NORTHERN ECONOMIST 2.0

Thursday, 20 June 2019

Is This the End of Trying To Balance Ontario's Budget?

The Ford Government announced a major cabinet reshuffle this morning and it is obviously an attempt to reboot and rebrand a government that has run into difficulty in terms of its popularity – and particularly the popularity of the “Populist” Premier who obviously did not take kindly to be booed at this week’s Raptor’s Celebration. All politicians I believe have an deep rooted need to be liked but if it becomes a dominant characteristic it can lead to bad policy.

Obviously, the Premier has decided that the source of his current unpopularity is a function of the actions of three ministers in particular: 1) former Finance Minister Vic Fedeli who has now been put in the Economic Development Portfolio and replaced by former Environment Minister Rod Phillips, 2) former Child and Social Services Minister Lisa MacLeod who is being replaced by the former Economic Development minister Todd Smith and 3) former education Minister Lisa Thompson who is being replaced by a cabinet newcomer – Stephen Lecce – on the eve of what will be contentious negotiations this summer as teacher’s contracts expire. There are a number of other changes – such as Caroline Mulroney moving out of the Attorney General position to Transport – and you can get the new list here. For those of you in the Northwest, Greg Rickford fortunately remains in charge of his portfolios.

There seem to be several themes here. First, moving ministers out of portfolios where there has been controversy and putting in new faces. It remains to be seen if the idea is to sell the same ideas with new faces or have an abrupt policy shift. Second, an increase in the number of GTA area ministers which given the population and clout of the region is probably a wise strategy and was an important omission the first time the cabinet was constructed. Third, an increase in the size of cabinet - from 21 to 28 – which will no doubt raise eyebrows in the Toronto area given the early move to reduce Toronto City council from 47 to 25.

In some respects, this cabinet shuffle probably is going to signal an end to attempts to enact major reforms and changes designed to put Ontario’s Finances on a more sustainable path. There is no doubt that some of the issues that affected people in health, education and social service sector were handled in a particularly ham-handed way but a move towards re-opening the taps wider in order to make a populist Premier more popular is not a good thing in the long run. However, the expansion of cabinet is an important symbol that says there is not going to be as firm an emphasis on reining in the deficit and debt. Indeed, it is very disappointing to see Vic Fedeli out of Finance given his energy level and steady hand when it came to the operations of government.

It will be an interesting summer.

Wednesday, 19 June 2019

Housing Prices Up in May...Even in Thunder Bay

The May Teranet-National Bank Composite House Price Index has been released and it shows the home price index in Canada up in May for the first time in nine months though it was the smallest May increase in 21 years. Given that there is usually a bump up in real estate markets in the spring, given the small increase by historic standards, it means that real estate markets are still slow. Indeed, once the index is seasonally adjusted it would appear that the index is actually down 0.4 percent in May rather than up 0.5 percent.

Some of the largest markets in the country – like Vancouver – are still in decline but Ottawa and Hamilton have been seeing larger increases. According to the Teranet Index: “Unadjusted indexes were up on the month for nine of the 11 metropolitan markets of the composite index, the exceptions being Vancouver (−0.2%) and Edmonton (−0.3%). Calgary was up 0.3%, Winnipeg 0.5%, Toronto 0.7% and Victoria 0.7%, but indexes for these four markets were down when seasonally adjusted. Index changes for Montreal (+0.5%), Quebec City (+0.8%), Halifax (+0.9%), Ottawa-Gatineau (+1.9%) and Hamilton (+2.2%) would have remained positive after seasonal adjustment.”

Of interest to those of us here in the North are the results for Thunder Bay and Sudbury which are part of a set of figures not included in the main composite index. Quoting Teranet: “Down from nine months ago were the two in B.C. – Abbotsford-Mission (−5.2%) and Kelowna (−3.6%). Up were the five in Ontario – Thunder Bay (1.6%), Sudbury (2.9%), London (4.0%), Kingston (4.2%) and Windsor (6.8%).” These last five cities are all places that have economically had a pretty tough time over the last few years and rising house prices are some evidence of recovery.

So, it would appear that the continuation of lower interest rates in Canada, plus what has been strong employment growth is on the whole managing to prop up real estate markets especially in some smaller Ontario centers a bit more removed from the GTA. Windsor certainly comes to mind. Prices in these markets are still more affordable at least by current Canadian standards though given the overall sluggishness one really cannot expect a resurgence of the boom of the last few years. Aside from Hamilton, other centers closer to the GTA are not doing as well – for example Barrie, Peterborough, Guelph and Oshawa.

Thursday, 6 June 2019

Trump, Brexit and the EU

On his recent state visit to the UK, US President Donald Trump waded into the Brexit issue and Britain’s EU relations with a number of pronouncements that included tweeting that Britain should throw off the “shackles” of EU membership and also offering the promise of a US trade deal once they left. If Britain follows through and leaves the EU, a trade deal with the United States would be an important consolation prize but one hopes the British have been watching the US and its ongoing relationship with Canada and Mexico to know that even with trade deals, economic relations with the current US administration can be a bit of a roller coaster.

Of course, President Trump is up to more than simply trying to throw the British a lifeline. Trump and indeed a chunk of like-minded American policy thinkers have never liked the EU and have been waiting for Euro and the EU to fall apart and fail. Indeed, one perspective in the Harvard Business Review a number of years ago refers to the EU as a failed experimentbecause of its slow recovery from the 2008-09 recession, the undemocratic aspects of the EU Commission and the failure to create a more integrated federation. Of course, if Europe was successful in creating a more integrated federation, it would likely spark the ire of Donald Trump even more.

Indeed, with his attacks on the relevance of NATO and the EU, it has been noted that Trump has been trying to disrupt the EU. While the presence of a united Europe which shares common economic and cultural values and supports a liberal international order, with the United States should be seen as a natural ally, the current President of the United States essentially sees a united Europe as a large bloc that would better serve American interests by being shattered into smaller units. These smaller units can then be played off one against the other for short term economic and political advantage whether it is trade deals that benefit the United States or other short-term alliances.

Needless to say, the Europeans have a right to be miffed not only with the UK which with Brexit has become a disruptive rather than constructive force in Europe but also with President Trump who is openly hostile to the EU. Of course, Britain’s behaviour is probably rooted in its history as it spent centuries making sure that continental European powers did not come together to form an alliance. Once they did with the creation of the EU, a cynic would argue that Britain eventually joined to be a disruptive force from within – indeed, De Gaulle thought they should not be admitted. The best thing that Europe can do if Britain leaves the EU is to work towards sticking together and becoming more united, but this is going to be a tough task.

Thursday, 23 May 2019

The Big Challenges Addressing Ontario’s Deficit & Debt Problem

The last couple of days have seen two reports – one by Statistics Canada and one by the Ontario Financial Accountability Office – which taken together provide the best picture yet as to why Ontario faces a big fiscal challenge in resolving its deficit and debt issues. First, the Financial Accountability Office (FAO) in its Spring 2019 Economic and Budget Outlook under its baseline projection projects that Ontario’s budget deficit decreases from $11.7 billion in 2018-19 to $7.3 billion in 2020-21 and improves rapidly over the following three years, reaching balance in 2022-23 and a relatively large surplus of $6.4 billion by 2023-24.

Yet, the FAO notes that the 2019 Ontario Budget projects smaller deficits over the next two years due to the government’s more optimistic outlook for revenue growth. However, beginning in 2021-22, the 2019 budget incorporates provisions for unannounced revenue reductions and spending measures. This would lead to higher deficits and add to Ontario’s debt. The Province should still achieve a balanced budget by 2023-24, due to its plan to significantly restrain the growth in program spending. The 2019 budget will see program spending grow at just 1 percent annually over the next five years bringing per capita government spending from $10,494 in 2018-19 to $9,391 – a decrease of 10.5 percent. Per capita government spending in Ontario is already the lowest in the country and this additional decline would widen the gap even more.

So why is Ontario unable to provide provincial government program spending closer to the national average? The answer to that lies in another report by Statistics Canada titled Income Growth per Capita in the Provinces since 1950 which examines GDP per capita and real GDI per capita over a 66-year period to provide insight on which provinces experienced the most growth over the course of this period, and how this affected per capita income levels across provinces. The news for Ontario is pretty grim in terms of economic growth rates. Whereas in 1950, Ontario had the highest GDP per capita of the ten provinces – followed by British Columbia and Alberta – by 2016 it was down to 4^thplace with Alberta, Saskatchewan and Newfoundland and Labrador in the top three positions. More startling is the growth rate of per capita income – which places Ontario at the bottom of all the provinces over this period (See figure).

So, Ontario in a sense over the last 50 years has spent beyond its means in an effort to keep up with the other provinces in terms of the provision of public services but that has still not been enough. It now has the lowest per capita spending of the ten provinces, the largest provincial total public debt, the second highest per capita public debt, and is engaged in an effort to balance its budget which will widen the program spending gap further with the other provinces. Now some may point to the factor here as a revenue problem driven by the unwillingness of Ontario to raise taxes. Ontario indeed has the lowest total revenue per capita among the ten provinces but it has the third highest per capita tax revenue – after Quebec and Newfoundland. Ontario’s relatively higher per capita tax revenue is offset by lower revenues from resource royalties, federal transfers as well as all other revenues when compared to other provinces. No, it is not a tax revenue problem.

The problem is three-fold: First, Ontario has had a weaker economic growth rate relative to the other provinces and needs to boost its productivity and economy to grow faster thereby expanding its tax base. Second, Ontario has not had has a resource sector boom that has enabled provinces like Alberta and Saskatchewan to leap ahead in terms of income and ultimately government spending and nor is it likely to get one from northern Ontario resources anytime soon given the slow pace of development. Third, as a result of its strong tax base - all things considered – Ontario is still a source of federal government revenue and ultimately transfers to other parts of the country which allow those regions to maintain a higher level of spending. While balancing the budget by 2022-23 will resolve Ontario’s fiscal situation, it remains that the long-term pressures driving its fiscal imbalance are still there.

Friday, 17 May 2019

Canada's World Role: Time to Grow Up

Canada is experiencing a particularly rough patch in terms of its international relations given the recent acrimonious trade negotiations with the United States over NAFTA, the deterioration in diplomatic and economic relations with China in the wake of the Meng Wanzhou affair and the recent spats with Saudi Arabia and now even the Phillipines. Despite our efforts to reach out diplomatically to our allies and gain their support for our predicaments, no one is going to come to our aid. While some of this can be traced to the deterioration of a rules-based world economic and political order and the rise of more populist regimes, the recent setbacks suffered by Canada have another direct contributor – the United States and especially President Trump.

The United States has signaled to the world that its America First policies extend to its closest North American neighbours – Canada and Mexico – and that there are limits to any “special” relationship with Canada. The lifting today of the tariffs on steel and aluminum does not change this. The NAFTA negotiations not only saw tariffs imposed on Canada but a set of particularly personal attacks on the Prime Minister and the negotiating team. Essentially, the Prime minister was “slapped around” in public by President Trump and the message this conveyed did not go unnoticed in the rest of the world. The message was that Canada no longer enjoyed any special protection from its close affiliation with the Americans – it was just another American foreign relation.

This may all seem far-fetched to the members of Canada’s governing Laurentian elites whose views are still anchored in the Golden Age of Canadian diplomacy of Lester Pearson but then most of them probably did not attend a rough and tumble northern Ontario elementary school in the 1970s. Unlike the zero tolerance environments of today’s elementary schools, violence in the playground was quite prevalent several decades ago. If the biggest kid took a dislike to you during recess and slapped you around, it was a signal to his minions that they could slap you around too. Taking a stand on principle and shouting out the importance of fairness and values would simply get you another pummeling. The trick to survival in that environment was to lay low and not attract too much attention while still getting things done.

So, Canada is in a situation not of its own making but one in which it is going to have to work hard to forge the economic relationships we need to support our standard of living. After all, about one third of our GDP is rooted in exports which means that we cannot just take our balls and go home to play. However, we do have to be more hard-nosed about reciprocity in our economic relationships with countries that are able to use Canadian rule of law to their advantage when it comes to investing in Canada but do not extend the same privileges to our citizens and companies. Our overall diplomatic efforts to build alliances must continue but in the long run they need to be coupled with something else – we need to get bigger if we want to ensure we are not so readily pushed around on the world playground.

Canada needs to continue to grow its population to expand its economic mass and needs to do so through migration incentives that place population in centers other than Toronto, Montreal and Vancouver to promote broader development. Canada also needs to spend more on its own defense if it wants to be taken more seriously. There are challenges coming to our Arctic sovereignty and unless we are planning to give the region away to Russia, the United States and China, we need to be able to effectively command access and transit through the region. We cannot depend on the United States or other allies to promote our interests – we need to do it more astutely and assertively ourselves.