Thunder Bay Budget 2019: Onward and Upwards Simply Won't Do This Time

The 2019 Thunder Bay municipal budget has arrived, and the proposed budget projects a total increase in the municipal tax levy of 3.25 percent. The proposed levy is $195.9 million which represents an increase of $6.2 million over last year’s budget of $189.7 million.  You can get a nice summary of the proposed changes in this summary article by Jeff Walters given that the actual executive summary document released by the City of Thunder Bay is really quite lengthy and as usual a rather opaque document with its summary of total tax supported(gross) spending, tax supported (Net), rate supported (Gross) and rate supported (Net) spending all of which include capital spending and government grant supported spending and are all well in excess of the $195.9 million tax levy which is not mentioned until the second page.

This first budget is an important test of the new Mayor and City Council in that it will provide an indication of their approach to municipal fiscal matters.  Indeed, the incoming Mayor in his assessment of major issues facing the City noted that taxation levels were one of his top three priorities  (along with infrastructure and crime).  There is of course a difference between the level of taxation and the size of a rate increase – reducing the level of taxation actually means having a negative rather than positive change to the net municipal levy. However, as Figures 1 and 2 show, the trend over the last two decades has been one of constant increases with a median increase in the levy of 3.1 percent. That is to say, half of increases were above 3.1 percent and the remainder below with the lowest increases being for the years 2000 at 1.1 percent and 2010 at 1.2 percent.  Hopefully we will not again see years like 2004 and 2006 as given the current levels of taxation they would represent an economic disaster for many local households.

 

 

An important issue for Council to ponder is the recent tendency for municipal budgets to generate large surpluses as was the case with the 2018 budget which was on track for a $3.6 million surplus as of October 2018.  While such surpluses are often used to replenish reserve funds, it remains that it becomes easy to budget when one overshoots with spending estimates and banks the savings at taxpayer expense.  Given that the increase in the municipal tax levy in 2018 was $5.75 million, it suggests that one could have had a much smaller tax increase and still run a modest positive variance in the $1-$2 million range.   And the fact is that 2017 also saw a budget surplus in the range of $8 million as a result of “one-time costs” that were lower than expected.  Essentially, municipal services - some of which are more regional than local it is to be noted - are being funded by local ratepayers as well as a broader range of cultural and social services and added to that a municipal "savings program" designed to build up reserves. Moreover, the residential ratepayer has been bearing a rising share of the tax burden given the decline in the city's industrial base.

I suppose whether you think using municipal property tax revenues to hit such a wide range of targets is a good idea depends on whether you believe the purpose of property taxation is to fund local services or whether it has a broader range of goals.  Municipal taxation is traditionally supposed to be "benefit" taxation - that is it is to be used to fund local services to residential property and property owners - rather than a form of wealth taxation - which is actually how the tax is levied.  If benefits and services to property are tied to the value of the property, then  the current approach works.  However, we all know that there is a wide variation in services to property.  As well, the aim should be for prudence in the budgeting to provide services with some effort to maintain reserves for unforeseen expenses.  At the same time,  the municipal ratepayer should not be treated as a sort of unlimited liability insurance provider when it comes to budgeting by being used to generate large surpluses that result in taxes higher than needed to fund operating service and needed capital projects.

So, what should this year’s increase in the municipal levy be?  Well, increases in levy supported spending should not exceed the rate of growth of population and inflation.  Given inflation in the rate of 2 percent and population increase of zero you are looking at 2 percent rather than 3.25 percent as the upper bound for this year’s increase.    True, unforeseen circumstances could cause more spending than anticipated later on in the year rather than a reduction but then that is what reserve funds are for and they have seen some healthy replenishment over the last few years.  Going ahead with the 3.25 percent increase is an indication of business as usual as 2017 and 2018 also saw increases in the total levy of over three percent.  Council will need to go through the list of proposed increases and ask for a pretty good justification of why they are needed.  Onwards and upwards is simply not a good option this year.

Ontario's North and the Future of Labour Force Growth

Northern Ontario and New Brunswick are similar in population size and face similar economic challenges given their rapidly aging populations and slow population growth.  However, with its provincial status, New Brunswick is often able to attract considerably more attention for its predicament as opposed to Ontario’s north whose issues are essentially buried within a much larger population focused on the GTA.  Indeed, a spate of stories over the years have noted New Brunswick’s declining birth rate, its outmigration, and its shrinking population.    

It is now common knowledge that northern Ontario’s population is aging at a more rapid rate than the rest of Ontario and that its population growth now rests on its Aboriginal population which is both younger and faster growing than the rest of the population.  Indeed, the 2016 Census showed that population was actually increasing in some northern Ontario Districts and attributable to the rising aboriginal population.  Given the projected labour shortages for northern Ontario that have been forecast as a result of an aging population and outmigration, it stands to reason that the Aboriginal population will have to play an increasingly important role in filling positions.

This role for the growing Aboriginal population has not only been noted for northern Ontario but for Canada as a whole which also faces the prospect of labour shortages given that nearly 20 percent of current employment is filled by those aged 55 years and older and the decline in labour participation rates particularly among those aged 15 to 24.  In his remarks made as part of the David Dodge Lecture in Public Finance at Queen’s University last spring, Bank of Canada Governor Stephen Poloz noted that: “Employment rates among indigenous peoples—one of the youngest demographic groups in Canada—remain well below those of the rest of the country.”

This is the challenge, not only for northern Ontario but for Canada as a whole.  For employment rates among our Aboriginal population to go up, they need to increase their participation rates and as the accompanying figure illustrates – there is much work to be done.  Figure 1 shows that the labour force participation rate for the Aboriginal population over the period 2007 to 2017 has remained consistently below that of the total population.  The average labour force participation over this period for the total population for those aged 15 to 64 is 78 percent compared 64 percent for the aboriginal population.  Figure 2 shows that a consistent gap also is present for the employment rate for those aged 15 to 64 which averaged 72 percent for the total population but 61 percent for the aboriginal population.

 

Needless to say, this national situation is invariably also a feature of the northern Ontario economy and the challenge for 2019 should be to take further steps to devise a strategy to increase the labour force participation and employment rates of the Aboriginal population.  The first step is increasing human capital and training.  While this is probably easier for Aboriginal populations closer to major northern Ontario urban centers, we also need to do better in the case of more remote populations also.  Our region’s economic future depends on our getting this right. 

Canada and the New International Age

Well, it has been a breath-taking week in international affairs and the best indicator yet that so to speak, “Toto, we’re not in Kansas anymore.” By acting on a US legal request to arrest for extradition Huawei CFO Meng Wanzhou, Canada has earned an over the top response from China that to date has also been accompanied by the arrest of two Canadians in China on “national security” concerns.  The response of the Chinese government and media includes words like “revenge” and “heavy price” with respect to what Canada will face if Meng Wanzhou is not ultimately released.  This all comes at a time when China’s economy is increasingly seen as a source of opportunity for Canada with a desire to boost trade via sectoral agreements.

And to top it all off, President Trump has basically made Canada look like the ultimate puppet state by arguing that he could intervene in the dispute and let Meng Wanzhou off the hook if it was useful in securing trade concessions from China.  The Rule Breaker in Chief has made it apparent that he is just fine without a rules-based international order.  There really is very little that seems to distinguish the tenor of the President’s behaviour from that of other authoritarian leaders around the world.  God bless America for a constitution that has a division of powers and checks and balances for otherwise all of this could be much worse – as hard as that might be to believe.

It goes without saying that it is becoming an increasingly difficult time for a small open economy on the world stage.  Over the last year, the NAFTA negotiations with the United States and Mexico involved public insults directed at Canada’s leadership while Saudi Arabia had a major tantrum over our views on human rights issues.  Even if Canada had done a better job of politically tiptoeing around these assorted landmines, it remains that we would still get bullied because we are viewed as small and not of sufficient consequence.  Even China’s recent diatribes against us are really directed at the United States given that they can send it a message by targeting what they obviously perceive to be its “vassal” state.  So much for their respect for us.

While China undoubtedly has some valid points in this diplomatic dispute as expressed by its Ambassador to Canada in a recent Globe opinion piece, it remains that its behaviour is reflective of an insecure adolescent on the world stage.  When a country of 1.3 billion people that claims to be an up and coming world superpower unleashes such an stream of invective and vitriol on a small country of 37 million people, one does not see an injured party but a bully.  Only a bully terrorizes the small fry while treading lightly with the bigger kids.

So where is this going next?  Well, it is unfortunate Canada cannot seriously consider getting a membership with the European Union because quite frankly, it has become a pretty friendless world.  We can’t even rely much on our Anglosphere friends because Australia and New Zealand are small like us while the United States is on a world disorder frenzy and the British are busy immolating themselves over Brexit.  So, we are on our own.

We need to do what we do best.  Remain polite and play the hand that we have been dealt as best we can and ride out the storm.  Weather analogies are good - we can't control the weather, we only deal with it and Canadians are used to dealing with bad weather.  We need to reach out to the Chinese at a senior level and reassure them that we are doing everything we can to resolve this issue in a fair, responsible and rules based manner.  We need to reach out to the Americans and ask for reassurance that this is not just a trade manoeuvre and request that this matter be dealt with expeditiously.  If anything, we might want to try and bring the two sides together to seek a diplomatic solution though given the rhetoric to date we would risk getting side swiped by both sides. 

In the end, this will get resolved and life will go on.  Indeed, President Trump’s own words provide the best excuse for us releasing Meng Wanzhou immediately – obviously, he thinks the arrest is a trade bargaining chip and not a matter of national security.  If we were more opportunistic, that is exactly what we would do and stick it to the Americans given that they have no qualms about throwing us under the bus.  However, we are polite and follow rules.

However, once the dust has settled, we really need to re-evaluate and review our international relationships – especially those involving the United States and China.  In the case of the United States, given our economic integration and the fact that they take 75 percent of our exports, there is going to be little we can do except hope for the day when a new and more reasonable administration takes the White House.  We share a continent with the Americans and not with China and that is that.  They can be bullies too when occasion warrants but our ties with them have been long standing.  In a sense, we are not caught in the middle between China and the United States, we are with the US given our shared history and geography.

As for China, well that requires some more thought.  Given mercurial and aggressive behaviour on the part of China when they don’t get their way and their willingness to bully, we do need to be very careful that we do not become as dependent on their economy as we have become with the Americans.  I’m not sure the Chinese market is worth greater access to us given the potential costs to our businesses and our sovereignty when China decides they are unhappy with us and wish to punish us. Nobody likes being slapped around and if they do, you need to either break off the relationship or minimize contact via a more structured relationship.  It’s a big world and there are other customers for our wares.  We need to trade with countries that behave in a less vindictive manner when it comes to international issues.

Setting Direction: The Next Four Years for Thunder Bay City Council

Thunder Bay’s new City Council has been sworn in and the first meeting tonight will send important signals on what the direction of the new council is as well as the ability of new council members to work together and effectively make decisions.  This is a process being repeated cross the province as new municipal councils from Toronto to Dryden to Windsor begin serving their terms. 

Many often feel the role of Council is to make decisions that do things – like boost the city’s economy or cut costs.  The reality is that much of this can only be done indirectly.  For example, the economic impact of City Council is via its role in setting tax rates and tax policy as well as providing strategic direction on what infrastructure and quality of life investments can attract business.   As for cutting costs, Council needs to follow a process that involves its civil servants –administration - which administers and delivers services.

True, City Council approves all decisions but it is only after strategic direction is provided and the alternatives have been produced and analyzed by the administration.  If City Council wants to reduce expenditure growth, it is not their role to decide what areas should be cut or restrained, it is their role to select the target expenditure level or the desire to reduce spending and then ask administration for their options on how to achieve it.  Having set the policy direction, City Council then decides on the options provided by administration to pursue in meeting the target.  In brief, the role of City Council is to select targets and then make decisions to meet those targets based on the instruments provided by their civil servants.

Of course, the automatic response to any such pontificating on the part of observers like myself is that I am not a member of Council and if I feel I know so much I should walk the walk and run for office. While I appreciate that elected office is an important calling and a tough job,  my response to that is on several levels. First, you should always be careful what you wish for. Second, such a retort on the part of any politician is really designed to stifle debate because given the number of people expressing opinions, how can we all run for office and all serve on Council or as an MP? Third, as engaged citizens and taxpayers we should contribute to debate and discussion and we all have skills that can serve the public in different way.   There is no one size fits all standard for public service and we cannot all be elected politicians.

 

So, that out of the way, the main challenges facing Thunder Bay over the next few years appear to have been categorized by the Mayor in his address last week: taxation, crime, the economy and infrastructure.  I would broaden the “crime” category to general “social fabric” given the interaction between crime, inequality and poverty but fair enough.  These are the categories most in need of attention in Thunder Bay.  Taxation of course is related to spending given that the municipal tax levy is directly linked to the amount of spending.  And, of course there are always issues that will rear their head as a result from decisions made elsewhere – such as the decision to legalize cannabis.

So the issues on tap for the first meeting tonight are whether to close Dease Pool or spend millions of dollars in repairs (apparently $2.8 million more), changes in parking regulations,  a recycling contract extension ($2.6 million more) and a report on the performance of the  new Python 5000 pothole repair machine.  Aside from the parking regulations, these issues all ultimately may involve spending more money for one reason or another.  Given that taxation rates are ultimately linked to spending, tonight will provide a pretty good indication of what we can expect from City Council with respect to tax rates in next year’s budget process and the direction for the next four years.

Long Run Economic Performance: Comparing China, the UK and USA

In light of my recent contributions on China’s economic performance which have appeared in The Hill and on the Fraser Institute Blog, I thought it might be useful to provide the figures which underpin the longer-term analysis of their performance.  The data I used is from the Angus Maddison Database – the 2018 update – and the data is summarized in the accompanying Figures 1 and 2.

Figure 1 plots total real GDP from 1820 to 2016 in 2011 USD for the United States, the United Kingdom and China.  In 1820, China had a vastly larger economy than either the US or the UK with a real GDP of $325 billion compared to $69 billion for the UK or $21 billion for the USA.  Indeed, for much of economic history, China has always been the biggest economy in the world as a result of its massive population.  In 1820, China had a population of 381 million people compared to 10 million for the United States and 21 million for the UK.  However, the 19^th century was not kind to China and by 1870, China’s economy had shrunk to $270 billion but it was still larger than the United States at $150 billion and the UK at $179 billion. 

 

Total GDP of both the US and the UK grew quickly as a result of late nineteenth century industrialization with the US matching the UK in 1878 and then pulling ahead in terms of total GDP.  By 1887, the US economy at $306 billion was larger than China at $274 billion and the UK at $228 billion.  By the eve of the First World War in 1913, the US economy at $791 billion was nearly twice the size of both the UK and China at $368 billion and $344 billion respectively. In the period since WWI, the United States grew rapidly and by the mid 1970s was over five times the size of the UK economy and about five times larger than China’s economy.

China had a Communist revolution in 1949 but economic performance in its aftermath - while substantial - was not as robust when compared to the last forty years.  From 1950 to 1975, China real GDP grows from $348 billion to $1.2 trillion – a tripling of output.  However, things for China really take off with the first economic reforms and liberalization of the 1970s and from 1975 to 2016, its economy expands from $1.2 trillion to $17.3 trillion.  Over the 1975 to 2016 period, the US economy expanded from $5.6 trillion to 17.2 trillion while the UK expanded from $1 trillion to $2.5 trillion.

In 2016, China re-assumed its historical role as the world’s largest economy.  Yet, as I pointed out in my oped pieces, this is not the end of the story.  Despite its impressive and rapid economic growth in terms of total output, China still lags when it comes to per capita output. As Figure 2 shows, over the entire 1820 to 2016 period, China has always had a lower per capita GDP than either the UK or the US and the relative gap has not changed all that much despite the rapid growth of the last 40 years.  In 1820, per capita GDP in China was about 26 percent that of the UK and 41 percent that of the USA.  By 1975, its per capita GDP was 7 percent that of the UK and 5 percent that of the United States.  After the robust growth of the post 1975 period, by 2016 per capita Chinese GDP now stands at 34 percent that of the UK and 24 percent that of the US.

 

So, China has done very well but it still has a long way to go.  Its rapid extensive growth masks the fact that large swaths of its population are still quite poor.  Its economy is showing signs of economic and political fragility given its aging population, large debt levels and economic inequality and this has global implications.  Such fragility is probably a reason for its more authoritarian turn in recent years under President Xi Jinping.  After the rapid growth and improvement in living standards of the last few decades, any economic slowdown may create a politically volatile domestic mix of discontent.