  From 2000 to 2022, municipal property taxes in Thunder Bay have nearly doubled going from $1,947 to $3,918.  The growth of water and sewer charges has been more pronounced going from $379 per household in 2000 to $1,158 in 2022 – a tripling of the average per household charge.

 

 

 

Figure 2 plots a dual scale chart with the total municipal workforce (full time, part time and seasonal) on the right size axis and the value of wages, salaries, and benefits per employee on the left axis.  Perhaps one of the reasons Thunder Bay is lagging in putting out its financial information is that it is a bit short staffed given that the total size of the municipal workforce has declined from a peak reached circa 2013 and has been pretty flat since 2016.  On the other hand, since 2000, the size of the municipal workforce has gone from 2,344 employees (there is a data  gap in 2003) to 3,404 in 2022 – an increase of 45 percent.  Over the same period, average wages, salaries and benefits per employee have grown from $46,978 to $83,799 – an increase of 78 percent.

 

 

 

However, these indicators and the increases over time are best placed in context to an assortment of other indicators and this is done in Figure 3 which plots the percent increase in an assortment of indicators from 2000 to 2022.  As one can see, prices in Thunder Bay as measured by CPI inflation have risen by 49 percent.  Own purpose property tax revenues (the total tax levy) has grown 122 percent while total grants revenues have only grown by 55 percent.  Municipal property taxes per household have grown 101 percent while water and sewer charges have grown 205 percent.  

 

 

 

Meanwhile the total taxable assessment has grown by 60 percent which when divided by the number of years works out to an annual average growth of 2.7 percent.  This seems at odds with the fact that published reports have been of average assessment growth over the last ten years of only 0.6 percent annually.  However, one suspects that the 0.6 percent is real growth – after inflation – because the average annual assessment growth of 2.7 percent minus the average annual inflation rate of 2.2 percent from 2000 to 2022 yields real average annual assessment growth of 0.5 percent.  Given that property prices have grown substantially in Thunder Bay over the last decade in particular, the nominal rather than inflation adjusted tax assessment has been growing in tandem

 

More interesting is the fact that between 2000 and 2022, the population of the City of Thunder Bay has actually decreased by 6 percent.  This also seems at odds with recent reports that Thunder Bay is over 130,000 people but it must be remembered that FIR deals with municipal finances and the population of the City of Thunder Bay is that within its city limits while the recent population reports are for the larger Census Metropolitan Area.  Essentially, growth in Thunder Bay has been occurring outside the city limits where they do not have to pay property taxes to the City of Thunder Bay.

 

And finally to round things off, the municipal workforce over the 2000 to 2022 period grew by 45 percent, the total compensation per employee grew 78 percent and the total value of building permits grew 85 percent.  However, after inflation of 49 percent, salaries and benefits per employee only grew in real terms by 29 percent while to end things,  the real total value of permits grew by 36 percent. 

Can Ontario's Universities Be Made Sustainable? Part 2 - Solutions?

Last post, we surveyed the financial situation of Ontario universities and the evidence suggests that the “system” as a whole is sustainable given that total revenues generally exceeded total expenditures.  However, that did not mean that there was not a sustainability issue given that as many as a dozen institutions were expected to run deficits going into the 2024-25 academic year.   It would appear that some institutions are more sustainable than others and that smaller and more remote institutions in particular faced financial issues of which the Laurentian situation was the grimmest recent example.  However, even larger and more research-intensive universities are not immune from financial issues as illustrated by the recent example of Queen’s University.

 

What are the solutions? The measures needed are either to reduce expenses, raise revenues or some combination thereof.  With respect to revenue, you will have to assume the total provincial grant package is not going to change beyond what the government has promised.  On the revenue side, there is enrollment revenue, and you can either raise price or quantity sold when it comes to students.  Demographics suggest that domestic enrollment is finally starting to rise but international enrollment is not in the wake of federal measures and given domestic tuition is still frozen it means tuition revenues cannot be expected to be a big driver of sustainability.  Moreover, much of the potential domestic enrollment increase over the next decade or so is going to be in the GTA which is of limited value to more remote regional universities.

 

 

Other revenue solutions?  Fundraising?  Ancillary revenues? Sales of goods and services?  Research services?  These already are being used and their growth potential depends on the local market.  In the case of ancillary revenues like parking, food services or even residence fees, these took a large hit during the pandemic and have yet to recover.  Students and even faculty and staff are no longer as likely or willing to be a captive market on campus.  While there is still a desire for in-person course learning, many university students like the flexibility of online or hybrid options and these options naturally do not come with parking sticker revenues or food purchases in campus eateries. Fund raising to build endowments?  These take a long time, and the reality is that donors like to contribute to goals with a tangible outcome – a building, a program, a scholarship – and not to a fund that will generate revenues for general operating expenses.  Indeed, some donations by creating new programs or positions or a building will contribute to operating expenses in the long term even if they generate short term resources.

 

Which brings us to the cost side.  One simple solution is simply a draconian government mandated across the board pay cuts to all university employees (there probably is a way to do if they put their mind to it).  In 2022, salaries and benefits for Ontario universities were $10.5 billion out of total expenses of $17.2 billion – 61 percent.  Academic salaries were only $4.8 billion or 28 percent of total expenses.  If only 28 percent of total university expenses are academic salaries (46 percent of total salaries and benefits) – it does beg the question as to what all the other money is going to.  Nevertheless, in theory, hundreds of millions of dollars can be saved by cutting salaries and benefits 5 or 10 percent – in the short term.  However, a system wide cut is a blunt instrument and as noted some institutions are just fine without it.  Moreover, an across the board cut - aside from the obvious political turmoil it would cause – does not address the structural issues of universities perhaps having the wrong mix of programs for their markets or even too many programs given their regional demand.  A wage cut without addressing the structure of spending only postpones the sustainability problem to another day.  And a wage cut to universities alone raises the more uncomfortable question about the wages and salaries for the rest of the broader public sector.  If you think universities pay well, then take a look at municipalities and the health and education sectors.

 

Another cost side solution is a university-by-university approach tailoring government initiatives and responses to the unique issues of each institution.  Maybe some institutions should be closed outright but every community with a university would fight (one hopes) to retain their university.   Are there cost savings in universities working together to save on procurement of supplies or services?  Can automation and AI streamline and reduce costs when it comes to management of students, human resource functions, recruitment, enrolment management?  And of course, can one save money by more intensive use of current human resources?  On the staff and faculty side we can term this as more “efficiency” or doing more with the same resources.  On the faculty side, this inevitably means larger classes or more classes – an increase in class size and teaching loads.  Of course, this may reduce program offerings and that leads to less diversity in both courses and programs.  On the other hand, does every university need the same set of programs and departments? 

 

All of these revenue and cost measures just outlined are not new ideas.  They have been around for some time and ultimately involve nudging the trajectory of expenses and revenues to ensure a more sustainable path.  They do not solve the fundamental problem outlined which is that Ontario has a set of universities which its government and public really do not want to pay more for.  Ontario funds its universities and regards it as a system but in reality, it is a set of semi-autonomous but highly regulated institutions, each with its own funding situation – some of which are sustainable and some which are not based on their debt and deficit positions - and filled with processes that lead to slow decision making given the independence of staff and faculty in particular. Nudging them does not seem to work very quickly if at all.

 

Another solution?  A complete overhaul of Ontario’s university system (I am not going to deal with community colleges but to some extent the same solutions can apply to them) that involves merging a number of the smaller institutions (along with more financially troubled larger ones if necessary) into an actual regional university system with individual campuses offering less diversified and more specialized offerings. This may be a way out given the politics of every major urban area in Ontario wanting a university but unrealistically expecting a full range of courses and programs that cannot be sustained given regional enrollment bases.

 

What might such a reform look like for any government willing to bite the bullet and incur the wrath of assorted regional electorates?  Well, the more sustainable larger research-intensive universities would likely remain pretty much as they currently are.  We all know who they are but at minimum would include University of Toronto, Western, Waterloo, McMaster, perhaps Queen’s and perhaps either Ottawa U or Carleton or maybe both.    Some might add Guelph to this list or even York.  As for the remaining universities – some of which are rather large – one could create three university systems: The University of Southern Ontario (Windsor, perhaps Guelph, Laurier, York, Universite de’Ontario francais, Brock), The University of Eastern Ontario (TMU, Trent, Ontario Tech, OCAD) and A University of Northern Ontario (Algoma, Lakehead, Laurentian, Nipissing, NOSM, Hearst). 

 

Of course, simply merging these various institutions into one a system only makes sense if it is accompanied by program and administrative rationalization.  For example, a University of Northern Ontario would not need six economics or six biology or six engineering departments or as many department chairs or eventually as many faculty and staff for that matter. There would also be a marked decline in the demand for Deans, Vice-Presidents, Associate Vice-Presdients and Presidents and assorted entourages.   The same would go for a University of Southern Ontario or Eastern Ontario.   Students would need to go to the campus where their specific program is being offered for their in-person courses or take them online.  This would be a major restructuring of courses and offerings as well as how they are offered.  Indeed, this rationalization via specialization of both administrations, faculty and staff in specific campuses linked by modern information and digital technology is where some savings might be.  Simply merging universities, keeping all the programs intact and creating a new administrative apparatus with dominion over them all is not going to save any money.  It will simply spend more.  The goal is to reduce the expenditure side well below the current revenue side to provide more resources overall for the system.  This outcome also requires government not take the savings and spend them on something else. 

 

Is a merged campuses solution just a pig’s breakfast of acrimony and political chaos?  Yes indeed.  Could it work? Perhaps with the right set of skilled decision makers but let’s face it, this is 21^st century Canada – skilled decision makers seem to be in short supply and outnumbered by word salad spewing political performers masquerading as the former.  And then, why have three systems?  Maybe those three systems that have been proposed could simply be combined into one – The University of Ontario alongside the remaining half dozen or so stand-alone universities.   Each University of Ontario campus would remain on the footprint of the current university but with fewer programs and faculties and of course fewer administrators and staff.  In some communities, you might even merge them with the local community college.  Sure, there would be a lot of unhappy campers, but it would be the system that Ontarians are willing to pay for.   If they don’t like it or if there are not enough places for everyone, they would be welcome to send their kids elsewhere – perhaps to another province or maybe an American liberal arts college? 

 

Trying to change the Ontario university system to deal with long-term sustainability is a task that most governments are not up for.   Most likely, the tendency will be to do nothing and let the system meander into yet another crisis down the road.  This is the most likely path forward given that not only do Ontarians not want to pay more for universities, but they do also not wish to think about them unless their children have trouble getting into a desired program or a residence spot.  In the absence of more public support for universities, another solution is to simply deregulate university tuition and let universities set their own fee schedules to attract and retain students based on what they see as their market and strengths.  It remains that the tuition currently being paid by domestic students is less than half what it actually costs to educate them.  The price is too low because it is subsidized by government.  More tuition competition in the end would result in universities eventually making their own cost-side restructuring decisions given that what they offer would need to be more tailored to price. Such an approach would also need to be accompanied by an enhanced provincial student aid program to deal with lower income accessibility to university (and college) education. 

 

 

 

 

However, again, none of this is new.  All of these ideas have been around for a long time but always come up against the political culture of the province and the culture of universities.  When it comes to universities, Ontarians want guaranteed access to a premium university system that provides a wide range of courses and programs but at discount prices.  The government likes to create universities but does not like to fund them.  Good luck with that.

 This post originally appeared on the Fraser Institute Blog, March 25th, 2024.

Ontario government’s fiscal history drenched in red ink

— March 25, 2024

The Ford government will table its next budget on Tuesday. But a longer-term perspective on the evolution of Ontario’s government finances provides some important context for today. Since Confederation, Ontario has seen a massive expansion of its revenues, expenditures and debt. And its fiscal performance in terms of balancing its finances has oscillated over the years. Using data from the Finances of the Nation database, assorted Ontario budgets, and the Fiscal Reference Tables, a picture of change and variable fiscal responsibility emerges.

With revenues of $2.3 million and expenditures of $1.2 million in 1868, Ontario had a substantial surplus and no debt. Indeed, substantial surpluses marked much of the pre-Second World War era. By 2023, the Ontario government had spending of $199 billion and revenues of $193 billion for a deficit of nearly $6 billion and a net debt of $400 billion. Ontario government spending on a real per-capita basis was relatively modest from 1867 to 1913 (despite province-building activities such as roads and railroads) and was financed primarily by federal government grants and natural resource revenues from forestry and mining. The period after 1914 saw an expansion of both government spending and revenues that was quite dramatic compared to the prior period, but which paled in comparison with the post-1957 expansion into health, education and social services.

With respect to revenue composition, Ontario gradually shifted from a reliance on natural resource rents and government grants to own-source revenues from income, consumption and other assorted taxes. When compared to the federal government—the only other Canadian government larger than Ontario in terms of total revenues or expenditure—in real per-capita terms Ontario spent less than the federal government until the early 1990s surpassing the Ottawa in 1993 for the first time. By 2020, real per-capita Ontario government spending was actually more than federal real per-capita spending, though the pandemic years saw a reversal.

What’s truly remarkable about Ontario’s finances is its growing reliance on deficit financing since the 1970s. Over the entire 1867 to 2023 period, Ontario ran an operating deficit in 70 out of 157 years or approximately 45 per cent of the time. However, in the first 100 years from Confederation (1867 to 1967) Ontario only ran 22 deficits—that’s 22 per cent of the time. In the fiscal years from 1968 to 2023, Ontario ran 48 deficits in 55 years—or deficits 87 per cent of the time. Deficits have gone from being a temporary departure for exceptional times to a near permanent device.

The accompanying charts plot Ontario’s deficits, its deficit-to-GDP ratio, its net debt and its net debt-to-GDP ratio from 1960 to the present. The first chart illustrates that Ontario maintained its largely balanced budget approach to its finances for most of the 1960s but incurred deficits in the 1970s.

Its three largest deficits were in 2010 ($19.3 billion), 2011 ($17.3 billion) and 2021 ($16.4 billion). As a share of GDP, the second chart illustrates that Ontario’s three largest deficits were in 1992 (3.7 per cent), 1993 (4.1 per cent) and 1994 (3.5 per cent). Ontario’s pandemic deficit peak in 2021 came in at 1.7 per cent placing it lower than some of the deficits of the 1970s and early 1980s.

Deficits plus interest eventually result in accumulated debt and Ontario like other provinces has added to that by borrowing for capital spending on top of its operating deficit. As the final chart shows, in 1960 Ontario had a net debt of $994 million and net debt-to-GDP ratio of 6 per cent. Today, net debt tops $400 billion and the net debt-to-GDP ratio is about 36 per cent. The profiles for net debt and net debt-to-GDP suggest Ontario’s net debt has grown in three phases.

The accumulation of net debt takes off in the mid 1970s, then accelerates in the 1990s and accelerates yet again after 2008. These periods of acceleration have all coincided with periods of economic slowdown or recession in the province—the low growth stagflation era of the 1970s, the recession of the early 1990s and recession/financial crisis era of 2007 to 2009. In each of these periods of distress, deficits mounted, yet even when the economy and revenues began to recover, spending growth and deficits continued. In essence, the Ontario government ran deficits during bad times and better times, giving a fiscal dimension to the provincial motto “Loyal She Remains.”

As Ontario moves forward from the pandemic era, it remains to be seen if the government will rein in perpetual deficit financing and halt debt accumulation, or if the government will embark on yet another cycle of mounting debt. In many respects, the government has continued to spend at a rate well above its economic ability and performance. Key to the issue is Ontario’s productivity lag, which has resulted in slow growth relative to the rest of the country. If the Ford government continues to spend as if Ontario was still experiencing the high growth rates of an earlier era, that’s not a sound recipe for fiscal responsibility.

What the Federal Economic Statement Did Not Highlight

 

Well, the Federal Fall Economic Statement for 2023 is out and soon to be relegated to the collections of fiscal and economic history.  There is a lot out there summarizing the economic and fiscal situation facing the federal government. Briefly, for 2023-24 it looks like revenues of $456 billion and expenditures of $489 billion for a deficit before actuarial losses of $32.5 billion and a deficit with actuarial losses of $40 billion.  Inflation this year will be about 3.8 percent and next year the outlook is for 2.5 percent while real GDP growth in 2023 is now forecast to end up at a lower 1.1 percent and for next year at a paltry 0.4 percent.  On the bright side, there are measures to create more housing, but they add up to perhaps 300,000 homes by 2031 which given the country apparently needs 3.5 million means the housing shortage is going to be around for some time to come. 

 

Two things the numbers on the fall statement do not highlight.  First, when one factors in population growth going forward at about 2.5 percent annually and the government's inflation and GDP growth forecasts, real per capita GDP is going to continue declining over the next five years.  As Figure 1 shows, by 2028, inflation adjusted output per person by 2028 will be lower than it was in 2014.  Given the anemic business investment in Canada and the resulting weak productivity performance of the Canadian economy and its inability to grow faster than population, falling real GDP per person means a declining standard of living.  We are looking at essentially a lost decade or more if nothing happens to ramp up growth.

 

 

 

Second, a fiscal anchor or guardrail set as a deficit to GDP ratio of 1 percent means that there will be perpetual deficits for years to come of at least 30 billion dollars.  Put more starkly as Figure 2 illustrates, federal revenues and expenditures will continue to grow in tandem like ships traveling alongside in the night but never actually meeting.  This will result by 2028 in a net federal debt of almost $1.5 trillion and debt service costs of about $60 billion annually which as a share of federal revenue will account for about 10 percent of revenue.

 

 

 

Needless to say, it is not surprising that these types of projections are not front and centre from the perspective of a government facing slowing growth and rising spending.

Ontario’s 2023 Fall Economic and Fiscal Statement: Some Thoughts

 

Finance Minister Bethlenfalvy released Ontario’s fall 2023 fiscal and economic update and a perusal of the numbers tells a number of stories.  First, the province is expecting the economy to slow down with consequent effects on its revenues though the current outlook for the current fiscal year 2023-24 shows tax revenues up just over 3 percent while 2024-25 and 2025-26 are currently projected at growth of 3.3 and 6.1 percent respectively.  Indeed, the period from 2022-23 to 2024-26 is expecting to see total revenues up 14 percent.  Over the same period total program spending is expected to rise  by 8.5 percent, debt interest by 22.6 percent and total expenditure will be up by 9.4 percent. 

 

Thus, revenues are projected to grow faster than expenditures but the gap between revenues and expenditures will persist until 2025-26 when a small surplus of 500 million dollars is forecast.  However, given spending that year includes a reserve of $2 billion set aside, it is likely the surplus that year will be much bigger. An economic slowdown notwithstanding, the province appears to want to keep a deficit on the books for as long as possible no doubt in part as a cautionary measure given economic uncertainty but also to quell demands for more public spending.  And as for economic uncertainty, employment is expected to grow each year until 2026 and the unemployment rate at its highest will reach 6.6 percent before declining to 5.8 percent by 2026. Hardly the recessions and downturns of yesteryear.

 

However, two items did catch my eye.  First, for 2023-24, the net public debt is expected to take a bit of a leap to $416 billion.  From 2018-19 to 2023-24, the net debt will have grown from $338 billion to $416 billion, an increase of 78 billion dollars or 23 percent.  However, deficits over that same period only sum to $42 billion.  In other words, an amount over and above the sum of accumulated deficits of $36 billion has been added to the net debt.  While this is of course likely the result of current government accounting practices that book capital and infrastructure expenditures separately from the operating expenditures, it is nevertheless a sizeable increase to see. 

 

More seriously, is the following.  If one takes past, current, and projected nominal GDP for Ontario, factors in inflation using the CPI as well as assumes population growth going forward at the medium Finance Ministry scenario of 250,000 people a year (about 1.7 percent), one gets a picture of real per capita GDP in Ontario that suggests that by 2025, real per capita GDP will be no higher than it was in 2017.  If one looks at the accompanying figure, despite ebbs and flows (with a particularly large ones circa the pandemic) as well as the early 1990s) real per capita GDP growth has been noticeably slower since about 2000.  The average annual growth rate in real per capita GDP from 1960 to 1999 averaged 2.1 percent while from 2000 to what is projected by 2025 the growth rate is 0.5 percent. 

 

 

 

You can blame some of this on population growing more quickly over the last few years, but the real culprit is that productivity growth in Ontario is lack lustre.  The long-term effects of productivity decline have begun to manifest themselves in our standard of living.  Real per capita GDP in 2022 in $2020 is $64,170.  If since 2000, real per capita GDP had grown at the average annual rate from 1960 to 1999, in 2022 it would be about $86,000 – that is a difference in output of nearly $22,000 per Ontarian.  It is not apparent that this stark difference has sunk in yet across political and policy circles in Ontario.  We have foregone a lot of output given our productivity decline and in the absence of a shift, that amount will only continue to grow.

 

 

The Finances of the University: A Lakehead Update

 

My last update on Lakehead University’s finances was in October 2021 and at that time despite the pandemic, it was doing well according to its 2020-2021 financial statement. From 2020 to 2021, revenues did fall slightly from $200.2 million to $198.4 million – a drop of just under one percent.  However, total expenses fell even faster going from $198.7 million in 2020 to $187.6 million in 2021 – a drop of 5.5 percent.  As a result, there was an operating surplus of $10.691 million in 2021 which was up from a surplus of $1.542 million in 2020.  And this was before the unrealized gains from an interest rate swap are factored in which brought  the total surplus to $14.456 million.  In the end, the sky did not fall during the pandemic. Moreover, there has been a long period of good financial performance given that over the 2000 to 2022 period, there have only been six deficits with the remaining years seeing surpluses – that is about 75 percent of the time.

 

We are now in summer of 2023 and while financial statements for 2021-22 are up and available, those for 2022-23 have yet to appear.  However, this type of lag appears customary across Ontario universities as the 2022-23 statements do not seem to appear on other university sites yet either.   Nevertheless, it is possible to quickly update the figures provided in October of 2021 with an additional year of data. 

 

 

 

Figure 1 shows that for 2022, revenues were at $184.824 million, down by $13.6 million dollars while expenses were up $17,470 million reaching $205.227 million.  As a result, the previous year’s surplus of $10.691 million had become a deficit of $20.403 million. If one factors in unrealized gains on interest rate swaps, then the deficit falls to $16.729 million.  At first glance, it would appear that the end of COVID savings and the resumption of in person teaching was accompanied by both rising expenditures and falling revenues. 

 

However, while general government grants from 2021 to 2022 fell from 64.014 million to $61.611 million, restricted grants rose from $16.838 to $22.005 million.  As well, Student fees also rose from $84.460 million to $86.962 million while the sales of goods and services nearly doubled in value going from $6.621 million to $12.279 million. All in all, taken together, these should result in rising rather than falling revenues.  However, the crucial variable here is the inclusion of investment income which was $20.055 million in 2021 (hence the large surplus that year) and -$5.384 million in 2022 (hence part of the 2022 deficit explanation).  However, it should be noted that much of this deficit is due to investment performance and if the 2021 investment performance had replicated itself, one would have seen a balanced budget if not a small surplus.

 

 

 

Figure 2 plots the university’s long-term debt, and it declined slightly in 2022 going from $106.575 million in 2021 to $103.655 million.  Figure 3 plots the main revenue sources – general government grants and student fees - in longer-term detail.  Total student fee revenue has been approximately stable since 2019 ranging from $84.460 million to $86.962 million.  This is despite the fact that tuition fees for domestic students were cut 10 percent by the provincial government and then frozen during that same period.  Like many other universities, Lakehead is now more reliant on international students whose tuition is not subject to the same restrictions. 

 

 

 

General government operating grants in absolute terms have also been stable for quite some time but in real terms (after inflation) they have declined.  As a share of total revenues, student fees have steadily increased over time while government general grant revenue has declined as a share of revenue.  Student fees now account for nearly 50 percent of Lakehead’s total revenue with general government grant funding now at about one-third.  This makes Lakehead much more sensitive to enrollment fluctuations than it would have been two decades ago when students fees accounted for about 30 percent of its total revenues.

 

Fortunately, enrollment has held up (See figure 4).  Total headcount enrollment (number of full time and part time students) has grown nearly 30 percent since 2017.  In 2022  the total headcount (as of November 2022) grew nearly 1 percent.  While the university’s total headcount has seen ebbs and flows, the overall trend since 2000 has been upwards.

So, there you have the update. Looking forward to the 2022-23 Financial Statement release!

Revisiting the Federal Finances

 

In the wake of the Federal 2023 spring budget, it is useful to take a look at the historical picture to see how the present and the immediate projected future fits into the long-term pattern of federal spending.  The key defining issue of recent public finance and government spending was of course the pandemic and the enormous amount of federal fiscal stimulus that was injected into Canada’s economy.  Federal spending rose from $363 billion in fiscal 2019-20 to reach $639 billion in 2020-21 – an increase of 73 percent.  It then declined reaching $480 billion as reported in Budget 2023 but is set to resume an upward trend and is expected to reach $556 billion by 2027-28.  As of the 2022-23 fiscal year, federal spending is 37 percent higher than going into the pandemic meaning an average annual increase in spending of about 12 percent.  This has been funded by deficits which in turn have increased the federal net debt dramatically going from $813 billion in 2019-20 to $1.3 trillion by 2022-23 and expected to reach just over $1.4 trillion by 2027-28.

 

A key feature of the pandemic is what appears to be a dramatic reversal of the decline in federal program spending as a share of Canada’s GDP – the so-called “federal fiscal footprint”.  Figure 1 uses data I compiled for my 2017 federal fiscal history with updates from the federal Fiscal Reference Tables and Budget 2023 to look at the program expenditure to GDP ratio for Canada from 1867 to 2022 and then projected forward to 2028. Fitting a simple linear trend shows that over time, there has been an expansion of federal program expenditures relative to GDP rising from about 5 percent in the 1870s to about 15 percent by the 1980s and with the COVID expenditure bump approaching 17 percent. 

 

 

 

Of course, there have been ebbs and flows around this linear trend with notable spikes during WWI and WWII.  It is noteworthy that the COVID spending spike represents the second highest federal program expenditure to GDP share with World War II as the highest.  After the spike and drop of the war era, the post WWII period saw a gradual rise in the federal fiscal footprint that saw it rise from about 10 percent in 1948 to peak at nearly 19 percent in 1982 and then decline, reaching 11 percent by 2000.  Since 2000, it has risen with a spike in 2021 at the height of the pandemic that brought the program expenditure share of GDP to 23 percent.  It has since declined to about 15 percent.  However, going into the pandemic it was just under 14 percent, up 1 percentage point since 2014 and the forecast of 15 percent means the federal footprint has returned to the size it had in the late 1970s to mid 1980s. 

 

Of course, we all know what happened after that.  There was a rise in the federal debt as a result of accumulated deficits and high interest rates that at first squeezed out program spending – note the decline into the 1990s even before the federal fiscal crisis – and then of course the transfer cuts and program expenditure reductions of the federal fiscal crisis. This of course makes the role of debt charges and interest rates of particular interest and Figure 2 plots two series: federal government debt charges as a share of total federal government expenditures and the effective interest rate on the federal net debt (defined as debt charges divided by net debt).  

 

 

 

The period from 1870 to WWI saw a decline in interest rates and not surprisingly a decline in the debt charge share of federal spending.  What surprises most people is that as a result of all the provincial debt the federal government took on at the dawn of Confederation, about 30 cents of every federal dollar of expenditure was going to service the debt in 1867.  Spending on nation building infrastructure such as railways saw debt levels and debt charges accumulate in the 1870s and 1880s but then came the great boom of prairie settlement after 1896 .  World War I saw an accumulation of debt and a rise in interest rates and with the budgetary and economic shocks of the Great Depression, debt charges as a share of total federal spending remained at over 25 percent.  Indeed, there is probably an interesting economic history thesis in explaining why there was a federal fiscal crisis in the 1990s but not the 1920s. 

 

The post WWII era saw a rise in interest rates that surpassed even the rise of the pre-WWI era and as significant budget deficits and debt began to accumulate after the mid-1970s, debt charges as a share of total spending began to rise.  However, with the positive budgetary balances of the post fiscal crisis era as well as the decline in interest rates, both interest rates and federal debt charges as a share of total spending hit historic lows.  In 2021, federal debt charges as a share of total federal spending was just below 5 percent and the effect interest rate on the net debt was about 1.8 percent.  Those numbers will be ones for the economic history books in the years to come as the debt service share of federal spending approaches 10 percent and the effective interest rate is just under 4 percent.  At least, that is what is currently forecast.

Ontario Budgets: The Long View

 

As we get ready for Ontario Budget Day, its always fun to look at the long-term picture to see where Ontario has been.  And by long-term, I mean the entire period in which Ontario has been a province of Canada – 1867 to 2022.  Figure 1 uses data from historic Ontario Budgets for the and from the Finances of the Nation fiscal and macroeconomic database to construct and plot real per capita Ontario government revenues and expenditures in 2020 dollars for the period 1867 to 2022.  Real per capita revenues have grown from about $40 per person in the 1870s to reach over 10,000 dollars today.  Expenditures have followed a similar pattern.  Much of the growth in per capita spending has occurred since the mid 1960s with the expansion of public health care as well as education spending.  From 1868 to 1965, real per capita expenditures grew from $22 to $1468 and since then has grown to reach $11,470.  Indeed, the implied annual growth rate of real per capita spending over this entire period works out to about 4 percent.

 

 

 

 

 

Figure 2 weighs in with a long-term picture of fiscal balance – deficits and surpluses.  Needless-to-say, a better measure would be a deficit to GDP ratio but Ontario GDP pre-1960 is more difficult to acquire though one day constructing estimates going back to 1867 is possible.  Over the entire 155-year period covered by this data, there has been a deficit in 87 years – 56 percent of the time.  Deficits were less common prior to 1945 with deficits only 46 percent of the time whereas since 1946 there has been a deficit two-thirds of the time.  However, the post-World War II period can be divided into two periods – one of consistent surpluses and one of consistent deficits.  The longest consecutive run of surpluses in Ontario history is from 1941 to 1967. In the period since 1967, Ontario has run a deficit 93 percent of the time. 

 

And there you have it. Happy Budget Day.

Ontario's Spring Budget Approaches

 

Ontario will be announcing its 2023-24 budget on March 23^rd in the wake of its third quarter fiscal update in February which reported a $6.5 billion deficit for 2022-23, an improvement over the Fall Update which had the deficit pegged at nearly $12 billion.  It would appear that fiscal circumstances are shifting rapidly as the Ontario economy appears to continue to exhibit robust growth resulting in revenues rising more than expected.  Indeed, revenues in 2022-23 are projected to be $16.6 billion higher than forecast in the 2022 budget and $9.6 billion higher than was projected in the Fall 2022 update.  Meanwhile, expenditure growth appears to be somewhat more restrained.  Compared to what was projected in the 2022 budget, 2022-23 is only up $3.3 billion. Even in the case of health spending – a contentious area given shortages and waiting lists – the province’s financial Accountability Office has noted that going forward, the province appears to be allocating billions of dollars less than what is required.

 

Indeed, a glance at some charts shows that these shifting projections go back even further to the 2021 budget that came as the pandemic recovery began in earnest.  Figures 1 and 2 plot revenues and expenditures as laid out by fiscal documents starting with the 2021 budget, the 2022 budget and the fall 2022 economic and fiscal update.  Both expenditures and revenues have shifted upwards with subsequent budgets and updates, but the shifts are more dramatic for revenues than expenditures.  Compared to revenues in 2019-20 of $156 billion, for 2022-23, the 2021 budget forecast $160 billion, the 2022 budget forecast $180 billion and the Fall 2022 update forecast nearly 187 billion to which the third Quarter update has now brought us to $196 billion.  Despite the pandemic and fears of deflation and revenue collapse, revenues today are $40 billion higher than 2019-20 – an increase of 26 percent.    

 

 

 

As for expenditures, from $165 billion in 2019-20, for 2022-23, the 2021 budget forecast $186 billion, the 2022 budget forecast nearly $199 billion and the Fall 2022 update a few hundred million more but still rounding out to $199 billion.  We are now looking at expenditures based on the third quarter update of nearly $202 billion.  Since 2019-20, expenditures have grown by $37 billion – an increase of just over 22 percent.  

 

 

 

What comes next over the course of fiscal year 2023-24 hinges on how the economy performs.  If we assume inflation coming down to 4 percent and real GDP growth of 2 percent, that still brings us to nominal GDP growth of 6 percent.  While 6 percent nominal growth is down from the nominal growth rates in 2022 and 2023, there is no reason to believe it will crash given the overall robustness of the Canadian and Ontario economies despite increases in interest rates. Historically, a one percent increase in the province’s nominal GDP is correlated with a greater than one percent increase in total revenue meaning that one can probably expect total provincial government revenues to rise by over 6 percent this year bringing revenues up easily another $15 billion.  With a deficit for 2023-23 now being projected as per the third quarter finances at $6.5 billion, it would not be a surprise if it comes in even lower and 2023-24 actually presents us with a hefty surplus.

Blue Ribbons and Ontario Universities

 

Ontario has made a number of announcements regarding its post-secondary education sector.  First, it extended its tuition freeze for a third year.  As you might recall, going into the pandemic, Ontario reduced domestic student tuition fees by ten percent and since then has held them frozen meaning that after three years of time and inflation, in real terms tuition has been reduced by at least twenty percent.  Though not emphasized this week, Ontario’s government grants to its universities also remain largely frozen.  As a result, with flat domestic enrollment and frozen funding, at the margin, Ontario university revenues have only been growing because they have been recruiting international students making them increasingly reliant on what could be a volatile source of revenue.

 

However, the provincial government is concerned enough about the future sustainability of its universities that it has also announced a Blue Ribbon Panel to “provide advice and recommendations to the Minister of Colleges and Universities to help keep the post-secondary education sector financially strong and focused on providing the best student experience possible. ” A blue ribbon panel or committee is generally a group of “exceptional” and “accomplished” people who are brought together to study a particularly vexing problem and bring their expertise to bear on providing solutions.  It is several notches below a Royal Commission but designed to bring a semblance of non-partisan expert advice to a problem.  This panel is expected to report back in summer of 2023.

 

Now it has already been remarked that there are no faculty representatives on this Blue Ribbon Panel.  However, it would be churlish to say the least to infer that the provincial government in any way thinks that university or college faculty are neither exceptional or accomplished.  In trying to choose faculty representatives for such a committee, one opens a can of worms larger than the universe.  If the provincial government had selected someone from the humanities, professional schools and sciences would have complained they were being neglected.  If a scientist, the humanities would have been outraged. If they chose a faculty member from a large university, the small universities would have complained.  If they had picked an economist, there would have been a chorus of criticism charging that the outcome was predetermined by selecting a minion of the capitalist neoconservative hegemony. You get the picture.

 

So in the end, the government chose a panel from people that it sees as leaders without a direct current stake in universities to study the problem.  There are no faculty nor do  there appear to be any currently serving university administrators on the panel either, though they all have links to post-secondary education in one form or another as well as board and community experience.   There is a member with student experience.  And there is past faculty and administrative experience in the case of Bonnie Patterson and Alan Harrison – who incidentally is also an economist who was at McMaster teaching at the time I was there in the 1980s.  There does seem to be an emphasis on CEO types with some financial experience and also strong representation from the new age of e-learning and other types of perceived innovative practices in education with CEOs from E-Campus Ontario and Contact North.

 

So, what will the panel decide? Well, that is to be decided obviously though I suspect e-learning and micro-credentials is one direction they are likely to emphasize. That will not please some universities who are trying to bring everyone back to the before times with full in person learning and on campus presences including night classes.  However, this is motivated as much for pedagogical reasons as it is for financial ones rooted in the need to fill parking lots, residences, and cafeterias with paying customers.  

 

The crux of the problem is that the provincial government thinks universities should be training people and providing marketable skills and is not happy where the money seems to be going.  Parents and students think that universities are supposed to provide the ticket to a career and lifestyle and do not seem to think the tuition fees worth what they are getting – though they still insist their kids go to university.  Essentially, the provincial government and the public do not perceive they are getting value for money especially given what appear to outsiders to be high paying cushy jobs for university faculty and staff. 

 

Meanwhile, university faculty believe they are independent researchers and scholars, building minds, and extending the frontiers of knowledge while university administrators seem to be conflicted players of whack-a-mole - negotiating the competing demands of government, parents and students, donors, and faculty and staff.  As the old university adage about where the money should go goes, faculty like new faculty hires, Deans like new programs, while University Presidents like new buildings.  So, the interim solution by government has been a grant and tuition freeze which universities have got around by bringing in more international students who can be charged as much as the market will bear.

 

Needless to say, this is not a scenario for long-term sustainability.  Demographics suggest that domestic enrollment in Ontario has peaked and will remain flat for some time to come.  Thus, without an increase in tuition fees, domestic students will not lead to increased revenues.  Moreover, domestic students want a flexibility in their learning environments – i.e., online learning – that seems to be at odds with the preferences of many university administrators and faculty.  Bringing in more international students is also not a stable long-term solution given that at any time that tap could shut.  And then there is the question that if the Ontario public university system is something Ontario does not want to pay more for either via public funds or private (more tuition) and is increasingly geared to international students, then why should it be as large as it is?

 

This last question is the uncomfortable one but needs to be asked given the increasing financial stress Ontario universities are facing especially in the shadow of the Laurentian bankruptcy.  Does Ontario have too many public universities given domestic demand? That is a question the Blue Ribbon Panel will inevitably have to answer.  Perhaps there should be mergers and rationalizations culminating in several province wide campuses – A University of Southwestern Ontario, A University of Eastern Ontario, a University of Northern Ontario and then a half dozen or so fully comprehensive research universities?  Should some universities be merged with community colleges to create Polytechnics?  Should there be a provincial E-University to satisfy the demand for flexible credentials earned online?  But then what of the rest of the system?

 

In the wake of the Laurentian debacle, the provincial government has nevertheless been creating new small financially weaker universities left right and center so it appears they are not too concerned that there may be too many universities.  Moreover, all communities with their own current university campuses will scream if their university is no longer a “real” university or does not offer the range of programs they are used to having.  Just don’t ask them to pay for it.  The political cost of major change is high and as a result there is unlikely to be any major change. 

 

My guess, is that along with keeping all the current players in Ontario’s university system, the end game is going to be the creation of assorted new online learning options independent of the current system and perhaps even new targeted private micro-universities that will provide the programs the provincial governments thinks should be offered.  This is in keeping with the provincial government policy towards its post-secondary sector of the last thirty years that has allowed colleges to evolve into perceived lower cost universities and universities expand their physical footprints without much thought as to what might happen down the road. 

 

Some of this is already underway and what the Blue Ribbon Panel may offer is some way of moving forward in a transitioning post-pandemic university environment that is still moving towards an unknown equilibrium.  At minimum, it will provide a justification for what the government wants to do. On the other hand, the panel may surprise everyone – including the government - with their recommendations which is why governments do not necessarily follow what Blue Ribbon Panels or Royal Commissions for that matter, suggest they do.

 

 

 

Federal Finances and Fiscal Projections

 

The Federal Fall 2022 Economic and Fiscal Update is now economic history and for 2022-23 it projects budgetary revenues of $446 billion, program expenditures of $438 billion, public debt charges of $35 billion, a deficit (including net actuarial losses) of $36 billion and a net federal debt of  $1.283 trillion.  By 2027-28, revenues are expected to rise to $542 billion with total expenses including actuarial losses of $537 billion meaning that a budget surplus is anticipated within five years. 

 

While total spending in 2022-23 is actually down from 2021-22 as a result of the COVID-19 unwind, it remains that compared to spending in 2018-19 of $346 billion just prior to the pandemic, "reduced" federal spending in 2022-23 is expected to be one third higher and projected to rise to $487 billion in 2023-24.  In other words, over a five-year period, the federal fiscal footprint after the COVID-19 unwind expanded at an average annual growth rate of 8 percent.

 

Despite the economic uncertainty currently present with respect to inflation, interest rates and the potential of a recession, the federal forecast is remarkably upbeat with both its  ‘downside’ and ‘upside’ forecasts for growth, unemployment, and the federal finances remarkably close to one another.  This of course means that the deficit forecasts that range from $36 to nearly $50 billion are also in a sense somewhat optimistic and hinge on economic conditions and in particular the impact of any downturn on federal revenues.  When it comes to forecasting the fiscal future, the greatest source of uncertainty is apparently not on the expenditure side – which is more in the hands of the federal government – but the revenue side which is in the hands of the economy.

 

A case in point is illustrated in figure 1 which presents federal estimates for revenue and expenditure for the 2021-22 fiscal year starting with the spring budget pf 2021.  What is remarkable moving forward to the final numbers for 2021-22 as released in the public accounts and also presented in the Fall 2022 update is the remarkable stability of the expenditure estimates and the constant revisions on the revenue side.  Compared to the initial budget forecast in 2021, expenditures went down slightly from $497.6 billion to $493.3 billion by fall 2022 – less than 1 percent variance.  On the other hand, revenues appear to have been significantly underestimated as the economy did better than expected and inflation helped pump up federal revenues from an original estimate of $355 billion to $413 billion – a 16 percent variance.  As a result, the deficit estimate also fell from $143 billion to eventually $90 billion.  This was not the result of fiscal restraint – expenditures stayed pretty much stable.  It was purely from the revenue surge.

 

 

 

Why does this matter?  What goes up can also come down.  Expenditures over the next five years are projected to rise steadily recession or not and one suspects based on past performance that barring a sudden policy shift those estimates will be close to the mark.  Meanwhile, while revenue growth is a function of the economy.  The economy rebounded better than expected and as a result revenues did too. However, while revenue was underestimated over the last couple of years, it could easily be overestimated going forward which means the optimistic deficit reduction scenario with a surplus by 2027 is as uncertain as economic forecasting in general.   

 

Despite the public pronouncements that there is now more frugality at the federal level, that is not the case.  The federal government is projecting average annual revenue growth from 2023 to 2027 at an average of 4.7 percent while expenditures (after the drop in 2022-23) will rise at 2.6 percent.  The federal government is banking on the revenue surge of the last couple years to continue and keep revenues growing faster than spending.  A severe recession could upset that optimistic projection.