Inflation, Wages and Municipal Monopolies

 

Statistics Canada released its April 2022 employment numbers today and the national unemployment rate edged down slightly to 5.2 percent.  Canada has low unemployment and real GDP growth in the 4^th quarter of 2021 was 1.6 percent which annualized translates into just over 6 percent real growth for 2021.  It is indeed a period of robust economic growth and of course inflation which in March was 6.7 percent.  However, if you have been to a grocery store, you will see that over the course of the last year many prices have gone up 30-50 percent and then there is gasoline which is now pretty much at 2 dollars a litre.  As a result, interest rates are up belatedly to arrest the surge in inflation to bring it back to the 2 percent range.  However, they will probably need to go higher given that inflation – while not yet stagflation despite alarmist media stories – is nevertheless quite persistent.  Still, Canada is not yet like Turkey which is seeing 70 percent inflation.

 

Stagflation a la 1970s requires a wage price spiral fueled by expectations of rising prices on the part of the labour force which become translated into effective wage increases.  However, that requires a certain amount of bargaining power on the part of labour and unionization rates in Canada today are dramatically lower than they were in the 1970s and 1980s.  If wages go up in the private sector, they are going to rise not so much because of labour action but because the labour market is seeing scarcity of workers.  As for the public sector, many provinces have some form of salary restraint – chief of which is Ontario which in 2019 brought in Bill C-124 which has kept most of the broader public sector to 1 percent annually. More on that in a minute.

 

In Thunder Bay, the unemployment rate (3-month average, seasonally adjusted) is now 4 percent – down from 4.9 percent the month before.  However, total employment in Thunder Bay is down from March going from 64,600 to 64,400 jobs, the size of the labour force has also shrunk going from 68,000 to 67,200 and the participation rate has fallen from 63.8 percent to 63.0 percent.  So, the robust low unemployment rate in Thunder Bay masks the fact that overall, there are fewer people working relative to the month before.  However, year over year, both the labour force and employment are up so all things considered, the low unemployment rate is a sign that the city’s economy is doing relatively well.  Which brings me to the main point.

 

As well as Thunder Bay is doing, eyebrows were indeed raised this week by the news that Thunder Bay City councilors have passed a 4 percent salary increase for its management and non-unionized staff and a 2.35 percent increase for councillors while unionized staff will be seeing a 1.5 to 2 percent increase.  The 4 percent increase for 319 managers and other non-unionized staff was dressed up as staggered which obfuscated from the fact that in 2022 the increase is nevertheless 4 percent.  The City Manager was quoted as saying: “The reason for [the increase] is to make the [city] more competitive against our competitors for skilled labour,” he said. “We are falling behind on a relative basis – against other municipalities, against the private sector, and against the public sector parameters we measure against.” As for the councilor increase, well it is now formula driven at half the rate of inflation so the 4.7 percent inflation in 2021 translates into 2.35 percent. It is not council deciding, it is simply the formula though they voted against taking a lower increase.

 

The point here is that municipal employees in Thunder Bay – like municipal employees elsewhere in the province - have a distinct advantage over other members of the broader public sector in that they have not been subject to the provincial salary restraint legislation in Bill C124.  In Ontario, health and education sector workers have been kept to 1 percent increases annually since 2019.  Municipalities have been exempted ostensibly because they have access to own-source revenues.  That is property taxes and user fees.  Municipalities still get a substantial portion of their revenues from the province in the form of grants though not as large a share as say hospitals, schools, and universities. 

 

Municipalities in Ontario derive about 40 percent of their revenues from property taxes, another 22 percent from government transfers, 20 percent from user fees and the remainder from licenses, permits, fines, and rentals. They can pass on their cost increases directly to their ratepayers and as a result can fund increases in spending while at the same time adding to their reserve funds with large annual budget surpluses.  In the end, they are no longer municipal governments serving the public interest but have become monopoly corporations and use their monopoly power to extract whatever revenues they need – even during the pandemic.  They have become bureaucratic maximizers of expenditures. A municipal election only every four years enhances that monopoly power.  Residential taxpayers throughout Ontario are going to see large increases in their bills down the road to fuel the spending increases that municipalities are going to bring in because of inflation. That the province has allowed this monopoly power to continue unchecked and indeed abetted it in the recent salary restraint legislation should be an election issue.

Ontario Budget 2022: Analysis

 

The Ontario government presented its budget yesterday and given there will be an official election call any time, one is left to conclude that the budget is at best an aspirational document of what the government might like to do if re-elected in June.  Despite what currently seems to be a boom period in the Ontario and Canadian economies, it remains that given the volatility of the global economy, Finance Minister Bethlenfalvy’s reluctance to explicitly state whether he would re-introduce the exact same budget if re-elected is understandable.  After all, four or five months from now, the fiscal and economic ground may have shifted yet again.

 

Figures 1 to 3 provide some material to summarize the budget.  Figure 1 shows that total revenues are projected to rise from $173.6 billion in 2021-22 to $196.9 billion in 2024-25 while expenditures (net of the contingency reserve) are projected to rise from $187.1 billion to $203 billion. Once the contingency reserves ($ 1 billion in 2022-23 and $1.5 billion in each of the subsequent years) are factored in, the deficit is expected to be $19.8 billion in 2022-23 and should decline to $7.6 billion by 2024-25.  

 

 

 

 

Figure 2 plots the average annual growth rate of assorted revenues and expenditures over the period 2022-23 to 2024-25.  Own source revenues are expected to grow an average of 5.6 percent and total revenues at 4.3 percent while total expenditures will grow at only 2.8 percent.  Thus, projected revenue growth is expected to do the heavy lifting when it comes to deficit reduction with the accumulated deficit from 2021-22 to 2024-25 still clocking in at $53.3 billion dollars. Interestingly, debt charges are expected to grow at 4.7 percent annually while nominal program spending will only rise by 2.6 percent. Once you factor in inflation and population growth, real program spending is declining.

 

 

Of course, what is also of interest is that while the additional accumulated deficit in the next few years going forward will be $53.3 billion, the net debt over the same period is expected to grow from 373.6 billion to 468.8 billion – an increase of $95.2 billion (Figure 3).   

 

 

 

This is because along with an operating deficit, the provincial government is planning many billions more in infrastructure spending covering roads, hospitals and even a new prison correctional complex in Thunder Bay (which is expected to be $1.2 billion).  If you add the planned $36.9 billion in infrastructure going forward starting 2021-22 to the accumulated deficit, you get pretty close to the $95.2 billion increase in the net debt.  However, GDP growth is expected to remain robust so the net debt to GDP ratio is expected to plateau at about 41 percent for the next few years.

A Liberal Hiatus in Thunder Bay?

Long-time standing MPP Michael Gravelle has announced that he is not seeking re-election in the riding of Thunder Bay-Superior North because of his ongoing health issues.  Mr. Gravelle has held the riding since 1995 and the popular Mr. Gravelle has seen his victories be by large margins.  One wishes him well with hopes for a speedy recovery.  At the same time, his departure leaves a gap for the provincial Liberals locally as well as provincially given the rather small contingent of provincial liberals elected the last time around. 

 

Thunder Bay voters historically at both the federal and provincial levels tend to elect Liberals and when they seek to punish them opt for an NDP candidate instead.  Oddly enough, Thunder Bay voters are indeed very conservative voters in the sense they have been doing the same thing for a long time. Federally, the last elected Conservative was Robert J. Manion in Fort William though MP Joe Commuzzi went over to the Conservatives in 2008 after being elected as a Liberal.  Provincially, the last Conservative elected in Thunder Bay appears to be Mickey Hennessy in the 1970s/early 1980s again on the Fort William side.  At present, Liberals hold both ridings federally (now known as Thunder Bay-Atikokan and Thunder Bay Superior-North) and the NDP holds the former Fort William riding with Mr. Gravelle on the north side.

 

Provincially, polling suggests that the Conservatives under Doug Ford are poised to do quite well with the opposition parties not able to gain a lot of traction with their opposition to a government that has become both centrist and populist. The Liberals in Thunder Bay have yet to name a candidate on the south side with the expected candidate, the ever astute  Bill Mauro deciding he would rather rule in hell than serve in heaven by taking his chances as Mayor.   Now, there may be another vacuum on the north side.  If candidates are not named soon, the provincial Liberals may be handing the ridings over to an NDP-Conservative race.

 

The provincial Conservatives appear to be paying the two ridings a fair amount of attention and there have been quite a few announcements which amount to substantial provincial dollars flowing into the region.  They also have their candidates lined up.  They already have Mayor of Conmee Kevin Holland running on the south side against NDP incumbent Judith-Monteith Farrell and Thunder Bay City Councillor Peng You on the north side.  Councillor You is considered a high profile catch for the Conservatives given his high vote count as an at-large councilor nearly four years ago.  At the same time, there has been some rumblings of dissatisfaction expressed about his performance on Thunder Bay City Council in terms of accomplishments to date.

 

So, what will happen?  Given the tea leaves as to what may happen province-wide, there may not be a lot of local Liberals willing to put up with the public social abuse that passes for an election campaign these days.  Even with what have traditionally been strong local organizations at the federal and provincial levels, they may not field candidates at all.  This would leave the race to essentially the other two parties and the interesting question will be if Thunder Bay Liberal voters simply embrace the NDP candidates or if the higher profile Conservative candidates this time have more of a chance. 

 

 

The Robinson Treaties and Renegotiated Payments

 

There was a news item yesterday of great importance both to the Anishinaabe signatories and descendants of the Robinson-Huron and Robinson-Superior Treaties of 1850 as well as the people of Ontario.  There has been litigation underway for a good many years regarding renegotiating payments that have not changed since 1875. A ruling in 2018 that the Crown had a mandatory and reviewable obligation to increase the treaties annuities when economic circumstances warranted was appealed by the Ontario government and was on its way to the Supreme Court of Canada when suddenly it appears that the Ontario government has decided to enter negotiations after all to determine a fair sharing of resource revenues from their territories. 

 

This is a complicated and longstanding issue but briefly in 1850 the Anishinaabe of the upper Great Lakes region signed two historic Treaties with the Crown, the Robinson Huron Treaty and Robinson Superior Treaty, that provided for a land cession of a vast territory in Northern Ontario. The Crown paid a lump sum up front and promised to pay a perpetual annuity to the Anishinaabe, to be increased subject to certain conditions. The annuity has not been increased since 1875 when it was set at $4 per person. The nature of the annuity and the conditions under which increases are to be made were the subject of this litigation and will now be the focus of negotiations with Ontario and Canada.  As well, the increases are expected to be tied to resource-based revenues.

 

There are really two calculations that should be made here.  The first is what the resource-based revenues for the Treaty areas would have been between 1875 and 2022 if some type of reasonable pattern of increases had been made.  The second, is what the sharing arrangement for future resource-based revenues should be.  These will be interesting and complicated problems – especially the redress of past underpayments.  It is a little remembered fact that resource-based revenues from 1867 to 1920 were a significant proportion of Ontario’s provincial government revenues averaging about 20 percent of total revenues.  Indeed, forestry and mining fees for the Ontario government were the equivalent of oil for Alberta today.  Today, these revenues amount to at best several hundred million dollars a year and the question going forward will be what proportion should accrue to the Robinson Huron and Robinson Superior communities - something that will inevitably be decided by lawyers and accountants though one hopes both sides will have also enlisted assistance from economists - always the helping profession.

 

The first question is of more interest to an economic historian.  What would the per capita payment look like today if some pattern of reasonable increase had occurred in every year since 1875?  Suppose the payment had increased each year by the rate of inflation?  If one uses the CPI for Canada from 1870 to 2020 from the Jorda-Schularick-Taylor Macro Database and calculates annual inflation and takes the average, one gets an average annual inflation rate of 2.4 percent for that 150-year period.  If one applies a 2.4 percent growth rate to the base amount of 4 dollars and works forward (y^x where y is 1.024 and x the number of years from 1875 to 2022) then that 4-dollar amount in 1875 would be about $134 dollars per capita today.  The total payment in 2022 using this per capita number would need to be multiplied by population of the affected Treaty areas.  By way of “an estimate” according to Statistics Canada, the total population by Aboriginal Ancestry in private households in the Robinson Superior Treaty Area in 2016 was 3,340 while for Robinson-Huron it was 7,060 making for a total of 10,400. That would make the payment in 2022 alone about $1.394 million dollars.  Doing such a calculation backwards to 1875 would result in a lump sum settlement payment in the hundreds of millions of dollars if not more based on what the population estimate for previous years was.  Naturally, the population estimate both in the past, currently and going forward will be of extreme importance.

 

Of course, this is only one approach and a crude one at that to estimating the past payments.  Indeed, there will be more precise ways of calculating the past payments based on what the actual resource revenues were each year which governments invariably must have as well as the actual population receiving the $4 annually which the provincial and federal governments must have buried away somewhere in their finance ministries.  So, this is a necessary step for the government and people of Canada to undertake given the historic injustice of keeping the payments frozen for a century and a half.  Hopefully, the negotiations will not take another century.  

 

 

A Spring Election Is Coming to Ontario…Money is Flowing Like Spring Melt

 

The Northwest of Ontario is still gripped in throes of winter relative to southern Ontario, but spring is inevitably on its way along with a Spring Budget at Queen’s Park (April 28^th) to be followed by a spring election in early June.  The Northwestern Ontario Municipal Association (NOMA) will hold its annual conference and general meeting April 27-29 in Fort Frances and the meetings will overlap the budget date.   There will undoubtedly be the traditional lament over the region’s needs especially in the aftermath of the pandemic, but the truth of the matter is that municipalities - even in Ontario's north - have generally done quite well financially during the pandemic as has the provincial government for that matter. 

 

Municipalities generally run surpluses (or in the language of municipalities, positive variances) and the pandemic does not seem to have changed that.  And, because of federal transfer supports and growing own source revenues, Ontario has seen provincial total revenues rise since 2017-18.  Based on the Fiscal Reference Tables and the Ontario 2021 Fall Economic Statement, total revenues were $150.594 billion in 2017-18 and reached $164.893 billion in 2020-21.  Fiscal year 2021-22 is forecast at $168.617 billion while by 2023-24 the forecast is for revenues of $178 billion. 

 

If anything, the numbers will likely be revised again in the April 28^th budget to show higher revenues than anticipated and a smaller projected deficit as even the Financial Accountability Office of Ontario (FAO) has already noted.  For 2021-22, the FAO expects a $16.0 billion budget deficit, lower than the government outlook for a $20.5 billion deficit. By 2023-24, the FAO projects the deficit will decline to $2.8 billion, compared to the government outlook of $11.4 billion.

 

So, one can expect that with robust provincial revenue growth and an election in the wind, there will be plenty of spending or “investments” in projects and programs across the province as the province fans out its ministers and spending announcements as a sort of missionaria protectiva to secure as many seats as possible.  Indeed, the spending has been underway since March and currently totals nearly 11 billion dollars.  Some of these announcements are really tax expenditure or foregone revenue in the case of the refund and cancellation of vehicle registration fees (approximately $2.2 billion) as well as the gasoline and fuel tax cut to take effect this summer ($645 billion).  Some are substantial infrastructure projects with billions of dollars for hospital and long-term care construction as well as highway projects. 

 

In terms of specifics for northern Ontario municipalities to date, there are four announcements of note: 1) The industrial electricity subsidy for northern Ontario ($176 million), the refurbishing of GO Transit train coaches’ contract for Ontario northland North Bay ($109 million) and the contract to widen the Thunder-Bay to Nipigon highway ($107) and 4) Rural Broadband internet ($900 million) which one would expect a reasonable share should flow to the north.  These are not inconsequential amounts or projects from a regional perspective and come on top of other announcements such $75 million for resumption of Ontario Northlander train service from Timmins to Toronto.  Throw in money for more medical doctor training with the expansion of NOSM and you can see a deliberate effort to woo northern voters.  Watching the opposition parties use the northern neglect line will be interesting given that many of the northern ridings are indeed held by the opposition and not the current government.

 

Of course, the budget next week will probably unveil even more spending initiatives given that revenues are likely higher than expected which means the government will be able to spend more and lower the deficit.  As for the province’s $400 billion dollar debt and high net debt to GDP ratio?  An election is coming, and an election is too important a time to worry about public finances as politicians have demonstrated since time immemorial. And besides, what politician would not want a future without challenges for their grandchildren especially when there is an election to win?