Ontario Health Spending: What's Up and What's Down

 The Canadian Institute for Health Information (CIHI) has released its 2024 National Health Expenditure Trends data and it paints an overall picture of rising health spending.  As I have noted elsewhere, total health-care spending in Canada is expected to increase by 5.7 percent in 2024, after rising 4.5 percent in 2023 and only 1.7 percent in 2022 coming on the heels of the pandemic.  The picture for provincial government health spending is also one of increase but once adjusted for population and inflation, the results are more mixed particularly if one looks at changes since the year before the pandemic.  Over the period 2019 to 2024, British Columbia and Prince Edward Island see the largest increases in real per capita provincial government spending at 17 and 16 percent respectively while at the bottom are Manitoba and Nova Scotia, which over the five years have seen their per capita provincial government health spending stay essentially flat.  Ontario, over this same period saw an increase of just under seven percent.

 

 

Figure 1 plots real per capita Ontario provincial government health spending ($2010) from 1975 to the present and the evidence shows that since 2010, real per capita health spending spending growth was lackluster at best rising from $3,617 to $3,783 - an increase of of 4.6 percent or about half a percent annually.  After 2019, the pandemic saw a ramping up provincial government health spending to a peak of $4,316 in 2021 - an increase over two years of almost 14 percent.  Since 2021, there has been a decline in real per capita spending and in 2024 it is estimated to sit at $4,040 - for a decline of about 6 percent.  Nevertheless, real per capita provincial government health spending in 2024 is still projected to be 6.8 percent higher than 2019.

 

What is quite interesting is how spending by expenditure category has performed over the 2019 to 2024 period.  Figure 2 plots the percentage change in real per capita provincial government health spending by category.  Over this five year period, the largest increase has been for real per capita spending on other institutions - namely, long-term care - at nearly 50 percent.  This is of course understandable in the wake of what transpired in long-term care homes during the pandemic as well as the promise to build more long-term care beds for an aging population.  Next is home and community care at 10.7 percent , followed by public health at 9.3 percent and then hospitals at 8 percent.  Other professionals is next with an increase of 5.3 percent followed by capital at 3.2 percent.  What comes next however is even more interesting .  All other health care net of home and community care spending is down by about a third of one percent.  Spending on provincial government drug plans in real per capita terms is down 4.4 percent while physician spending is down 5.8 percent.  Finally, real per capita provincial government health spending on health administration is down nearly 24 percent. 

 The surprise here is that spending has dropped on two items that directly affects a lot of individuals in Ontario - namely, government paid for prescription drugs and physician services.   Obviously, if one measures availability of physician services by how much is being spent per person after population growth and inflation, it is obvious that Ontario is having trouble keeping up in this category.  With an aging population, the decline in physician and also drug plan spending is definitely going to be felt even if the provincial government asks us to take solace in the increases in long-term care, home care and hospital spending. 

Canada's Life Expectancy at Birth in Decline

 

Standards of living are marked by a number of indicators most upfront of which are economic measures such as per capita GDP or per capita wealth.  However, other indicators of the standard and quality of life include basic health indicator and life expectancy at birth has long been a marker of the average “quantity of life” a country provides.   Yet after the increases of the twentieth century and 21^st centuries which saw average life expectancy in the world rise from 32 years in 1900 to 71 in 2021, much of the world has seen a decline in recent years in the wake of the COVID-19 pandemic.   Statistics Canada has already noted that for three years in a row, life expectancy at birth for Canadians has declined from 2019 to 2022 with this decline being driven by an increase in unexpected deaths (such as substance related deaths, suicides and homicides) as well as the impact of COVID.

 

However, what is more interesting in the Canadian case is just as real per capita GDP growth slowed after 2010, so did the growth in life expectancy at birth which highlights the connection between economic growth and performance and ultimately health indicators such as life expectancy.  The accompanying figure plots life expectancy at birth for Canada and Ontario at assorted overlapping three-year intervals since 2005 and they show that life expectancy at birth grew from 2005/07 to 2011/13 from 80.51 years to 81.73 years for Canada and 80.86 years to 82.19 years for Ontario.  Growth then slowed and life expectancy at birth peaked at 81.94 years from 2015 to 2018 for Canada and 82.41 years for Ontario.  Since then, both have declined hitting 81.55 years for Canada and 81.97 for Ontario by 2020-22.

 

 

 

While much of the decline definitely coincides with the pandemic, life expectancy was essentially flat from approximately 2011/13 to 2017/19 when the decline begins but then accelerates during the 2019/2021 window as the pandemic strikes.  So, the takeaways I get from this is that the pandemic indeed is associated with a decline in life expectancy at birth, but growth had already plateaued and begun to slip well before this in the wake of the 2008/09 recession and the slower economic growth and performance since.  The pandemic appears to have strained or augmented whatever forces were already in play prior to 2020. 

 

Of course, one might ask if this has also occurred in other countries.  For example, a quick glance shows life expectancy at birth in Japan rising from 2012 until 2020 before a decline set in going from 83.1 years to peak at 84.56 in 2020 before declining to 84 by 2022.  From 2012 to the pandemic start in 2020, life expectancy at birth grew 1.8 percent in Japan but only 0.2 percent in Canada.  Germany, on the other hand from 2012 to 2020 grew by 0.6 percent (from 80.54 to 81.04) years.  The United States on the other hand saw life expectancy essentially flat since 2012 (growing just under 0.1 percent) to the pandemic with a decline during the pandemic.  These trends are food for thought indeed. 

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.

Can Ontario's Universities Be Made Sustainable? Part 1-The Issues

 

Ontario’s post-secondary system is facing the problem of financial sustainability.   Indeed, the inevitable question arises of whether Ontario simply has too many colleges and universities.  An excellent overview of this question with an accompanying discussion is available here.  And of course, there is always Alex Usher’s excellent blog on all aspects of Canadian universities with posts over the years on provincial and Ontario university finances.  However, the question I wish to address in light of the evolution of Ontario university finances is whether the system can actually be made sustainable with sustainability defined as having the resources available to fund desired expenditures. 

 

Resources are of course the revenues available to universities and they need to be compared to expenses.  Figure 1 plots the total revenues and expenditures of the Ontario university system as a whole from 2001 and 2022 and based on this very simple metric, the system as a whole is “sustainable.”  In 2022, the system took in $17.5 billion in total revenues whereas total expenditures were $17.2.  However, this is overly simplistic because Ontario universities do not function as a system per se but as 24 institutions (20 publicly supported universities and four associated universities).  Some of these institutions-usually large research intensive ones in southern Ontario -  have been running substantial surpluses but a rather large number have been running deficits and acquiring debt with the most extreme example  of what can happen there being the Laurentian insolvency.

 

 

 

The challenges facing a number of smaller institutions in particular and especially in Ontario’s north is that their revenues are having difficulty keeping up with expenditures.  Part of the issue is that provincial government grants have essentially not been growing over time and provincial funding as a share of total university revenues has declined as illustrated in Figure 2.  This leaves student tuition and fees and a plethora of other sources ranging from miscellaneous federal funds, ancillary fees, to investment income as the sources of sustainability.  Tuition fees have grown since 2001 from 24 percent of total university revenues to 45 percent in 2022.  The provincial share of university revenues has declined over the same period from 36 to 24 percent while all other remaining sources have also declined from 39 to 31 percent.  Notes again, that performance across individual universities may differ substantially.  Northern Ontario universities face particular challenges in growing domestic enrollment given that population is clustered in the GTA.

 

 

 

After a period of long-term provincial government behaviour which has essentially constricted their provincial grant funding and shifted reliance to tuition and other sources, the crux of the current set of issues is as follows.  Since 2018, domestic tuition in Ontario was cut by ten percent and then frozen.  Grant revenue has also been essentially frozen.  Universities in the GTA with access to a lot of students have boosted their domestic enrollment to generate revenues.  Universities without easy access to the GTA and its demographic advantages have recruited more international students, but all Ontario universities (and colleges in particular) have gone this route.  However, that door is now being shut at least in the short term by the federal government over concerns about immigration affecting housing stocks.

 

In the short term, the provincial government also finally responded in spring budget 2024 to its Blue-Ribbon Panel Report which called for tuition increases and increased provincial funding of $2.5 billion dollars  by providing a short term funding reprieve to universities that entailed about $1.3 billion over three years.  This is really half of what was recommended by the government’s own panel and was accompanied by an extension of the tuition freeze.  The Council of Ontario Universities noted this assistance while welcome  has fallen far short of what was needed and that eight universities are still forecasting operating deficits for 2023-24 and 12 are projecting deficits for 2024-25. 

 

So, where do we go from here?  Well, the problem really is this: Ontario does not want to pay for the university and college system it currently has.  It certainly wants local universities with a broad range of programs to educate their children, but it does not want to pay for them. Ontario has too many universities (and colleges for that matter) given what seems to be the expressed willingness to pay by governments and the public.  The Ontario public does not want to pay more for universities in terms of out-of-pocket tuition nor does it want to pay more in terms of increased government funding especially if it requires raising taxes.  This has been a feature of Ontario’s political culture for quite a few decades now, no matter the political stripe of the government.  This means that expenditures of the current system need to be tailored to what Ontarians as demonstrated by the actions of their government seem to wish to pay. More on that in a post to come.

Ontario's Dynamic Economy in Doubt

 This post originally appeared in the Fraser Institute Blog.

 

Ontario’s future as dynamic economy in doubt—if employment trends continue

— June 22, 2024

As Canada’s largest province both economically and in terms of population, Ontario is a key driver of Canadian prosperity. Its economic strength manifests itself via job creation and Ontario has nearly 40 per cent of the country’s employment. Since 2010, Ontario’s total employment has grown by more than 21 per cent while the rest of Canada (ROC) has expanded by about 18 per cent. While Ontario’s employment growth mirrors that of the rest of the country, it does exhibit some interesting differences in terms of public, private and self-employment shares of total employment and their performance over time.

 

The first chart below plots public-sector employment as a share of total employment for Ontario and the rest of Canada for the period 2010 to 2023. Overall, Ontario is somewhat less reliant on public sector employment but there is a difference in trends over time. From 2010 to 2019, Ontario was marked by a slight decline in the public-sector share of employment as it went from 19 to 18 per cent. At the same time, the rest of the country stayed at about 20 per cent. Since 2019, both Ontario and the ROC have seen a jump in public-sector employment to nearly 20 per cent for Ontario and 22 per cent for the ROC with a levelling off after 2022.

 

 

The second chart shows Ontario consistently above the ROC when it comes to private sector employment shares reflecting Ontario’s continuing role as a centre for Canadian manufacturing and finance especially in the Greater Toronto Hamilton Area (GTHA). Moreover, since 2010 that share has grown from under 66 per cent to 67 per cent with that growth continuing after the post pandemic employment rebound. The rest of the country has been somewhat more moribund in this regard as its private sector employment share is no higher than in 2014.

 

 

 

The third chart is more concerning given the trends revealed for Ontario and the rest of Canada. First, Ontario’s self-employment share was relatively stable between 2010 and 2020 at an average just above 15 per cent. Over the same period, the ROC saw a decline that by 2020 brought the share to below 15 per cent. Indeed, over the 2010 to 2020 period, the ROC went from slightly above Ontario to below when it came to the self-employment share. When the pandemic hit, the self-employment share in both Ontario and the ROC took a steep dive from which neither has yet to recover. This represents a remarkable free-fall that does not bode well for the future.

 

 

 

What are the implications of these trends?

 

While the long-term increase in total private sector employment is reassuring, the rise in public sector employment and drop in self-employment is not. To start, a drop in self-employment means a drop in the number of small businesses and ultimately a decline in entrepreneurship. The shock and restrictions of the pandemic were invariably a factor as many smaller and family or individually run businesses decided to pack up shop for good. While some of these individuals may have gravitated towards public-sector employment it is more likely given the aging labour force that they simply have decided to retire from the labour force permanently.

 

This is a national trend but in a province that is the economic engine of the country , it foreshadows a decline in innovation and future economic growth. Small businesses are the backbone for developing entrepreneurship and innovation and they also provide opportunities for financial independence aside from traditional employers in both the private and public sector. Moreover, while the self-employed themselves may only account for 14 per cent of employment, they in turn are responsible for a large chunk of the remaining private-sector employment.

 

In terms of other takeaways, another interesting item to note is that for Ontario, the period of declining public-sector employment shares occurred under the McGuinty-Wynne governments while the increase since 2019 has been under the Ford government. While the pandemic is inevitably a factor in the post-2019 public-employment surge, as it recedes into the past there seems to be no movement towards the public-sector share shrinking. Indeed, if one looks at the public-sector salary disclosure lists, during the McGuinty-Wynne era spanning 2003 to 2018 the list added 130,981 salaries over $100,000 to the broader public sector. Since 2018—a much shorter time period—nearly 150,000 salaries have been added to the list.

 

More public-sector employment is not better for long-term economic growth. Ontario’s future as an innovative and dynamic economy may be in peril if these trends continue.

Author:

Livio Di Matteo

Municipal Spending in Ontario: A Long-Term Overview

 This originally appeared on the Fraser Institute Blog. 

Municipal dollars in Ontario—where did the money go?

— April 24, 2024

   

Municipal budget season in Ontario recently ended and the evidence reveals some fairly substantial tax increases around the province. For example, Waterloo Region approved a property tax increase of 6.9 per cent while Toronto passed an increase of 9.5 per cent. Hamilton ultimately saw an increase of 5.8 per cent after fears of a double-digit tax increase were unveiled in the fall while Kingston saw one of the lower increases coming in at 3.5 per cent. For the most part, these increases exceed the current consumer price index (CPI) inflation rate of approximately 3 per cent and rather anemic GDP growth performances.

Given these tax increases have exceeded both inflation and income growth, it’s more than a matter of curiosity to understand what drives the increases. Municipal governments in Ontario provide numerous services to ratepayers, and their budgetary actions can have a major economic impact on households and individuals. An overview of municipal expenditures at the provincewide level using data from the provincial Municipal Financial Information Return illustrates not only how much total expenditures and household taxes have grown but the categories driving the expenditure over time.

The first chart below plots total municipal expenditures along with average property taxes per household from 2000 to 2022. Since 2000, municipal operating expenditures have more than doubled going from $21.3 billion to $53.4 billion. It should be noted that total municipal operating spending has grown by 151 per cent while population has grown 61 per cent and the number of households by 134 per cent. Meanwhile, property taxes used to fund that spending have also grown from an average of $3,580 per household to $5,471 per household. Importantly, municipal operating expenditures do not include capital spending and much of that spending has been funded by debt. From 2000 to 2022, municipal net debt grew from $3.8 billion to $25.5 billion—nearly a six-fold increase in debt.

Over this period, the municipal workforce in Ontario grew from 216,367 to 234,235—an increase of 8.3 per cent over roughly 20 years. Much of the additional municipal spending is going into higher wages and salaries per employee rather than simply more employment. Indeed, any examination of the public-sector salary disclosure data for Ontario finds that the number reported earning more than $100,000 grew from 586 in 2000 to 61,021 in 2022 while the average salary for those over $100,000 rose from $118,333 to $127,294—an increase of eight per cent. While the average salary of those earning more than $100,000 has increased modestly, the growing number of municipal workers earning those high salaries has been the big expenditure driver. Put another way, in 2000 approximately one-third of one per cent of municipal employees on Ontario earned $100,000 or more whereas in 2022, that percentage had grown to 26 per cent.

Where does the money go? The second chart shows the composition of municipal operating expenditures in 2022—the four largest expenditure items were transportation (22 per cent), social and family services (18 per cent), protection to persons and property (17 per cent) and environment (15 per cent). These four items together accounted for more than 70 per cent of municipal operating expenditures. What’s more interesting is the growth rates of all these categories since 2000 especially when compared to the growth rate of economic indicators.

Municipal operating expenditures since 2000 have grown the most in the categories of health and emergency services (335 per cent) followed by planning and development (215 per cent), then transportation and “Other” categories at 207 and 208 per cent respectively. Of the 11 expenditure categories, nine have grown faster than either nominal provincial GDP, real GDP, population or inflation (see third chart below). General government and social and family services have grown the least at 45 and 79 per cent respectively. While the relative restraint with respect to general government is welcome, the slower growth of social and family services given the social problems afflicting many Ontario cities seems a curious choice of priorities.

So, pulling everything together, here’s the story that emerges. Municipal operating expenditures in Ontario over the period 2000 to 2022 have grown 2.5 times faster than general inflation and double that of population. They have also grown a bit faster than the province’s output.

The increase in spending is driven by spending on wages and salaries but not in the manner one might think. Average salaries in the municipal sector for those making more than $100,000 annually since 2000 have grown by only 8 per cent but the number of individuals making those salaries has grown in the thousands of per cent. Within the broader public sector, in 2000 municipal employees accounted for 6 per cent of individuals on the salary disclosure list whereas by 2022 they accounted for 23 per cent.

In Ontario, municipal tax dollars have gone not so much into an expansion of services but into paying substantially more for roughly the same total number of people providing those services. And the areas of greatest spending increase have been in health and emergency services and planning and development. While the former can be explained by the pandemic and the opioid crisis, one must wonder where the value for money is with respect to planning and development given shortages of affordable housing and homelessness that have been allowed to develop across Ontario’s municipalities over the long term.

Ontario’s Evolving Salary Disclosure List

 

Just before the arrival of the Easter weekend, Ontario released its annual public sector salary disclosure list.  The 2023 edition of the list saw a total of just over 300,000 individuals on the list earning a total salary amount of $38.2 billion for an average salary of $126,941.  What is interesting is looking at the long-term evolution of the list from its debut under the Harris government in 1996 to the present.  The list was instituted during Premier Harris’s Common-Sense revolution as a mechanism to essentially provide accountability for public sector salaries and spending and hopefully restrain their future growth.  Any public sector worker with a salary of $100,000 or more is on the list and that nominal salary bar has been the same since 1996. If the salary threshold has been adjusted for inflation using the CPI since 1996 – the all-Item CPI has increased by about 85 percent since 1996 – the threshold today would be about $185,000.

 

Figure 1 presents the total number of employees on the Ontario public sector disclosure list at five key points: the debut under Premier Mike Harris in 1996, the total at the end of the Eves era (which could really be called the Harris-Eves era given Eves was only premier over the 2002 to 2003 period), the end of the McGuinty premiership in 2013, the end of the Wynne era in 2018 and the current release for 2023 at the end of just over half a decade of Premier Ford. Figure 2 presents the total salaries earned by those on the list at the same points in time as Figure 1. 

 

 

 

In the first release of the list in 19967, there 4,501 public sector workers on the list earning a total of 546.8 million dollars for an average salary of $121,495.  By the end of the Common-Sense Revolution era, the number of employees on the list and total earnings had nearly quadrupled at 20,368 employees and $2.6 billion respectively.  After the tenure of Premier McGuinty a decade later in 2013, the number of list members had grown to nearly 98,000 for a salary total of $12.5 billion.  Between the departure of Premier McGuinty and the departure of Premier Wynne, the list grew yet again to reach just over 151,000 employees and $19.3 billion in salary spending. Since the end of the Wynne premiership, the number of employees on the list has nearly doubled to just over 300,000 and an accompanying  total salary bill of $38.1 billion.  

 

 

 

The growth in the public sector wage bill at least as represented by the public sector disclosure list has been driven more by quantity than by price.  In 1996, the average salary earned by those on the list was $121,495 whereas by 2023, that average had grown to only to only $126,941 – a nominal increase of under 5 percent and well below the overall rate of price increase.  Essentially, $100,000 today has about half the purchasing power in had in 1996.  The number of people on the list, however, grew from approximately 4500 to just over 300,000.  It may be time to look at updating this metric to consider both changes in the overall size of broader public sector employment as well as the effects of inflation on thresholds if one is to draw meaningful comparisons.

 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 is a Provincial Government to Do?

 

Ontario is coming up to Budget Day next week on March 26^th and it will be interesting to see what the provincial government does on a number of issues because quite frankly the provincial government is in a bit of a pickle when it comes to economic and fiscal policy.  Over the last decade, Ontario has been hit by a productivity decline that has translated into slower economic growth.  Since the pandemic, this has been combined with a bout of inflation and a surge in population growth.  When you start looking at Ontario fiscal and economic indicators in real per capita terms, there are going forward disturbing implications for our standard of living.

 

If one compares the 2023-24 fiscal year forecast from the Fall Economic Update with the 2018-19 fiscal year, total provincial government revenues and expenditures are up approximately 30 percent respectively.  Health expenditure is up 33 percent.  The size of the provincial economy is up 22 percent.  On the surface, this is seemingly good news in the wake of the pandemic.  The problem is that over the same period, population in Ontario has grown by an estimated 12 percent while prices have risen nearly 19 percent.  Put another way, the combination of population and inflation at nearly 30 percent has outstripped nominal GDP growth while essentially matching the growth of government revenues and expenditures and in particular health spending.

 

The best way to visually illustrate these effects is to create an index.  Figure 1 uses data from Statistics Canada, the Fiscal Reference Tables and the 2023 Ontario Fall Economic Outlook and Fiscal Review to create real per person indices of economic and fiscal performance setting 2013/14 as 100.  Figure 1 plots real per capita (deflated using the CPI-All Items Index) Ontario provincial government Own Source Revenue, Federal Transfers, Total Revenue, Program Expenditure, Debt Service Costs and Total Expenditures.  Note that 2023-24 is an estimate.

 

 

 

In real per capita terms, debt service costs have been a bright spot in that despite the continuing rise in both the provincial net debt and interest rates, inflation and population growth have served to reduce the real per capita burden of servicing Ontario’s debt.  Indeed, the drop-in debt service has probably been able to free up resources for program spending. On the other hand, compared to 2018/19, real per capita revenues and expenditures are now below where they were.  In other words, provincial government revenue and spending have not kept up with inflation and more importantly population growth.

 

 

 

Figure 2 illustrates the decline in the Ontario way of life a bit more succinctly.  Does the health care system feel strained?  Real per capita provincial government health care spending after the surge of the pandemic is back to where it was in 2018/19.  Indeed, it has not changed much since 2013/14.  During that time, one imagines that labor costs for health care have gone up pretty dramatically which means there are indeed fewer doctors and nurses available to service a growing population. And to top it all off, real per capita output in Ontario has not kept pace with either inflation or population growth.  While real per capita GDP in Ontario grew somewhat from 2013/14 to the pandemic, it has since declined.

 

Looking at Figure 2, if the average Ontario had to ask themselves am I better off than a decade ago when it comes to my real per capita income and health spending, the answer is one that should concern the provincial government.

 This post originally appeared on the Fraser Institute Blog, February 24th, 2024.

Ontario’s housing woes—a supply-side problem

Housing prices in Ontario, like in much of the rest of Canada, have soared because of several factors including supply constraints combined with rising demand fuelled by robust population growth. The most recent installment in this ongoing saga is the federal government’s move to cap international student visas to which Ontario has announced measures requiring universities and colleges to guarantee student housing—though how this is to be done is a good question.

These short term reactive regulatory actions at both the federal and provincial level will ultimately do little to solve the problem of scarce and expensive housing because they do not address the root of the problem—the supply side, particularly the high cost of building new homes, which results in meagre efforts to build new housing stock.

Aside from the recent labour shortages and run-up in construction costs in the pandemic’s wake, there are two additional facets to the supply and cost-side issues of housing in Canada in general and Ontario in particular.

First, there’s the role of government in driving up the cost of new housing through regulatory actions at the provincial and municipal level. Housing in early 21st century Ontario has been treated not as an investment but as a source of cash for governments, which always seem to need more money. According to a CMHC report, government charges on new housing development via warranty fees, municipal fees, development and permit fees easily add 20 per cent to the cost of building a new home. Indeed, the regulatory charges for a new home in a place such as Markham can easily add up to $180,000 with some of the higher costs imposed on higher density row homes and high rise units relative to single-detached homes. This is not an inconsequential amount given housing prices in Markham average about $1.3 million.

Second, housing supply has not kept up with population growth. This is not a new story—the addition of new per-person housing stock in Ontario peaked in the 1970s. The chart below plots total housing starts for Ontario from 1955 to 2023. While there have been cyclic highs and lows, the overall trend has been upwards. Even so, the total number of starts peaked in 1973 at 110,536 starts. By way of contrast, 2023 saw 89,297 new home starts. In 1973, Ontario’s population was 8.1 million people whereas by 2023 it was estimated at 15.8 million.

When one calculates the number of new starts per person and constructs an index with 1955 equal to 100, it becomes clear that new housing starts per person have been on a long-term decline. Compared to 1955, we’re building 45 per cent fewer new homes per person. If you compare it to the per-person peak in the 1970s, Ontario in 2023 built nearly 60 per cent fewer new homes per person.

To add to the stock of affordable housing, the Ontario government has set the target of 1.5 million homes to be built by 2031. To this end, it created a Building Faster Fund that would provide up to $1.2 billion to municipalities that meet or exceed the government housing target set for that community and provide strong mayoral powers to municipalities to help cut through municipal red tape and speed up construction. The government has also set housing targets for municipalities to meet to receive the funding.

Keep in mind that to reach a target of 1.5 million new homes by 2031, Ontario would need to add 187,500 new homes a year until 2031. As the first chart illustrates, since 1955 there has not been a single year where Ontario has come close to that number. Indeed, if one compares housing starts as a per cent of the target set by the provincial government across municipalities based on data from its Housing Tracker (see chart below) it’s clear that as of late-January 2024, barely one-quarter of municipalities had met their 2023 housing target. Not the most auspicious start.

What’s Ontario to do? The province’s housing availability and affordability problem will likely get worse before it gets better. Along with boosting the supply of skilled trades people to help construct more homes, it must reduce the regulatory and zoning barriers that slow down the construction of multi-unit residential projects, reduce the governmental development charges particularly on “missing-middle” density builds that emphasize family-sized units, and provide further tax incentives geared to building high-rise multi-unit builds with family-sized units. Governments should also increase efforts to leverage surplus public lands at the federal, provincial and municipal levels to help construct affordable housing as the current approach has paid little attention to having a constant and ample supply of shovel-ready sites.

Only such a multi-pronged approach will have any hope of meeting the housing needs of Ontarians over time.