The Shape of Federal Fiscal Things to Come: Chrystia Freeland’s 1 Percent Solution

 

Yesterday’s Federal Fall Economic Statement is actually quite a remarkable document. On the one hand, given the expectations being raised that the deficit for 2020-21 might reach $450 billion, coming in an $381.6 billion has probably caused many to heave a sigh of relief.  That was probably the intention. Of course, that $381.6 billion figure is the lower bound estimate given economic assumptions and could be as high as just under $400 billion.  Moreover, none of the scenario deficit projections were factoring in the $70-$100 billion in stimulus spending that was to be spread over 3 years once the pandemic was brought under control.

 

The Fall Economic Statement appears to be as much a political as it was an economic and fiscal document in that it continues federal spending and support for the pandemic as well as positions the government for substantial spending announcements of stimulus spending in the spring probably in advance of a federal election once the pandemic appears to be under control – which it currently is not. 

 

If one takes the base case scenario, revenues for 2020-21 will be $275.4 billion and spending $641.6 billion for a deficit (after actuarial adjustment of federal liabilities – the recent twist in federal finance reporting) of $381.6 billion.  For 2021-22, revenues are expected to rise to $335.9 billion and spending decline to $441.5 billion for a deficit of $121.2 billion.  After that, deficits will continue to decline reaching $24.9 billion by 2025-26 and returning us to the deficit range of the 2018 to 2019 period.  This period of deficits will take the federal net debt from $772.1 billion in 2018 to reach $1.494 trillion by 2025.

 

The document is quite clever because it lays out a fiscal plan with a target – which critics have been clamouring for – without actually stating there is a fiscal target.  The pandemic is essentially a dis-equilibrium situation for the federal government’s finances and the federal government hopes to return to its version of equilibrium finances by 2025 at which point revenues will be higher at $417.3 billion and spending at $484.4 billion.  

 

 If one takes their GDP growth forecasts into account, the deficit to GDP ratio for 2020-21 is actually just over 16 percent but will decline to 5 percent the year after and then essentially reach 1 percent.  Prior to the pandemic, a deficit to GDP ratio of 1 percent was what the federal government saw as perfectly reasonable given low interest rates and GDP growth rates and that is what they want to get back to.  It is the 1 percent solution.

 

To place all of this in very long term visual perspective, data from the Jorda-Schularick-Taylor MacroHistory Data Base, Statistics Canada, my federal fiscal history and the 2020 Fall Economic Statement is used to generate figures 1 and 2 below. Figure 1 shows real per capita federal revenues and spending from 1870 to 2018 and then forecasts from 2019 to 2025.   

 

 

 

If all pans out as forecast, then the surge in spending and revenue collapse of the pandemic will subside with real per capita revenues and spending eventually up 2.5 percent and 3.4 percent respectively from their 2018 amounts.  That will be viewed as a perfectly acceptable growth when spread over 5 years. Figure 2 presents the deficit to GDP ratio with the pandemic showing the second largest deficit to GDP ratio in history but with a return to roughly where it was just prior to the pandemic.

 

 

 

This is the shape of federal fiscal things to come, assuming the federal government’s vision pans out.

 

 

 

 

Thunder Bay Residents Fight Back with a $350 Million Lawsuit

 

After months of silence on the part of their municipal government, residents of Thunder Bay affected by the leaky pipe pandemic have finally decided to launch a $350 million lawsuit against the City of Thunder Bay and have retained the services of a Toronto law firm that specializes in class action lawsuits.  Needless to say, this probably could have been avoided if the City of Thunder Bay had made some effort to acknowledge the financial hardship and inconvenience of affected property owners by rendering them some assistance.   Yet, on the advice of the City of Thunder Bay’s legal advisors, they chose to do nothing.  The result? When you have lawyers on one side telling you to do nothing, the best solution is to get a bigger lawyer.

 

In the end, I think a key issue here will not even be the addition of sodium hydroxide to the water per se as a lead control option but why sodium hydroxide was used rather than orthophosphate given so many other cities in Ontario use orthophosphate.  Another key issue is that after problems emerged, the city of Thunder Bay took so long to acknowledge there was even an issue and stopped adding the chemical to the water and followed up by rendering no assistance – doing and saying absolutely nothing aside from filling City coffers with additional water use and water shutoff revenues. A case in point, a pinhole leak problem became apparent in Folsom, California this summer and that city hired a consulting firm and by the fall proposed a solution.  Meanwhile, after nearly a year of leaks, Thunder Bay won’t even speak to the problems. And, this lawsuit probably does not deal with any potential health effects – physical or mental – that the addition of sodium hydroxide may cause.

 

The silence of the councilors on this issue is appalling given they are our elected representatives.  They remain silent because they have been advised to do so by the City of Thunder Bay’s lawyers?  Really?  They are not the board of directors of a private business – they are elected by the people to represent their constituents.  What are they thinking?  During the current pandemic do provincial premiers or the Prime Minister not publicly acknowledge the loss of life or hardship people are facing as individuals or residents of long-term care homes?  What kind of elected representatives hide behind their publicly tax funded lawyers during a time of crisis and then proceed to debate fireworks restrictions, new tourism signs, or new construction projects?  Are they inspired by popular perceptions of the legacy of Marie Antoinette?

 

The scale of the problem is evident from the number of people who have registered on the Leaky Pipe Club Facebook page.  Moreover, the problem is not over yet and will likely continue over the winter and into the spring.  The problem is city wide as Figure 1 (data from Thunder Bay Leaky Pipe Club poll) shows with higher incidence in the Northwood, Red River Wards and McIntyre Wards. Approximately one-third of reports are from the Northwood ward followed by 21 percent in Red River and 18 percent in McIntyre.  Of course, given the vintage of many homes in these neighborhoods, the local chatter has mentioned that it is homes from the 1970s that are to blame.  However, a reason so many homes from the 1970s have been affected is that there are so many of them in Thunder Bay.  As much as one-third of Thunder Bay’s current housing stock was built in the 1970s – particularly in the area of multi-unit dwellings like apartments.  Indeed, the $350,000 pin hole leak lawsuit filed by St. Joseph's Care Group for the PR Cook Apartments is probably the tip of the iceberg for apartments.  The other older neighborhoods all have more lead pipes - ironically, the people the sodium hydroxide was to help through lead effect mitigation.

 

 

 

Given the City is planning to spend over $40 million on a soccerplex and is considering a new $50 million police station, they obviously are not short of financial resources with which to provide help.  Homeowners in Thunder Bay are not only facing the prospect of catastrophic damage and the expenses for repairs, but home insurance rates will skyrocket across the city.  How is a city that is trying to attract investors reconcile a city with this infrastructure chaos as a “good place to set up business?” Obviously, the City of Thunder Bay thinks a $350 million lawsuit is fine but added onto the $375 million class action lawsuit from the 2012 flooding, one wonders what they are thinking?  Are the councilors throwing up their hands and somehow hoping the City can declare bankruptcy or the province appoints an administrator to bail them out? Is it time for the province to take over and defund Thunder Bay City Council?

Updated November 26th.

Thunder Bay City Budget 2021: And Now for New Police Facilities

Thunder Bay is surveying its residents for input into the 2021 budget and as part of the budget input process a virtual town hall was held Wednesday this week to overview and answer questions.  Surprisingly, no questions were answered about the pinhole leak problem but then it was not a live phone or zoom in but one with “submitted questions” and this careful screening undoubtedly eliminated such awkward inquiries.  As part of its new autocratic behaviour, Thunder Bay City Council is rapidly overtaking the Communist Party of China for the breathtaking nature of its staged theatrical consultations. 

The 2021 budget includes a tax supported infrastructure deficit estimated to be $21.7 million annually, while the rate supported infrastructure deficit is estimated at $7.6 million annually.  The budget process is still advancing the prospect of a two per cent tax levy increase.  However, that does not factor in expenses related to the ongoing COVID-19 pandemic which would result in a 6 percent tax levy increase.

While the town hall noted that the City will be looking to reserves and other sources to mitigate the impact of COVID-19 it remains that the words of the Finance Committee Chair alone are not enough to keep the levy at 2 percent.  Many of the councilors will be happy with exploring an increase between 2 and 6 percent as part of a convoluted political ballet of creative manoeuvre to pursue additional spending agendas.  

In terms of spending, along with the coming Turf Facility (with a cost range of anywhere from $30 to $42 million), many have forgotten that new police facilities are also coming down the pipeline and Monday night’s meeting will see a needs assessment study with a veritable alphabet soup range of options -  A,  B, B1, B2, C, C1, D and E – with options B1 and B2 in particular reminiscent of beloved  Australian children’s television characters.

In brief, with estimated construction and separate total project costs at the end of each option, here are the nominees:

OPTION A Base Case New HQ any location $45,025,668 / $ 49,875,204

OPTION B New Central HQ with South Satellite (south core satellite includes Exhibits, Comm Services) $48,638,522 / $ 54,117,483

OPTION B1 New Central HQ with South Satellite (south core satellite includes Patrol & Comm Services) $49,568,285 / $ 55,068,311

OPTION B2

New Central HQ with South Satellite (South core satellite includes Patrol) $48,736,702 / $54,078,066

OPTION C

Existing HQ with South and North Satellites (perhaps they will be named Deimos and Phobos though being associated with Mars they are also the Greek Gods of fear, panic and terror and therefore probably not appropriate names to be associated with modern policing) (South core satellite includes Exhibits, Range North core satellite is covert (no public access) $50,939,978 / $ 62,626,447

OPTION C1 Existing HQ with South & North Satellites (south core satellite includes Comm Services Support Bldg includes Exhibits, Range, Comm Services) $49,133,748 / $ 62,878,096

OPTION D
New South HQ with North Satellite (satellite is covert (no public access) includes Range) $48,371,662 / $ 53,581,582

OPTION E

New South HQ with North Satellite (north satellite includes Comm Services). $46,635,047 / $51,791,507

This is going to be a fairly complicated decision but the long and short of it is that new police facilities will have a total cost of anywhere from $ 49,875,204 to $62,878,095 and that is before any of the inevitable cost overruns that usually characterize public sector construction projects in Thunder Bay. Some of us are now old enough to have seen it all and examples of cost overruns include the new hospital – whose costs ultimately more than doubled from initial estimate to final project - to most recently the Marina Park pedestrian overpass refurbishment which is now $500,000 overbudget – an increase of 38 percent.   

The direction of the project is definitely towards a new build, not only because the word “new” appears in 6 out of the 8 options but because the existing HQ with north and south satellite options (C and C1) seem to have the largest spread between construction and total project costs and ultimately the highest total costs.

So, the die is cast.  Not only is $40 million dollars or more headed towards a new turf facility but another $50-$55 million dollars is headed towards a new police facility which is close to $100 million in new capital infrastructure spending before the inevitable costs overruns of which only 30-40 percent is probably a lower end estimate.  It is no wonder Thunder Bay City councillors and staff are remaining silent on fixing the leaky pipe infrastructure – they have other priorities for Thunder Bay’s tax dollars which incidentally are financed by the second highest residential tax rates of 35 Ontario municipalities.

 

 

 

COVID-19 and Hospital Capacity in Ontario

 

This morning, Ontario reported 1,418 positive COVID-19 cases bringing the total to 100,790 cases to date.  Breaking the 100000-case ceiling will be seen as a milestone of sorts. Of these 100,790 cases, 84716 cases are considered resolved meaning that the number of active cases is currently 16,074.  Of these cases, 518 are presently in hospital with 142 of them in the ICU.  What this means is that of the current number of active cases, about 3.2 percent currently require hospitalization. 

 

Many Ontarians going about their daily lives have probably made similar calculations and concluded the risk of COVID-19 is small. Even if you catch it, they think the odds of requiring hospitalisation are slim and skewed towards an older or health compromised demographic.  Constant warnings to social distance and not engage in unnecessary social activities are going in one ear and out the other because most have concluded the risk of something bad happening is small.

 

However, the flip side of this behaviour is the potential of exponential increases in cases and, when combined with Ontario’s diminished hospital capacity, it is this where the real risks lie.  In 1990, Ontario had close to 35,000 acute care hospital beds and a population of 10.3 million people. By 2000, after a decade of fiscal crisis and “health care reform”, the number of acute care beds had declined dramatically to approximately 22,000 - about a 35 percent decline - and have remained practically constant at that level ever since.  However, by 2019, Ontario’s population had increased to 14.5 million – an increase of 41 percent while the population aged 65 and over had increased by over 70 percent.  As a result, acute care beds per capita in Ontario have declined to practically the lowest levels in Canada but in the OECD.  

 

While COVID-19 may appear manageable at current rates of new cases, if the number of active cases doubled every week, the system would rapidly be overwhelmed even if only 3.2 percent of active cases require hospitalization.  Here is the math:

 

 

Essentially, by Week 3 there would be crisis as nearly 10 percent of acute care beds in the hospitals would have to be given over to COVID cases – and this does not factor in any regional differences in severity of the active case count or the need for ICU beds.  By Week 5, essentially 40 percent of acute care beds would be needed for COVID and by this stage the system would not need to reach Week 6 to essentially collapse.  Having 1990 acute care bed numbers would help but only buy you a week or two.  And this is the result of only a doubling of active cases every week.  If cases tripled every week or they doubled in less time, the system would be overwhelmed even more quickly.

 

The average member of the public may think that only 3 percent of active cases needing to be hospitalized is a small number and with currently just under 1500 new cases a day it is not so bad.   So they carry on paying lip service to any rules and figure there are no consequences to their behavior.  Think again. 

 

 

 

 

 

The COVID-19 Surge in Ontario and Thunder Bay District

 

The COVID-19 case count is surging in Ontario and is even affecting more remote parts of the province that saw a relatively mild first wave – such as the Thunder Bay District. It has been a while since I plotted my provincial and local numbers with trend and presented a visual update, so here it is. Figure 1 plots the daily number of cases in Ontario with a LOWESS smooth that highlights the trend.  The second wave of cases is as known already much larger than the first and is definitely poised to continue surging. Based on the trend line, one can easily expect to see 3,000 cases per day within three weeks which brings us the early December.  More ominous is the rise in death rates shown in Figure 2 and here while there is an upward trend, the second wave so far has seen a milder death toll than the first wave.  However, if one extrapolates that trend line, one could see the death toll hit the levels of the first wave in about three weeks also.  Needless to say, the trends are not pointing to a good place.

 

 

 

 

As for Thunder Bay,  one expects the smugness should be over but Thunder Bay is a stubborn place.  Many in Thunder Bay have been carrying on in their splendid isolationism as if they were somehow exempt from infectious spread given the low number of cases and only one death to date.  As Figure 3 shows, the District was largely spared during the first wave not so much by superior behavior but by geographic distance, low population density and good luck.   

 

 

 

The luck seems to have ended given the large number of close contact cases over the last week.  There has finally been a local super spreader event though the demographic affected at this point appears to be a younger one.  Whether this can be contained and spread to more vulnerable demographics prevented remains to be seen.  If nothing happens to curtail the current trend, at the current trend rate of increase, within three weeks one can expect 25 to 30 cases per day.  And, eventually there will be more deaths.