Reliance on housing investment creates prosperity mirage in Ontario

 

While Ontario continues to grapple with COVID, there’s light at the end of the tunnel. At some point, government decision-making will move away from pandemic management and towards economic recovery and the need to get Ontario’s economy firing on all cylinders.

In 2020, Ontario’s nominal GDP dropped by nearly 5 per cent. Ontario’s spring 2021 budget forecasts a rebound in 2021 of slightly more than 6 per cent followed by another 6 per cent in 2022. However, it’s premature to conclude that happy days are here again given the long-term economic and productivity issues in Ontario.

The first chart below presents Ontario’s real per capita GDP (in 2015 dollars) starting in 1961 to provide a long-term perspective.

The second chart presents the annual growth rate of real per capita GDP with a linear trend. The picture is actually rather grim as it shows a long-term decline in real per capita GDP growth. Between 1961 and 1991, Ontario’s real per capita GDP rose from $23,218 to $43,357—an increase of 87 per cent. However, over the next 30 years, real per capita GDP only grew an additional $10,094 dollars—an increase of only 23 per cent.

Whereas the 1990s saw a rebound after the dip of the 1990-91 recession, growth essentially flattened for the 15-year period from about 2000 to 2015. A recovery seems to have begun in growth in 2015 but then 2020 alone saw real per capita GDP take a 7 per cent hit.

A lot has happened in Ontario over the last 30 years that factor into the reasons for the long-term growth and productivity decline (which is not unique to Ontario). Indeed, trying to get real GDP growth above 2 per cent is a problem not only for Ontario but also Canada and many advanced economies. However, the key issue for Ontario can be summarized by in the third chart below, which shows a long-term decline in the investment-to-GDP ratio in the province over time. Ontario has reduced the share of output devoted to new investment.

Productivity growth requires new investment in productive capital—plant, machinery and equipment—and the period from 1960 to 2000 saw it decline from highs near 25 per cent of GDP to well below 20 per cent. True, a recovery of sorts seems to have started since 2000 but much of that is housing investment. As much as people feel wealthy from their investment in new housing and the appreciation of its value given the incessant bidding up of real estate prices, that’s not the foundation for true productivity growth.

Indeed, like much of Canada, Ontario’s economy right now is being propped up by government spending and real estate spending. This is a prosperity illusion.

Declining long-term economic growth in Ontario has resulted in weaker growth in its tax base and government revenues, and yet Ontarians still want their government to provide health care, education and investment in new infrastructure in those sectors. Ontario governments have dealt with these demands to provide the public goods Ontarians want by essentially spending more than they take in. The result is structural deficits and mounting provincial government debt, as the chart below shows. The provincial net debt-to-GDP ratio has gone from about 5 per cent in the 1960s to about 40 per cent, followed by the pandemic bump above 40 per cent in 2020.

Yet, despite this run up in debt, Ontario’s government now spends (on a per-capita basis) some of the lowest amounts on health care and education in Canada.

Low economic growth rates, rising provincial government debt and an economy increasingly marked by a public fixated on real estate appreciation as a source of wealth-creation rather than productivity growth remains a recipe for a diminished future. The rebound in growth rates forecast for this year and next are being driven by a flood of cheap money that has generated widespread public and private borrowing and spending on housing to create an illusion of prosperity.

To have an economic future that’s sustainable and not a mirage, Ontario must boost its productive investment.

This originally appeared on the Fraser Institute Blog,  May 3rd, 2021.

COVID-19 Case Trends: Ontario and Thunder Bay Seem to Be Stalling

 It is the start of the month and a good time to review how Ontario and Thunder Bay District are faring in terms of the trend in daily COVID-19 case counts.  Ontario has now been in a lock down for about four weeks with Thunder Bay District in a lock for weeks before then.  The current restrictions are set to last until May 20th but it is likely they will be extended given that while the upward surge has been arrested in Ontario, there is not yet a downward trend.  As of today, Ontario is reporting a total of 473,901 COVID-19 cases and 8,118 deaths.  Daily cases climbed above 3,000 about April 2nd and peaked at 4,812 on April 16th but they have stubbornly remained above 3,000 since.  Figure 1 plots Ontario's daily cases with a LOWESS smooth and the best that can be said is that the cases have stalled with a distinct downward trend yet to emerge. 

 

 

As for the Thunder Bay District, Figure 2 shows that since the peak that was reached circa the first week of March (about Day 408), there has been a dramatic decline but we have not gone down to zero.  Rather, we seem to be leveling off at about 5 to 10 cases daily. Indeed, the average cases reported over the last two weeks is about 7.  While this is a rather manageable problem for the time being compared to what things were like in early March, it remains that these embers are capable of still sparking a much larger conflagration. Indeed, given the much higher case numbers to the west of us in the Northwestern Health Unit as well as the prairies, the potential for the more rapid spread of new variants is still there.

 

 

One suspects a distinct downward trend for the province is still several weeks away and will only occur as the vaccination process gets to larger numbers of people.  Complete eradication will likely not occur given the spread of new variants, the general non-compliance with general restriction measures by a surprisingly large share of the population and of course the refusal or reluctance of some to get vaccinated. In the United States, the widely circulating variants and vaccine hesitancy has led experts to conclude that herd immunity there is unlikely and that the virus will continue to circulate for some time to come.  It is likely not going to be any different in Canada.  The new normal will include precautions and some level of restrictions for some time to come - likely a few years.

Thunder Bay City Finances Reporting Another Surplus

 

The City of Thunder Bay is now projecting a positive variance of $3 million for the 2021 budget year.  Despite the ongoing COVID-19 pandemic and its costs, the City of Thunder Bay is receiving more financial support than expected from both federal and provincial levels of government.  As well, policing costs as well as other expenses such as debt interest are coming in lower than expected.  If the assumptions underlying this budget update forecast come to pass, then for 2021, Thunder Bay will have its seventh consecutive positive budget variance making for accumulated variances of $17.1 million over seven years. 

 

Needless to say, this “good news” will be used to lend a positive vibe to discussions of spending more money on big capital projects such as a revised Multi-use Indoor Turf Facility project or the new proposed police facility.  After all, with City finances in such “good shape”, we can afford to spend more. Until next fall of course when the discussion will tilt to how we need to raise taxes 3-4 percent. It would appear that the budget spin in Thunder Bay changes from quarter to quarter depending on the need to support the needs and aspirations of the moment.

 

Positive variances are an odd term.  The term variance makes it sound like all that has happened is that the numbers they are getting now are somehow at “variance” with the original budget.  The degree of economic literacy in the general public and maybe amongst a few of the city councilors is such that they probably do not realize that a “positive variance” on the budget is not some type of COVID-19 hybrid spreading to the finances but rather than what it really is: a surplus.  What the city is really saying is that they either have or are projecting an operating surplus on the tax supported budget.  At three million dollars it is just about the size of the tax increase they brought in this year meaning that once again taxes came in much higher than if spending estimates were on the nose.

 

Of course, this is a COVID-19 year and a lot of unexpected things can happen.  Moreover, while having very large positive variances means that the tax rate levy that was imposed was again higher than it needed to be in 2021, one does not want municipalities to become spendthrifts and needlessly run down their reserves.  After all, it was not that long ago that negative variances were more of a concern as the accompanying figure illustrates.  As the numbers for the City of Thunder Bay show, negative variances used to be a problem but to its credit the city actually got a handle on its spending to the point where the financial leaks have been plugged.  Too bad, they could not solve the City’s ongoing leaky water pipe crisis too.

 

 

 

Municipal governments of course are not allowed to run deficits on operating expenditures by the provincial government, so deficits are covered out of reserve funds while surpluses can be used to augment reserve funds.  At the same time, many municipalities – Thunder Bay included – are now in the practice of running habitual surpluses funded out of tax increases that are often higher than they need to be. Enjoy the surplus. We are paying for it as ultimately it comes from taxpayers at either the local, provincial or federal level.

Federal Budget 2021 Snapshot

 

Yesterday’s federal budget – the first in two years – made up for lost time and came in at a hefty 724 pages.  With total expenditure in 2021-22 projected at $497.6 billion, that works out to about $687 million of spending per page.  The budget theme was essentially  a long-term recovery plan for jobs, growth and resilience to finish the job against COVID-19 but it is not so much spending to drive economic growth as it is spending designed as a platform for the next election.  The government is gambling the public is ready for a larger government and has provided initiatives targeted to families, seniors and assorted other interests. In many respects, if you look hard enough, there is something for almost everyone, but it is very often a case of what the governing party thinks you should have. A case in point is post-secondary education where there is more money being provided  for specific initiatives in technology/life sciences research but not for basic research.  The Liberal Party’s vision for the future is one of bigger government but also one that is more directive.

 

For 2020-21, total spending, the tally came in at revenues of $296.2 billion, expenditures of $634.9 billion and a deficit of $354.3 billion – down from projections of nearly $400 billion.  Believe it or not, Finance Minister Freeland was on the news stating something to the effect that this was an accomplishment and that the government had saved the taxpayers money by bringing in only a $354 billion deficit.  For 2021-22, revenues are expected to rise 20 percent as the economy recovers reaching $355.1 billion and spending will fall 21 percent going to $497.6 billion. 

 

The deficit to GDP ratio goes from 16 percent in 2020-21 to 6 percent this fiscal year.  However, the net debt rises to $1.333 trillion this fiscal year and by 2025 is expected to reach $1.5 trillion – nearly doubling from what it was in 2019.  However, the net debt to GDP will peak at 55 percent and then decline slightly thereafter because the economy is on fire this year with real GDP growth of seven percent this year and 4 percent next year.  However, despite this being a budget for long-term growth, according to the forecasts, real GDP growth reverts to the moribund two percent rate by 2024.

 

COVID-19 spending in 2020-21 was $264.6 billion and much of that will go in 2021-22 even with continuation of assorted supports and only amount to $71.9 billion.  However, the government is bringing in $101 billion in new spending over the next three years with the bulk front ended this fiscal year which means there will be about $50 billion in new spending this year.  Indeed, there is a permanent increase in spending being put into place and by 2025, federal government spending will be about one third higher than it was in 2019. 

 

There is $30 billion over five years for $10 a day national day care.  However, this requires matching 50/50 financial participation from Ottawa and the provinces and given that the provinces have always felt they were burned by a promise of 50/50 funding for Medicare and health transfers that ultimately vanished, you can be sure they will not agree unless there is more money.  Incidentally, health transfers are not going up this budget.  There is also money for long-term care, a ten percent increase in Old Age Security for seniors, millions for entrepreneurship, life science research, indigenous affairs, tourism, regional economic development (there is more money for FEDNOR), and the list goes on.

 

The government is not concerned about the deficit or the debt. Indeed, there is no plan for balancing the budget in the medium or long-term.  It is hoping to grow its way out of any fiscal problem. As long as interest rates remain low and there is no recession, it will probably get its wish.  However, given the economy has apparently done better than expected, why is so much stimulus – sorry, investment in the future – needed?  Interest rates are low fueling a housing frenzy.  Canadians have accumulated a large pool of savings – over $100 billion – during the pandemic that they will be looking to spend.  Permanently boosting federal spending by one-third is really adding fuel to the fire.  Even the $30 billion child-care plan is in the end potentially a source of stimulus.  After all, given that some families are spending between $1,000 to $2000 a month for child-care, a $10 a day child-care plan frees up thousands of dollars a year for spending on other things – probably housing. The economy is going to be awash in money but supply of just about everything seems to be limited.  It does sound like a recipe for demand side inflation.

 

 

Are Doug Ford's Days as Premier Numbered?

The most interesting development over the last few days as the Ford Government deals with the spread of the pandemic's new variants was the announcement of new restrictions including giving the police enhanced powers to stop and question people as to where they were going.  Even more interesting was the response of those charged with enforcing those rules - the police.   A number of forces actually said they would not be enforcing the rules. And, in the wake of the backlash, the Ontario government has scaled back this measure with many forces now saying they will simply educate people they come across who are obviously out and about where they should not be.

This may be nothing but from my experience, when the palace guard decides it will no longer do as told, it means that a coup is in the offing.  It is quite remarkable when the civil authorities are told to do something and they simply respond with no.  And now, the story is that the provincial government is going to suspend the legislature.  Ostensibly, this sounds as a measure to provide protection from the pandemic and keep the legislators safe. However, if you were Premier and had gotten wind of a bunch of back benchers, who were plotting to remove you as leader given the growing dis-satisfaction with the pandemic management, why not deprive them of a stage? Or perhaps the party has already delivered the grim news to the Premier and the legislature is being shut down because really, who wants to have a  coup and transition of power while the legislature is sitting.

While the current government has always been a sort of shoot first and then backtrack type of administration, it has gotten worse.  The party may want to preserve its governing role and their own seats prior to the next election by dumping Mr. Reverso and bringing in a fresh face.  However, one has to wonder if it will be too little too late to save them given that it may simply be the case of new face, same gene pool when it comes to the ability to govern effectively.  The hospitals are filling up and the situation is worse than last spring because essentially that time, hospital capacity was saved by first, shutting down surgeries, and then simply not treating those most affected - seniors in long term care homes - in a hospital setting.  This time its different. It is difficult to shut surgeries down given the obvious costs of that strategy the last time and the ill are not dementia patients who cannot advocate for themselves but younger ambulatory people who show up at emergencies.

There is plenty that has gone wrong during this pandemic at the federal and provincial level. And, the stiff-necked Ontario public which either cannot comprehend rules or does not want to, has not been much help either.  Moreover, the sparse staffing and hospital capacity in Ontario is the outcome of decades of government under-funding and not just the current government.  Still, how to fix things in a pinch? Unlike Ontario universities which can be treated as expendable because the anti-intellectual climate of our times allows governments to foster the view that they are simply teachers with longer summers, now is probably not the best time to restructure hospitals yet again.  However, Premier Ford's call this week for health workers from other provinces and an appeal for federal assistance suggests a desperation that means things are really about to go sideways.  The federal government as the cavalry to save Ontario now?  The federal government is too busy monitoring vaccines and trying to re-invent public spending and society on a grand scale.  Stay tuned for announcements and decrees from the balcony of the Pink Palace in Toronto.