NORTHERN ECONOMIST 2.0

Wednesday 1 May 2019

Thunder Bay's Municipal Tax-Ratio Challenge

One of the items at the Monday April 29^th Thunder Bay City Council meeting was a discussion on tax policy and a move to bring it more in line with provincial requirements. Namely, the province has property tax ratio thresholds and in order to meet them there needed to be a reduction in non-residential tax ratios as follows: Industrial ratio from 2.925444 to 2.63, Multi-residential from 2.422438 to 2.0, and Commercial from 2.137932 to 1.98. This has been a process that has been underway since 1998 and partly as a result the share of the tax levy paid by residential ratepayers has been rising over time while that of non-residential has been declining.

In Thunder Bay at present, nearly two-thirds of the tax levy is borne by residential ratepayers while the other third is non-residential or essentially business property taxation. In 1990, it was about a 50/50 split. It should be noted that the City of Thunder Bay’s financial statements now report taxation revenue without dividing it into residential and non-residential as used to be the case only a few years ago. To get that information, one now has to go onto the government of Ontario website and access the Financial Information Returns provided by municipalities which can be quite a daunting task. This lack of transparency on the part of the City of Thunder Bay in reporting these important numbers more directly is a disappointment.

Of course, municipal public finance can be a pretty arcane and complex issue– even for an economist - and the discussion the other evening was actually more spirited and informative than usual, all other things given. Administration affirmed that the tax levy this year would remain the same and the changes to the residential burden would be phased in but in the end based on the short segment I observed they did not successfully allay the concerns of councilors that residential taxes could rise even if the tax levy stayed the same. Indeed, the emphasis that the tax levy is going to remain the same this year did not deal with the concern that taxes for residential will rise more than they otherwise might in future. How can this be?

Ontario Budget 2019: Some Spending Details

Well, the dust is settling from the April 11^th 2019 Ontario provincial government budget and it is time to spend a little more time looking at some of the details in spending. There are many stories in the media about assorted cuts coming down the pipeline, but it remains that overall spending is up and projected to continue rising though at a much lower rate. Indeed, as discussed in my previous post, total spending is expected to rise from $162.5 billion in 2018/19 to reach $164.4 billion representing an overall increase in spending of 0.6 percent. This of course is a much lower growth rate in spending than was the case under the previous government.

What is more interesting is what a more detailed analysis by ministry expense category reveals. Approximately two-thirds of ministry expense categories are expected to decrease while one-third have actually experienced an increase. Table 1 lists the ministry expenses by ranked percentage increases whereas Table 2 does it by ranked expenditure decreases. Increases in spending range from 550 percent for the Treasury Board Secretariat Capital Contingency Fund to 0.5 percent for the Training, Colleges and University Base Budget. Despite what may seem to be very large increases for the Treasury Board Secretariat they are on amounts that represent less than one percent of total spending. With respect to the Treasury Board Secretariat, the government also notes that: “The Province has put in place a prudent Operating and Capital Contingency Fund housed in the Treasury Board Secretariat. This fund is the main driver of the increase in the Ministry’s 2019–20 budget, in addition to an increase in employee pension benefits paid.” (Ontario 2019 Budget, p. 298). Other increase of note also include Infrastructure (Base) (261%), Total Transportation (10.9 %) and Interest on the Debt (6.4%).

It should be noted that Health and Long-Term Care and Education (Primary & Secondary) together represent in 2019/20 a total of $95 billion or about 60 percent of the spending total. While there are changes within both these categories underway designed to create efficiencies it remains that Education is going to grow by 2.6 percent and Health by 2.2 percent. It is fairly simply math to realize that if categories representing 60 percent of government spending are going to grow by over 2 percent when total spending is growing by 0.6 percent, then there are going to have to be reductions in many other categories which account for the other 40 percent of spending.

Here the list is much larger (therefore two tables) and some of the percentage increases also larger. Reductions range from -0.4 percent for the base budget of Municipal Affairs and Housing to -67.1 percent for Natural Resources and Forestry Emergency Forest Fire Fighting. However, the total budget for Natural Resources and Forestry is declining by -19 percent while the base budget is declining by -3.2 percent. While the Total Budget for Training, Colleges and Universities is declining by -6.1 percent, its base budget is actually growing by 0.5 percent while the student assistance component is declining by -33 percent.

To its credit, the provincial government has embarked on what appears to be a pretty substantial review and restructuring of government spending in all categories. Within expenditure categories it is choosing what to increase – albeit at a lower rate than in the past – and what to substantially reduce. Some categories have been hit immediately with some large reductions. Some of these reductions include the winding up of one-time funding and therefore appear quite large for the coming year which is why a comparison of base budget rather than overall totals might be more appropriate. However, the ultimate aim appears to be a substantial restructuring with priorities being selected. It would appear the priority is to deal with the province’s fiscal situation while ensuring that overall budgetary cuts do not occur particularly in the key areas of health and education. Indeed, all things considered, the transfer partners in the municipalities, universities, schools and hospital sectors (MUSH) have gotten off relatively lightly. This naturally means larger declines in the remaining 40 percent of government spending. It cannot realistically be otherwise.

Friday 12 April 2019

Ontario Budget 2019: Some Preliminary Thoughts

Well, the Ford Government’s first budget is out. Detailed analysis of the new fiscal numbers takes time but for now, some quick preliminary thoughts on what I think will ultimately be a positively received budget by the Ontario public despite the criticisms that will be leveled by both the right and left of center critics. This positive public reception is not just because of popular new measures in alcohol, gaming and cannabis – such as earlier starts to establishments - that will facilitate consumption.

The right will argue that the move towards fiscal balance is not occurring fast enough. Moreover, Ontario’s debt pile is projected to grow past $343 billion to reach $360 billion with an accompanying increase in debt service costs. Meanwhile, the left will emphasize any harm to services from reductions needed to find public sector efficiencies. Indeed, the lead up to this budget has seen some particularly vociferous commentary about the “storm” coming to Ontario and the "apocalyptic" cuts coming to public services.

Yet, many middle of the road Ontarians may probably find this to be a reasonable budget that is less harsh than many expected. After all, spending is still going to be up slightly next year – from $162.5 billion to $163.4 billion and then to $165.6 billion the year after. With signs the economy may be slowing down, the government is certainly not keen to worsen any potential downturn with a slash and burn budget. However, the next four years may also be one of the most transformative periods in recent Ontario public finance if the government succeeds in implementing its vision to better manage Ontario’s public sector while maintaining services.

The Ford government is expected to end 2018-19 with an $11.7 billion deficit and is bringing in the 2019-20 fiscal year with a $9.3 billion deficit with plans to balance the budget by 2023-24. With respect to fiscal progress, the Ford government could have balanced the budget in about three years if it had decided to freeze nominal spending for a couple of years. Instead, it is planning to allow total spending to grow at about one percent annually which is still very restrictive relative to the projected increases of the last Liberal budget. Spending in Ontario is being placed on a much lower growth trajectory so that over time it will eventually match revenues. Given that compensation is a big part of public sector spending in Ontario, the one percent number is a signal of what wage increases can be expected in the public sector.

After inflation, real spending in Ontario will nevertheless decline and therefore there will need to be choices made on where greater reductions and efficiencies will occur. However, some of those efficiencies will be used to fund new initiatives whether they be dental care for seniors, a new child daycare tax credit, opening new long-term care beds on a faster schedule, investments in public transit, and ultimately even some tax relief down the road.

More specifically, despite creating a new single health agency and optimizing productivity, over the medium-term health sector spending is still expected to grow an average of 1.6% annually to 2021-22. Education is expected to grow 1.2 percent annually. On the other hand, post-secondary education and training is expected to decrease at 1% annually and while justice, and children and social services, will each decline at about 2% annually.

In terms of efficiencies, aspects of the government plan are going to take shape via coming expert panels and task forces. Education is a key area with changes in class sizes the first step that was taken. A task force to find efficiencies in how the four systems operate will inevitably lead to suggestions for more coordination of procurement and spending across school boards, standardization of pay scales and perhaps even some type of consolidation of facilities in declining enrollment areas as well as administrative and management functions that preserve the distinctive nature of each system.

Then there is post-secondary education where the budget has communicated a desire to tie college and university funding more to performance outcomes. The key issue here is what those performance outcomes are going to be. Along with graduation rates and employment success, one might expect to see research output and measures of commercialization success or community outcomes as additional measures. However, Ontario’s post-secondary sector especially at the university level is quite diverse and constructing a one-size-fits all set of measures will be politically challenging given the regional role many universities play.

However, where the government will garner more sympathy from the public is with respect to its position on trying to do something about aging university faculty who can continue working past 65 and earn a salary and if still working after age 71 also collect a pension. However, university pensions are not like school teacher pensions – there is no province wide university pension system but each university has its own so again there is no easy one-size-fits-all solution. The government will at minimum need to separate its thinking with respect to those universities with plans that are defined benefit-where the employer bears the risk - from those that are defined contribution – where the employee bears the risk.

And then there is health care, Ontario’s largest single budgetary expenditure. Health care in Canada has been looking for transformative change for years and the inevitable result has been more and more spending. The slowdown in growth rates of the last few years may ultimately prove to be temporary, driven in part by a slowdown in new drug products and postponement of capital spending. With a pledge to end hallway medicine and increase the number of long-term care beds, combined with an aging population and the arrival of new high demand pharmaceutical products, any savings found by true transformative change in Ontario will be rapidly eaten up by other spending. This will be the area of greatest challenge.

So, there you have it. This budget has a lot of plans for change by implementing reforms and best practices and innovation but for the moment they are just plans. Politics is the art of the possible and the next couple of years will reveal what is possible and what is not. Much hinges on how the economy performs, and especially whether we go into a small recession. If the economy does better than expected and revenues are buoyant, the government will be able to shrink the deficit more than expected and spend more money. Angst generated for media purposes and twitter universe rants aside, I think a sizeable silent chunk of the Ontario population will give the provincial government the benefit of the doubt for now.

Tuesday 2 April 2019

Addressing Violent Crime in Thunder Bay

Mayor Bill Mauro has gone public in his calls for help in dealing with crime in Thunder Bay. In reports by Thunder Bay Television and the Chronicle-Journal, the Mayor has called on the federal and provincial governments for assistance in dealing with the spike in violent crime that is afflicting Thunder Bay. The City of Thunder Bay is hard pressed to deal with the financial impact on the police budget of the recommendations made by the Office of the Independent Police Review Director (OIPRD) to deal with systemic racism and now the spike in gang-related violent drug crime that is underway.

Thunder Bay is experiencing a surge in violent crime that has been underway for a number of years. While overall crime rates are down in Thunder Bay as shown by overall traditional crime rates as well as the Crime Severity index, violent crimes are up. As Figure 1 below shows, overall crime as measured by the Crime Severity Index (Source: Statistics Canada) has fallen from a peak of 126.25 in 1998 to reach 88.25 in 2017. Violent crime, however is at 145.81 in 2017 and was 122.62 in 1998. When linear trends are fitted to the data, violent crime has been trending up over time while overall crime severity has been trending down with non-violent crime severity quite flat.

Regional Economic Divides a Challenge for Ontario Budget 2019

The Financial Accountability Office of Ontario recently issued a report called Incomes in Ontario: Growth, Distribution and Mobility which summarizes recent trends in personal income in Ontario in the areas of income growth and distribution. Among the findings were that Ontario’s median income growth was the slowest among the provinces between 2000 and 2016, that there has been an increase in income inequality in the province, and that relative and inter-generational income mobility has declined – that is over time, it has become more difficult for lower income Ontarians to move up the income distribution and that children of higher income parents are more likely to become high income earners themselves.

As the report states: “It has become more difficult for Ontarians to “get ahead” – that is, move up the income distribution. In this report, upward income mobility is defined as the share of working-age Ontarians who move up at least one income quintile over a five-year period. This share declined from 41 per cent in the early 1980s to 32 per cent more recently. The decline was most pronounced for lower-income Ontarians.” Moreover, what is also of interest is that while Ontario’s productivity has grown, incomes have not kept pace suggesting that Ontario’s economic growth has not translated directly into increased personal incomes.

Much of this report focused on Ontario wide trends but one of the most interesting pieces of information is Figure B.1 in the appendices - a map titled Median household income across census divisions in Ontario. In this map, median household income from the 2016 Census is plotted by major census division in Ontario in four categories – Less than $65,000, $65,000 to $69,999, $70,000 to $74,999 and finally more than $75,000. The map taken from the report is shown below and illustrates Ontario’s great regional economic divides.

Ontario’s highest household income regions stand out as mainly two islands on the map – the area surrounding downtown Toronto – that is the GTA and central Ontario – and the Ottawa region. Downtown Toronto itself has substantially lower household incomes than the surrounding GTA and GTA belt area. The east and the southwest have swathes of lower income areas and then there is the North.

NORTHERN ECONOMIST 2.0