Aging Populations and Rising Health Spending: It’s More Complicated Than You Think

  

Rising health expenditure and aging populations are linked in policy discussions of health spending. With the health expenditure to GDP ratio in Canada now up to 12.7 percent and per capita health care costs rising with age, the conventional wisdom is that the sustainability of provincial government health care systems is under threat from a grey tsunami as the last few cohorts of the baby boom generation turn 65.  While aging is a key factor in rising health care costs, it only accounts for about half of the increase over time with factors such as wage/cost inflation and rising utilization rates being other important factors in the growth.  More importantly, when it comes to aging, it is a little observed fact that per capita health expenditures in the over 75 age categories have been seeing moderation and declines.

Figure 1 plots real per capita provincial/territorial government health spending by age for three years – 1998, 2011 and 2023 using data from the CIHI National Health Expenditures.  As is expected, expenditures are approximately u-shaped with a decline up to the 1-4 age categories, relatively flat profiles until the mid to late 40s and increases that accelerate after age 65.  In 2023, the most recent year available, provincial-territorial governments spent $19,875 per capita (in 2025 dollars) for those aged less than one year which then dropped to $2,377 by the age 10-14 category. This rises very slowly to reach $3,651 by the age 40-44 category and then rises to reach $10,079 in the age 65-69 category and hits $32,483 for the 85-89 age category. This fits into the conventional view that health care costs rise with age and therefore aging populations will create a sustainability challenge for provincial government health systems.

 

 

However, if one looks more closely at the diagram, one can see that the orange line for 2011 is always above the blue line for 1998. This is to be expected.  As populations age, the health spending age profile rises with age but over time cost factors are also shifting the relationship upwards.  However, when one compares 2023 with 2011, note that there are segments of the green 2023 line that are below the 1998 line – namely in the late 20s and early 30s and in the 80 to 89 age categories.  That is between 2011 and 2023, real per capita provincial government health spending declined in these age categories.

 

 

Figure 2 looks at the percent change in real per capita provincial government health spending from 1998 to 2011 and 2011 to 2023.  Except for the <1 age category, growth rates declined in all age categories over time and sometimes by quite a bit.  For example, between 1998 and 2011, real per capita provincial/territorial government health spending grew by 46 percent for those aged 35-39 but from 2011 to 2023 it only grew 8.9 percent.  However, over the same two periods, for those aged 25-29, and 30-34, real per capita expenditure growth went from 33.3 percent to -4.5 percent and 41.9 percent to -5.5 percent respectively.  Even more interesting, for those aged 75-79, the respective growth rates were 26.7 percent for 1998 to 2011 and 1.4 percent from 2011 to 2023.  However, for those aged 80-84, the growth rate went from 24.1 percent to -2.9 percent and for 85–89-year-olds from 11.3 to -4.6 percent.

Despite the talk of unsustainable health spending, the growth rates in health spending have fallen dramatically over time and for some age categories there have been declines.  What is of more interest is why there are drops in real per capita spending for the 25-34 age groups and the 80 to 89 groups?  Are these demographic groups becoming more healthy over time and require fewer health services?  Have provincial government restraint measures been borne disproportionately by these age groups? Is the falling birth rate the reason meaning that there are fewer women of child bearing age facing complications from birth a factor in the 25-34 age group decline?  Is the onset of Medically Assisted Death (MAID) in Canada in 2016 a factor in the decline for 80–90-year-olds? Or is there simply a problem accessing primary care that is more prevalent in these age groups?

These are all important questions.  While seeing per capita health spending fall and generating potential sustainability improvements for provincial health systems are welcome, it is important to know the reasons why this is happening.

The Finances of the University: Lakehead 2026 Edition

  

Universities in Ontario have been feeling somewhat more upbeat this year in the wake of provincial government measures to bolster the sector. After years of essentially starving the sector with a tuition cut and freeze as well as a continued freeze in operating grant funding, 2026 saw the announcement of combined measures totalling nearly $6.4 billion (at least according to the government’s accounting) to make the sector more sustainable.  Not least of which was a move to finally allow universities to once again begin increasing tuition rates on domestic students by up to 2 percent a year.  While this will likely not make up the revenue drop from the decline in international students, it is also being accompanied by increases in base funding to the system.

The government finally moved on the university sector funding issue because quite frankly the sector was at the end of its rope. However, even with the new funding which has pulled the sector back from the “abyss”  it remains that in the end it is not so much a rebuild as a halt to deepening the financial pit. Even with the funding, universities remain in austerity mode and with many continuing in deficit mode, they will still be making cuts.  And all this will be in the face of what is anticipated to be rising demand and a projection that nearly one million additional university educated workers will be needed in Ontario between 2026 and 2035. This is not a surprise given that since 2018, Ontario has added nearly two million people largely through immigration and immigrants being younger on average than the general population have children who will be seeking education. On top of this, a massive retirement boom is coming meaning numerous vacancies will need to be filled.

Through all this flux and financial challenge, some universities have managed to do better than expected this year financially and while one always expects University of Toronto to do relatively well and balance its budget, Lakehead is also expecting to balance its budget for the 2026/27 fiscal year.  Lakehead appears to be holding its own quite well in attracting targeted government funding for new initiatives whether they be a STEM Campus in Barrie or a new veterinary school, on top of the coming increases in both government base finding as well as higher tuition fees on domestic students.  Lakehead indeed was fortunate in not being as dependent on international undergraduates for its international student enrolment as some other universities. 

This comes on top of a relatively strong long-term financial performance because of its gradual transformation away from being a university for northwestern Ontario to a regional multi-campus Ontario university.  Indeed, Lakehead with its three campuses of Thunder Bay, Orillia and Barrie in one university has become the holy trinity of universities.  The Barrie campus will bring special financial blessings as it is in the center of a compact CMA population of 250,000 meaning that ultimately its enrolment may even eclipse that of the Thunder Bay campus.  This will all build on a rather successful tradition of prudent long-term financial management and soundness as documented below. The data for the subsequent charts come from historical Institutional Statistics Books accumulated for the 2000 to 2011 period (eg. Institutional Statistics Book 2001/02) as well as annual university financial statements.

Figure 1 plots revenues, expenditures and deficits annually from 2000 to 2025.  From revenues and expenditures of just under $80 million annually in 2000, by 2025, Lakehead’s revenues had grown to $246 million and expenditures to $231 million. In 2025, Lakehead ran a surplus of $15.4 million which followed 2024 with a surplus of $7.6 million.  Indeed, Lakehead has usually managed to run surpluses with deficits being incurred in only 6 of the last 26 fiscal years with an accumulated surplus since 2000 of $89.7 million. 

 

 

The biggest deficit was of course pandemic induced in 2021-22 but surpluses have grown every year since. As a result, long term debt has gradually been whittled down as Figure 2 illustrates.  There was a surge in university long-term debt during the 2000 to 2006 period as the Orillia expansion was started and new buildings such as the ATAC constructed on campus.  Long-term debt peaked in 2012 at $115 million and by 2025 had declined to $94 billion.  

 

 

The major revenue drivers during this period have been the duo of government operating grants and student tuition revenue as illustrated in Figure 3.  However, government operating grants were essentially flat between 2012 and 2024 at just over $60 million but then surged from $61 million in 2024 to $69.5 million in 2025. They have nevertheless declined from a peak of 41 percent of university revenues in 2012 to 28 percent in 2025.  Meanwhile, tuition revenues, reflecting the rise in international students, have grown quite steadily both as a share of revenues as well as in total.  Indeed, in 2025, at $102 million, tuition fees accounted for 42 percent of Lakehead University total revenues.  Other revenues aside from operating grants and tuition which together account for 70 percent of university revenues include income from investments, ancillary fees and revenues (e.g., Parking) and restricted government grants and funds.

 

 

Of course, the reason we are all here at Lakehead is because of the students and no exposition of university finances would be complete without looking at the trends in enrollment. Figure 4 plots total enrollment at Lakehead (headcount of both full and part time students) from 2001 to 2025.  There was rapid growth from 2001 to 2011 that saw enrolment rise by about 40 percent.  Enrollment then levelled off for nearly a decade but has begun to grow since 2022 and now sits at a headcount of just over 9,000 spread out as it is across three campuses.  It remains that over this period there has been a decline in the share of Thunder Bay campus undergraduate enrollment which has been made up by graduate enrollment across all the campuses and undergraduate enrolment in Orillia in particular. 

 

 

In the end, the university has managed to grow its enrolment in a particularly challenging demographic environment given until recently stagnant population growth in the region. Part of its financial management has also involved restraining costs.  In this regard, Lakehead has been assisted by two factors.  First, the total full time faculty complement has remained relatively stable since 2010 while enrolment has risen reflecting more intensive human resource use.  In that year, there were just over 300 full time faculty appointments at Lakehead and in 2025, there were also just over 300 full time faculty appointments.  While the number of full-time faculty has remained essentially fixed since 2010, total headcount enrollment has grown nearly 14 percent and as a result the average student headcount to full time faculty ratio grown from approximately 25 per faculty member to 31. 

Second, there was the impact of Ontario’s Bill C-124 which was brought in in 2019 capping salary increases at 1 percent in the broader public sector and was in effect until 2024.  Low salary growth rates combined with stable faculty numbers is an effective cost management tool and the fruit is borne out by the charts provided here.  Lakehead has managed to grow its revenues faster than costs over a sustained long-term period that has seen balanced budgets or surpluses in three quarters of the fiscal years since 2000.  It has also expanded its infrastructure to encompass three campuses to recruit more students while at the same time gradually reducing its long-term debt from a pronounced peak.   In a tough and competitive environment, Lakehead has managed to thrive, and its financial state is a success story that should be celebrated.

The Finances of the University: Lakehead’s Exceptional Performance

 

With all the doom and gloom about the finances of Canadian universities these days, it is refreshing to know that some universities have been doing well in coping with all the fiscal challenges thrown at them over the last decade.  Nowhere is this more the case than in Ontario where domestic tuition fees were cut 10 percent in 2018 by the province, and have remained frozen since, provincial government grants have generally been a declining source of revenue and the flow of international students curtailed by the federal government. While Ontario produced Laurentian, it has also produced Lakehead where the last decade has seen a better financial performance than one might have expected which is good news for Thunder Bay, northwestern Ontario and of course the students, staff and faculty at Lakehead.

The evidence is quite convincing.  Figure 1 (and subsequent figures) takes data from the audited financial statements of Lakehead University from 2014 to 2025 and plots total revenues and expenditures.  Between 2014 and 2025, Lakehead’s total revenues grew from $177.3 million to $246.0 million - 38.7 percent – while total expenditures grew from $167.0 million to $230.5 million – a 38 percent increase.  While the pandemic period from 2020 to 2022 saw a dip in revenue growth, since 2022, revenues have managed to grow faster than spending. Indeed, over the period 2015 to 2025, the average annual growth rate of revenues was 3.3 percent compared to 3.0 percent for expenditures.  

 

 

The result has been a decade where the budget has usually been balanced, sometimes with substantial surpluses, and the long-term debt been reduced.  Figure 2 plots Lakehead University’s deficits (-)/surpluses (+) as well as the total long-term debt again from 2014 to 2025.  Out of these 12 budget years, Lakehead ran a surplus 75 percent of the time with an accumulated surplus of $43.9 million while the long-term debt has decreased nearly 16 percent going from $111.5 million in 2014 to $94.0 million in 2025.  The worse deficit year was 2022 with a deficit of $16.7 million in the wake of the pandemic but the three years since has seen growing surpluses with 2025 at $13.5 million.

 

 

Drilling down into some of the data, Figure 3 presents the data for Lakehead’s major revenue sources – provincial government grants and student fees.  In 2025, these sources made up 82 percent of Lakehead’s revenue with the remainder a combination including investment income, research income, ancillary fees, and sales of goods and services.  The narrative regarding provincial government grants should be nuanced by the fact that there are the general operating grants and then more specific restricted grants tied to conditions.  In 2014, the value of the operating grant was $65.3 million, and it then proceeded to decline through to 2019 when it reached $62.9 million.  Note that this decline preceded the arrival of the Ford government in 2018 showing that in the end universities in Ontario do not have any tried-and-true political party friends at the provincial level. Grants then rebounded in 2020 declining to a low of $61.6 million in 2022. Since 2022, the operating grant has been somewhat erratic rising to $66.7 million in 2023, falling to $61.0 million in 2024 and then climbing again to $69.5 million in 2025.  Stable funding it is not.  As for restricted grants, they climbed in fits and starts going from $15 million in 2014 to almost $17 million by 2021 and then rising more steeply to 30.5 million in 2025. 

 

 

While total provincial grants to Lakehead grew 25 percent from 2014 to 2025, the real revenue story is in student fees which rose from $57.5 million to $102.4 million – an increase of 78 percent.  This is even though overall enrolment has grown but not in leaps and bounds.  The revenue increase is largely the result of a compositional shift as more higher tuition paying international students arrived at the university.  Given that many of these students are primarily graduate level and in disciplines that are in demand, it appears the immigration restrictions have not hit Lakehead’s enrolment as hard as some other universities.  This suggests a careful mix of programs tailored to demand.

So, to summarize, Figure 4 presents the average annual growth rates of these major indicators for the 2015 to 2025 period.  Total revenue at Lakehead has grown at an average annual rate of 3.3 percent while expenditures have grown 3 percent.  This in and of itself presents a picture of fiscal sustainability rooted on both the expenditure and revenue side.  While general operating grants have only grown at an average annual rate of 0.7 percent, restricted grants (targeted to some purpose) have grown 8.7 percent annually and student fee revenue has grown 5.5 percent.  And the icing on the cake is that long-term debt has been declining at -1.5 percent annually. 

 

This is extremely good news and evidence that even in today’s challenging university environment, it is possible to succeed both financially and academically as a university offering programs in a fiscally sustainable manner.  Lakehead has managed this operating as it does in a dispersed fashion with campuses in Thunder Bay, Orillia and Barrie making it a province wide university.  This success may indeed serve as a model for future of Ontario’s universities. This success is also a testament to the strength of its board and administrative leadership as well as its students, staff and faculty.  It is nice to have some good news for a change.

Federal Platforms, Costing and Fiscal Sustainability

 

The two main federal parties have released their platforms and costing and inevitability the question of whether their fiscal programs are sustainable emerges.  Trevor Tombe at The Hub has already weighed in on the Liberal platform and notes that it “marks a clear break from the government’s previous approach to fiscal policy and proposes to move Canada onto a less sustainable track.” The Liberal Platform essentially adds $225 billion in deficits to Federal debt.  More specifically, Tombe notes that: “marks a clear break from the government’s previous approach to fiscal policy and proposes to move Canada onto a less sustainable track.”  The Conservatives have also released their platform with costing and they have no plans to balance the budget either and will be adding about $100 billion to the federal debt over the next four years. 

The question that arises is whether these additions to the federal debt will make federal finances unsustainable.  The answer to this is of course dependent on what your definition of sustainability is and what the growth rate of the economy is projected to be.  The latter is a big uncertain variable given that there is trade upheaval underway with the United States and much of the increase in projected spending deals with addressing the trade upheaval and associate issues such as national security.  As for the definition of sustainability, it depends. If your benchmark for sustainability is a good credit rating on federal debt and being able to meet the debt service costs relatively easily, then both platforms are easily sustainable for the foreseeable future.

However, public finance economists have a somewhat more discerning measure that is tied to the debt to GDP ratio.  In other words, if the debt to GDP ratio is flat or falling, then the fiscal course of the public finances is sustainable.  On the other hand, if it is rising, then it is not sustainable.  So, to examine sustainability using these measures, Figures 1 and 2 plot three scenarios (Baseline taken from the Liberal Platform, the Liberal Platform and Conservative Platform). I am going to take all their numbers at face value and not get into whether projected revenues or cost savings are realistic. Having said that, the results are dependent on the rate of growth of GDP.  For each scenario, the deficits going forward from 2025-26 to 2028-29 are added to federal net debt with 2024-25 set at $1.396 trillion. Meanwhile, GDP in 2024-25 is set at 3.173 trillion. 

Going forward, the growth rates for GDP are one of two scenarios.  Figure 1 plots the estimates with an assumption of nominal GDP growth annually at 4 percent.  This is a relatively optimistic scenario all things given but not unreasonable even in the wake of the recent IMF revisions to their forecasts which reduced Canadian real GDP growth for the next two years to 1.4 and 1.6 percent.  If inflation stays at 2 percent, we are looking at nominal growth ranging from 3.4 to 3.6 percent. Figure 2 however, reduces nominal GDP growth to 3 percent annually going forward and  at 2 percent inflation yjis translates to 1 percent real annual growth. 

 

 

The results show that at 4 percent nominal GDP growth, the Baseline and Conservative platform paths both show a declining net debt to GDP ratio.  The Liberal platform at 4 percent growth is essentially stable for the next couple of years and then turns down ever so slightly.  Of the three scenarios, one would expect the Liberal platform is the one that is most sensitive to lower GDP growth and that is indeed borne out in Figure 2.  With 3 percent growth, the baseline scenario reveals at upward shift in the net debt to GDP ratio for 2025-26 and then a decline making it sustainable going forward.  The Conservative net debt to GDP ratio remains on a downward trend even with lower growth.  However, the Liberal net debt to GDP ratio going forward is clearly not on a sustainable path going forward though one may of course quibble that going from 44 to 45.4 percent over five years is hardly the end of the world.  However, should there be a recession later this year and into next year, all these scenarios will be worse.

 

 

So, it appears that even with all the spending being proposed, the federal public finances do not appear to be on a widely out of control path going forward whatever party forms the government. However, strictly speaking, some scenarios based on these assumptions are more sustainable than others.

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.

Interest and Debt

 

Wednesday's Bank of Canada rate increase reminds us once again that the era of cheap money is over not just for consumers and business but also governments. One of the notable features of the pandemic response in Canada was the enormous amount of federal fiscal stimulus injected into the 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 began to subside going down to $480 billion as reported in Budget 2023 but is set to resume an upward trend and 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 is expected to reach just over $1.4 trillion by 2027-28.

 

The long-term implications of this spending and debt surge are of course debt service costs. As a result of recent interest rate increases, they are about to become in nominal terms the largest, they have ever been.  Using data from the federal Fiscal Reference Tables and Budget 2023, Figure 1 plots both the total annual amount of federal debt charges paid as well as the annual percent increase for the period 2000 to 2022 and then as forecast until 2028.  What is evident at a glance is that until 2021, annual debt charges had been on a downward trend falling from nearly $44 billion in 2011 to $20.4 billion in 2021.  Since then, they have soared growing 20 percent in 2022 and forecast at 41 percent and 27 percent growth in 2023 and 2024 respectively before subsiding.  Indeed, by 2028, annual debt service costs are anticipated under the current forecast to reach over $50 billion which surpasses even the peaks reached in the 1990s. 

 

 

 

Now of course, as a share of total federal government spending, these debt charges may seem less alarming as at less than ten percent of total expenditure, they are modest relative to peaks of nearly 30 percent or more in the 1990s and 1930s. However, it should be noted that the share of total federal government spending going to debt service more than doubled between 2021 and 2023 rising from 3.2 to 7.2 percent and is expected to keep rising to just over 9 percent by 2028.  Nothing to worry about you might think?  However, it all depends on what happens to interest rates.  The fact remains that not surprisingly there is a strong correlation between the growth rate of federal debt charges and the effective interest rate on the net federal debt.

 

 

 

Figure 2 plots the annual percent change in federal debt charges against the effective interest rate on the net debt since 1867 (calculated as debt charges divided by net debt) using data from A Federal Fiscal History, the federal Fiscal Reference Tables and Budget 2023.  With a linear trend fitted, there is a definite positive correlation that has a bigger impact than you might think.  On average, a one percentage point increase in the rate of interest is associated with a nearly two percent increase in debt charges.  Given such sensitivity, it is not a surprise that debt charges have doubled since 2021.  And the current situation is anything but average given the enormous stock of nominal debt meaning that even with the staggering of long-term government bond debt issue, small interest rate increases can have large increases in government debt interest costs.  Moreover, with the anemic real GDP growth forecasts and an increase in interest rates, the long-term sustainability of the federal fiscal position becomes more of an issue.  We are in for interesting times.

What a 2.4 Percent Municipal Tax Levy Increase Really Means

Thunder Bay City Council has voted to pass the 2018 municipal budget and will formally ratify it at a vote this evening.  The Mayor and Council have of course been patting themselves on the back about how it is a “responsible budget” and how it keeps the tax levy increase in spending within the average of the last two terms of council.  The tax levy increase is now coming in a 2.4 percent now – just above the rate of inflation - which is down from the 3.03 percent increase that was originally on the way after several weeks of deliberation and debate.  This was managed by essentially taking out about $1 million from the city reserve fund to lower the levy against the advice of City administration it turns out who also noted that the reserves – used to cover unexpected costs or deficits throughout the year - have been declining since 2012

What this all really means is that this is an election year.  The average municipal tax revenue increase over the period 2011 to 2018 has averaged 3.3 percent and ranged from a high of 5.7 percent in 2015 to a low of 2.2 percent in each of 2014 and 2016.  The increase of 2.2 percent in 2014 was also during an election year and was followed by a 5.7 percent increase in 2015.  Keeping the increase low this year can be interpreted as a deliberate political strategy to not raise the ire of ratepayers in the lead up to the October election and one can expect a hefty increase to make up lost ground when the 2019 budget comes in.

In the end, a tax levy increasing at just above the rate of inflation is not much of an accomplishment given that it was done by dipping into the reserve fund.  While much was said during council debate about the hard decisions that have been made the fact remains that spending is going to go up by the amount originally agreed upon – just over 3 percent – but it is going to be subsidized by borrowing from the reserve fund. 

But then, cost control is hard work and in the end some of the efforts at cost control have backfired.  One need only look back at the attempt by Thunder Bay to reduce garbage collection costs in 2017 which were supposed to eliminate a truck and labour costs via attrition while at the same time reducing bag pick-up to two bags from three with additional bags requiring a tag.  And what was the end result?  After a period of chaos, the truck was reinstated but the three-bag limit was not and things have remained very quiet since.  So, one has to conclude that costs have remained the same while less garbage is being collected and revenue is probably up for the City from the bag tags. It was certainly a win for the City of Thunder Bay but not for rate payers who altogether have to pay more but are getting less.

We can expect more of the same next year after the dust clears from the election.  The current cast of councilors will largely be returned to office and the cycle will start anew. We will be paying more and getting less, and the debut will be a hefty tax levy increase to replenish the reserve fund as well as boost spending to make up for the previous year’s slowdown.  There will be the usual grumbling and complaints, but they will be dismissed because after all Thunder Bay voters are the ones doing this to themselves by falling for the same thing election after election.  Why would city politicians take them seriously when they complain?

Additional Note: February 6th - Well, the budget did pass last evening. Please note that the 2.4 percent levy increase coming in is "net" or after factoring in "new growth".  The gross levy increase is actually 3.13 percent.  Originally, the net increase was going to be close to 3 percent and the gross increase nearly 3.6 percent.  So, total spending is still going up 3 percent and the net is 2.4 because of the use of projected surplus funds from 2017 budget away from the reserve fund and towards the tax bill.  However, apparently there was an effort to move even more of the projected 2017 budget surplus away from the reserve but it did not succeed.  Of course the 3.13 percent does not mean that everyone's tax bill will be going up 3.13 percent or 2.4 percent if you are an "existing" ratepayer.  That is the total increase in tax financed expenditure. Much of the burden of the increase will go to residential ratepayers. See my post last month here for a more detailed discussion.   

Northern Economist in the Winnipeg Free Press

 

The View from the West

Harper seeking a sustainable Canada

By: Livio Di Matteo

February 13th, 2012

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

Livio Di Matteo is professor of economics at Lakehead University.

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

New Health Fiscal Sustainability Report Released

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

Key Messages

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