NORTHERN ECONOMIST 2.0

Wednesday 22 March 2017

Federal Budget 2017 Analysis

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

General Comments

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

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

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

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

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

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

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

Northern Ontario Comments

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

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

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

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

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

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

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

Sunday 19 March 2017

Economic News Around Northern Ontario: March 19th Edition

Well, another week has come and gone and there are many economic stories bubbling around northern Ontario and even farther afield with implications for northern Ontario. For example, this morning's Thunder Bay Chronicle-Journal reported on upcoming talks between the forest sector and the federal government on preparing for the upcoming Canada-US softwood lumber negotiations. However, little information was provided in the story as to what strategy options are being explored as Canada moves into negotiations with the Trump administration on this file.

Stakes high for forestry sector, Chronicle-Journal March 19th, 2017.

The policies of the Trump administration will soon also be front and center with respect to environmental funding dealing with the Great Lakes. The budget proposed in the United States has put forth rather large cuts to program spending and one area that will have a direct impact on northern Ontario is what seems to be the complete elimination of $300 million dollars annually for the Great Lakes Restoration Initiative with plans shifting the responsibility onto state and local governments. See:

Canadian politicians outraged at Trump Great Lakes funding cuts. The Globe and Mail, March 17th, 2017.

In brighter news, while northern Ontario reports the lowest optimism when it comes to construction activity in the Ontario Construction Secretariat 2017 Construction confidence Indicator, it is nevertheless up from 2016 and part of that optimism is due to a number of post-secondary construction projects in Sudbury and North Bay at Laurentian University and Canadore College. However, the Trump effect is again rearing its head here as: "Despite the boost in overall confidence, nearly half of the 500 contractors surveyed report they expect the Donald Trump presidency to have a negative or harmful effect on Ontario’s economy and construction industry. This sentiment is most acute in Windsor-Sarnia where 59 per cent of respondents believe Trump’s government will harm Ontario’s economy." See:

Post-secondary projects generate optimism in North Bay, Sudbury-survey. North Bay Nugget, March 16th, 2017.

In business activity and expansion news:

Explor Resources starts drilling program on Timmins-area property. Northern Ontario Business. March 16th, 2017.

Prime Gelato makes the leap to grocery stores and restaurant menus in Thunder Bay. CBC News. March 17th, 2017.

U.S. Coast Guard ready to break ice from Duluth to Thunder Bay. CBC News. March 15th, 2017.

Seminar offered to help local firms export to the U.S. Saultonline. March 14th, 2017.

When it comes to civic issues and municipal government, a couple of items. The urban renewal legacy of the 1970s haunts us still. In Thunder Bay, they are revisiting the future of Victoriaville Mall. In the 1970s, both the north and south downtowns in Thunder Bay (corresponding to the old cities of Port Arthur and Fort William) received urban renewal makeovers that in the long run were less than successful. The Keskus Mall in downtown Port Arthur was eventually demolished to make way for the Casino but Victoriaville which was built right on the main downtown intersection and permanently affected traffic patterns lingers on and apparently costs the City of Thunder Bay $500,000 annually. Victoriaville hit tough sledding right off the bat in the recession of the early 1980s as its anchor store -the Chapples family store - went under. Keskus did not lose its major retail anchor until the late1990s when Eaton's went under.

Thunder Bay city council considers step towards Victoriaville mall demolition. CBC News. March 15th, 2017.

And in Sudbury, the big municipal fiscal issue is the contentious reorganization of its fire and paramedic services with a big meeting slated for March 21st. For my take on the issue and links to some of the news stories, see my earlier blog post here.

In Sudbury mining news, see:

Vale to mothball century-old Ontario nickel mine. Mining.com. March 13th, 2017.

It is also Federal budget week with the budget coming down March 22nd and we will have to see what emerges specifically geared towards northern Ontario. For my contribution to federal budget debate this week, see here. Have a great week.

Friday 17 March 2017

Fire Services in the North: The Case of Sudbury

Sudbury is in a bit of a tizzy over proposed changes to its fire and paramedic services. The proposed plan will see nine of the current 24 fire halls closed and a move to reduce the number of volunteer firefighters and hire more full time firefighters. The staff report estimates that the full-time compliment would go from 108 to 166 within the next decade, while the volunteer ranks would be almost cut in half from the current staffing level of 350.

Sudbury is a very large and dispersed municipality with the central core area served by full time firefighters and outlying areas served by volunteers who are paid part-time employees. Under the new plan, Sudbury's municipal government maintains that firefighters would be able to reach 90 percent of Greater Sudbury within nine minutes, as opposed to the current 69 percent. Part of what is planned is an equalization of services to standardize and improve coverage and response times. However, part of the plan also involves composite stations staffed by both full-time and volunteer firefighters, as well as increases in taxes in the areas currently served by volunteer firefighters.

It is useful to see where Greater Sudbury stands in its fire service costs relative to other cities in Ontario. Figure 1 uses data from the BMA Management Consulting 2016 Municipal Study to plot the net per capita fire service costs (including amortization of any capital assets) for cities in Ontario with more than 100,000 of population as well as the Northern Ontario Five (N5) – Thunder Bay, Timmins, Sault Ste Marie, North Bay, and Greater Sudbury. The results show quite a difference in per capita costs ranging from a high of $273 in Thunder Bay to a low of $102 in Milton. Sudbury’s costs are quite modest coming in at $149 – the lowest among the N5 – and placing 22^nd among the 27 cities in Figure 1.

Of course, one can understand the concerns of ratepayers in Greater Sudbury that the proposed changes will raise costs and therefore raise taxes. The costs of fire fighting according to the BMA Municipal Study 2016 Report can vary as a result of a number of factors, which include:

1. The nature and extent of fire risks: The type of building construction, i.e. apartment dwellings vs. single-family homes versus institutions such as hospitals

2. Geography: Topography, urban/rural mix, road congestion and fire station locations and travel distances from those stations

3. Fire prevention and education efforts: Enforcement of the fire code, and the presence of working smoke alarms

4. Collective agreements: Differences in what stage of multi‐year agreements municipalities are at and also differences in agreements about how many staff are required on a fire vehicle

5. Staffing model: Full‐time firefighters or composite (full‐time and part‐time)

Costs in the end are an interactive function of the geographic area that must be served as well as the population base in that area that is available to cover the costs as well as its compactness - in other words, population density is a factor. The importance of population density as a determinant of fire service costs is highlighted in Figure 2, which plots the net costs per capita of Figure 1 against population density (population per square kilometer) and reveals an inverse relationship when a linear regression is fitted to the data. It of course does not control for any other variables and there is a fair amount of dispersion (the R-squared is also very low) around the fitted relationship but if Sudbury’s population density is plugged into the relationship, all other thing given, the per capita cost of its fire services rise to 181 dollars per capita. Thus for Sudbury to be at 149 dollars per capita it must mean there are other factors affecting its costs or it is doing something to keep its costs well below – nearly 20 percent below - what is predicted by its population density alone.

It is the volunteer staffing model which has probably been a factor in keeping Sudbury’s fire fighting costs per capita relatively low given the large land area that must be served and the accompanying low population density. Moving away from this model will probably bring Sudbury’s per capita costs more in line with other major Ontario municipalities. No wonder ratepayers are upset. At the same time, making the changes needs to weigh the improvements in service and response time that are expected to emerge against the expected additional costs. It is an important cost-benefit analysis and should make for an interesting City council meeting in Sudbury on March 21st.