Thunder Bay's Economy: Rebound in 2022 With Future Stable

 

The July 2022 Major City Insights Report for Thunder Bay has been released by the Conference Board of Canada and it paints a picture of major and broad based economic rebound that is “firing on all cylinders”. According to the Conference Board:

 

·      Thunder Bay’s economy will rebound again in 2022 as forestry, tourism, and transportation boost economic activity to pre-pandemic levels. Real GDP growth of 3.9 per cent is forecast this year, down slightly from our forecast at the beginning of the year.

·      The economy’s recovery is expected to continue into 2023, but risks are plentiful, especially if the Bank of Canada is unable to contain inflation.

·      Thunder Bay is lagging the economic recovery province-wide, as real GDP in Ontario is already back to pre-pandemic levels. On the other hand, the city’s labour market has tightened markedly, even more than the province’s.

·      Continued economic recovery, a tight labour market, and the possibility of teleworking should help improve the city’s attractiveness to migrants. This could be an opportunity for the city, especially as the federal government ramps up international immigration targets over the next few years.

·      Real GDP is forecast to grow 1.0 per cent annually on average over 2023–26, while the city’s population will remain flat at around 125,000

 

While generally an upbeat report, it does note that Thunder Bay is nevertheless lagging the province wide economy, and this is expected to persist.  While Thunder Bay’s real GDP growth in 2022 is ranked fifth amongst 11 comparator CMAs (including places like London or Sudbury) for the 2023-26 period it is forecast to remain at number 11.  Total employment will recover to about 65,000 jobs (up from 61,000 in 2021) but will essentially remain around there until 2026.  Housing starts will also recover and return to their annual figure of circa 200 starts a year.  These are ceilings that has not been breached since the end of the forest sector crisis.  It should be noted that while the unemployment rate is very low, the shrinking of the labour force has been a factor in that.

 

Until the forest sector crisis of the early 2000s, Thunder Bay’s employment would essentially range from about 65,000 to 70,000 jobs.  Since then, there has been a permanent downsizing of employment in the city and has ranged from about 60,000 to 65,000.  Over the long term, there have not been sufficient long-term and sustained economic opportunities to boost growth above that.  And, with slow in migration and an aging population, the paradox of a growing labour shortage at a time when there has been an economic rebound has driven costs and prices of skilled trades and many renovations upwards. As well, it remains that much of the recent growth remains in broader public sector activities such as health and education – indeed educational employment surged in 2021 according to the Conference Board.

 

At the same time, the report points out opportunities in tourism, transportation and manufacturing, and resources and while high inflation and rising interest rates are eroding household purchasing power, some of the city’s industries should see increased profitability form high resource prices. As noted, transportation will benefit as airport and port activity improves. Potash shipments are booming, while a rebound in western agriculture production will help lift grain shipments through the port this summer.  Overall, transportation and warehousing output is forecast to grow by 15.8 per cent in 2022 as the sector continues to recover from the hit it took during the pandemic.

 

Indeed, one point acknowledged by the Conference Board Report is that there is significant “upside” risk to these projections – that is, they could turn out to be better than expected.  As they note: “A significant upside risk to the forecast is the plan to spend as much as $1.2 billion over the next four years to build a new Thunder Bay Correctional Complex. The project will be funded by the province as part of an effort to modernize the correctional system.”  Indeed, this project based on some expectations could generate an additional 700-800 construction jobs though given the current labour shortages in the city this will either drive up local costs even more crowding out other local activity or require out of town temporary workers.  As well, there is future highway construction for the Thunder Bay to Nipigon corridor and numerous local road projects that will generate activity. 

 

So, 2022 appears to be a positive year.  Things are rebounding quite well to the point that there are local labour shortages and rising costs.  Once the rebound bump is complete however it would appear that the local economy will stabilize at its recent historical levels of employment.  Even projects like highway corridor upgrades and the new correctional center construction represent short term bursts of employment growth rather than a permanent long-term increase.  Indeed, Thunder Bay’s economy continues to grow at below the rate of most other Ontario cities.  What impact the rise in interest rates will have on planned or scheduled construction projects is of course a major downside risk on activity going into 2023.  However, if inflation peaks this summer and subsides in the fall, one can expect interest rate increases to level off and a slow decline begin.

 

 

The Shape of Labour Force Things to Come

 

If the June 2022 Labour Force Survey is part of a trend, Canada’s labour shortage issues are going to be getting worse.  On the positive side, the unemployment rate reached a new consecutive low of 4.9 percent in June and politicians with vested interests will no doubt seize on this as good news.  On the other hand, total employment fell in June by 43,000 jobs with the employment loss almost entirely due to a decrease in workers aged 55 years and older.  As well, the number of self-employed workers fell by 59,000 (2.2 percent) while the number of employees in both the public and private sectors held steady.  Dig deeper, and the long-term trend shows self-employment declining while public sector employment has grown over the last few years – not exactly good news for the health of the business sector.  And, as final points, the size of the labour force between May and June shrank by 97,500 while the participation rate in the economy shrank from 65.3 percent to 64.9 percent.  Remember that this is the start of summer, usually when things pick up.

 

So, what is going on here? I like to term this the Thunder Bayization of Canada’s economy.  For quite a few years now, Thunder Bay and indeed much of northern Ontario has seen low unemployment rates.  These are usually touted by local community leaders as good economic news.  After all, if the unemployment rate is low what could be better news than that?  Except, the problem is that in the case of Thunder Bay, both the labour force and total employment shrank permanently after the forest sector crisis nearly twenty years ago and has never really recovered.  Moreover, with the aging of its labour force, the local labour force has shrunk faster than employment hence resulting in a decline in unemployment rates.  Total employment has shrunk.  This continues as even the June 2022 labour force shows that in Thunder Bay since May the labour force and total employment both fell though this time employment fell a bit more than the labour force so that the unemployment rate rose slightly to 4.3 percent.  Think about it – a chronically depressed city-region with an unemployment rate below the national average of 4.9 percent.

 

There is a lot going on here but basically, the two-year pandemic hiatus of less work with substantial government benefits, the continuation of extended EI benefits and accumulated savings have caused a shrinking of people ready and willing to work.  Combine that with an aging labour force – about 20 percent of the labour force and employment is people aged 55 and over – and the start of retirements which has probably also been accentuated by the pandemic.  Indeed, one suspects that for some the CERB was a nice early retirement/buyout package courtesy of the government.  Then there is the pandemic toll on small business and the resulting shrinking of self-employment also.  Put it all together, and you have the start of a growing and continuing labour shortage in Canada. 

 

Thunder Bay can function in an economy where the number of people shrink, and inflows of assorted government transfers keep the economy going.  However, can this be a sustainable future for an entire country where more and more people simply withdraw or retire from the labour force and the number of people available for work and employed shrinks?  Can an economy where everyone wants to enjoy the consumption of goods and services exist alongside one where there are not enough people available to work?  In the absence of immigration, this would probably be worse.  Food for thought.

 

 

Is There Really a Municipal Candidate Shortage in Thunder Bay?

 

Outgoing councillor Rebecca Johnson has joined city administrators in raising the alarm over what appears to be the low number of confirmed candidates for this fall’s municipal election.  In 2018 there were apparently twice as many registered candidates at this point.  On the one hand, this is probably not a surprise given the last few years have been exhausting because of the pandemic not to mention the worst winter in two decades has left people scrambling to repair damage to homes and basements.  People are preoccupied on numerous fronts now and running for council is probably not at the top of their list.  Moreover, there is still almost two months to go until the August 19^th deadline and if the past is any indication, there will be plenty of candidates springing from under the woodwork any day soon.

 

Of course, given the record low turnout in the recent provincial election, it is a reasonable question to ask if there is a lack of engagement with this year’s coming municipal election.  Political life has never been more challenging given the presence of social media which makes election campaigns often more akin to a process of ritualistic character assassination than a debate of ideas.  There is probably also a sense of fatigue in Thunder Bay over constant issues that never seem to be resolved and in recent years appear to have only grown whether it is crime or deteriorating infrastructure.  One expects this year’s issues will be quite similar to those of 2018 and one senses this endless wheel of time litany is discouraging to many.

 

And then there is the process of running for municipal office which is not just about signing up to appear on a ballot, but which over time has involved like everything else into a more involved bureaucratic process.  Nomination papers must be filed by appointment only.  You need the endorsement of at least 25 people if you wish to run for Mayor or councillor – a spur of the moment decision it is not.  There is a filing fee, a declaration of qualifications and a consent to release personal information.  While one might want to discourage frivolous candidacies, at the same time, one may need to review the process to see if it can be made more candidate friendly.

 

Yet, it remains that there is probably not going to be a shortage of candidates.  This type of hand wringing has happened before and will happen again.  During the 2018 municipal election campaign in Thunder Bay, there were similar concerns being expressed by early July as with the exception of the Mayor’s position, there was a drop in the number of candidates seeking municipal office in most of the wards.  It turns out after the story went out, a slew of candidates came forth and the total number of candidates running for municipal office in Thunder Bay rivalled that of much larger cities. There were 101 candidates vying for office of 2018 with 26 going after an at-large position which pretty much guaranteed victory for incumbents.

 

In the end, the chief beneficiary of a plethora of candidates is incumbents who already have deep rooted name recognition.  More candidates split and fracture any opposition vote whereas fewer candidates running allows dissenting or dissatisfied voters an opportunity to coalesce around an opponent and bring incumbents down. It is noteworthy that many incumbents have not declared yet either – including the current Mayor.  Incumbents announcing too early potentially scares off candidates and reduces the candidate pool, so the trick is to lay low and wait for the competition to reveal itself in sufficiently large numbers and then emerge.  One suspects the same is going to happen yet again and by August we will be lamenting that there are too many candidates, and the same faces will be getting in again.  Thunder Bay’s wheel of time continues.

 

 

Health Care in Ontario: Not Getting Better Anytime Soon

 

Ontario’s public health care system is once again making headlines – this time with respect to emergency room waits.  In the GTA, wait times in emergency rooms can be six to eight hours while in some smaller centres in Ontario you cannot even get an emergency room physician. Hospitals in general appear to be at 100 percent capacity or more and it is not just a bed shortage but also a staffing shortage.  Growing and aging populations, continued COVID-19 admissions as well as treatment for long-COVID and not to mention the surgical backlog from procedures cancelled during the peak COVID waves and one begins to see alarming strains on a system that was already strained pre-pandemic.  All of this does not even consider what has been happening in long-term care.  And of course, a rather large chunk of Ontarians still does not have a family physician even though we now have more physicians per capita than we did a decade ago.

 

Of course, looking ahead one begins to see that Ontario’s health care spending by the provincial government – already amongst the lowest in per capita terms amongst Canada’s provinces – is not going to improve anytime soon.  Indeed, if one looks at the spring 2022 Ontario budget, makes some projections for population growth and inflation, one sees that by 2025, real per capita Ontario government health spending will be where it was in 2019 just before the pandemic.  Moreover, that spending in real per capita terms was essentially flat since the end of the Great Recession circa 2010.

 

Figure 1 provides some evidence.  Real per capita spending from 1975 to 2021 is calculated from the most recent edition of the Canadian Institute for Health Information’s 2021 National Health Expenditure Release. Another series for 2021 to 2025 is calculated from the Ontario Spring 2022 budget with the numbers assuming inflation of 2.5 percent annually until 2025 and population growth of 1.2 percent.  The money is inclusive of COVID-19 support spending with 2021 marking an interesting break point depending on whether you use the CIHI estimates for 2020 and 2021 or the Spring 2022 budget medium term fiscal plan numbers that start in 2020-21. 

 

 

 

For 2021, the CIHI has Ontario provincial government health spending forecast at $75.2 billion (including COVID-19 supports) and $71.7 billion excluding them. On the other hand, the Ontario spring 2022 budget says base health care spending for 2021 (fiscal 2020-21) will be $64.4 billion with COVID-19 limited time funding at $19.1 billion bringing us to a total of $83.5 billion.  There have been issues with what the provincial government has said they would spend on COVID-19 and what they actually have.

 

No matter, combining the numbers and going forward to 2025, real per capita provincial government spending including COVID-19 spending (in $2020 dollars) was $4,523 in 2019 and in 2021 reached $4,987 using the CIHI numbers and $5,538 using the 2022 Ontario spring budget numbers.  Spending on health in Ontario did rise dramatically during the pandemic - it is just a question of by how much.  The provincial budget then shows base spending in health rising to $78.3 billion by 2025 (up from $64.4 in 2021) while COVID-19 spending declines to $12 billion in 2022, $6.9 billion in 2023 and then is zero afterwards.  So, by 2025 real per capita provincial government health spending will be $4,486 dollars – down from $4,523 in 2019.  From 2010 to 2025, real per capita provincial government health spending will have grown from $4,388 to $4,486 – an increase of 2.2 percent spread out over 15 years – annual growth of just over one-tenth of one percent.

 

How can the Ontario government increase health spending by billions of dollars more and yet spending per person is essentially flat for a fifteen-year period?  The spending on health has essentially not kept up with inflation, and population growth as well as given the additional demands being made for new drugs and treatments and an aging population.  Moreover, compensation has grown in the health sector – with additional payments during the pandemic – and the fact is that despite all these demands for additional in real terms we will be spending the same amount per person that we were fifteen years ago.

 

From a historical perspective, flat real per capita health spending appears to be a new era given the increases of 1975 to the early 1990s and then the late 1990s to about 2010.  Real per capita spending fell from about 1991 to 1996 in Ontario as the federal fiscal crisis led to a reduction in transfer payments.  The last fifteen years are in a league of their own when it comes to trends.  Not automatically spending more every year and keeping up with inflation and population growth means that the health care cost curve that everyone was worried about as being unsustainable has been sustainable for over a decade now – once you factor out the effects of the pandemic. In some ways, one might claim this as a success story unless of course you are in an ER waiting for a bed.

 

At the same time, keeping spending per capita constant means that over time more and more difficult choices will need to be made as the population ages, labour shortages worsen, and new treatments clamour for funding.  And remember that per capita spending has been constant, but Ontario already ranks pretty much as the bottom of several health resource indicators including hospital beds per capita and spending per capita.

 

There is no immediate way out of this.  How to get more resources into the system?  You can raise taxes and spend more – an unpopular solution especially now during a time of inflation and rising costs. You can spend less on other things such as education, social services, transportation, and other government services and spend more on health.  This will of course generate political winners and losers in the government funding sweepstakes and generate as many unhappy campers as happy campers.  Governments generally like to keep as many campers as possible happy unless they happen to be considered an inconsequential voting bloc.  Just ask families with one stay at home parent when it comes to tax treatment by the income tax system.

 

You can delist services currently being provided by the Ontario public health care system and transfer them onto the public as private spending which will provide more money to spend on the remaining public services.  However, this always seems to be forbidden territory in Canadian public health care despite it being a feature of other public health care systems we sometimes hold up as models – namely western Europe - and is therefore done incrementally.  Over the years, Ontario has delisted certain services but always on a piecemeal basis rather than part of a comprehensive reform package to contain the political fallout.   It also remains that Ontario already has the largest private financed share of health spending in Canada at about 66 percent. 

 

You can try to reform the current system to make it more “efficient” but short of delivering a pay cut it is hard to see how much more efficient you can get after fifteen years of standing still in per capita terms.  Sure, there are some efficiencies from reorganizing and implementing new technology or changing payment systems for health professionals or having physicians take on more patients but that will take more money in the short term and as the aftermath of the Romanow Report shows, more money for transformative change does not always get you the change you were looking for.

 

As a result, it is unlikely that we will see any dramatic changes or improvements to Ontario’s public health care system.  Any changes will likely be a short-term response to an immediate problem driven by which affected parties scream the loudest.  Right now, its emergency services but next week it might be driven by headlines in another long-term care home or perhaps a flare-up of monkeypox.  Firefighting driven by the media focus of the moment is not the way to deal with long-term public policy but that seems to be the world we live in.  With a four-year majority mandate and a collapsed opposition, this might be a window of opportunity for more dramatic change in Ontario health care but don’t count on it.  All governments are inherently conservative when it comes to change. No pun intended.

Rising Surpluses, The Other Shoe Drops...and Manure

 

Well, the City of Thunder Bay’s finances just keep getting better. After projecting a positive variance of $3 million for the 2021 budget year, and then a surplus for 2021 that was supposed to be coming in at $5.6 million, the 2021 surplus has now come in at $10.9 million.  Thunder Bay will have its seventh consecutive positive budget variance making for accumulated variances of $31.3 million over seven years.  Indeed, this is the largest surplus in seven years.  While much of the savings will come from lower-than-expected COVID costs for which the city has received substantial  federal and provincial support, it remains that the City of Thunder Bay could obviously use some some help in crafting their budget projection and forecast models. 

 

Figure 1 plots the annual tax levy increase since 2015 against the corresponding surplus at year end.  For example, in 2015, the tax levy increase was $9.4 million – a 5.7 percent increase on a $164.7 million levy the year previous. The year’s end saw a positive variance of about $1 million which on $174 million tax levy was just over one-half of one percent.  Since 2015, however the size of the surplus has increased substantially, often coming close to matching the size of the tax levy increase that year.  In 2017 for example, the levy increase was $5.96 million – a 3.3 percent increase – but the year-end surplus came in at $5.6 million – almost 95 percent of the value of the original levy. For 2021, there is now a surplus of $10.9 million – which is more than double the original tax levy increase of $4.3 million.  This is indeed a first, a surplus bigger than the  year's tax levy increase.  I suppose if they had some creative economists working for them, the City of Thunder Bay could spin this as a tax levy surplus multiplier of 2.53.

 

 

 

If Thunder Bay had been able to correctly forecast the surplus each year and implement a tax increase incorporating the surplus and balancing the budget, what could have the alternate tax levy increase have been? Figure 2 plots the actual percentage tax levy increase since 2015 and the alternate increases.  In 2017, for example, the budget could have been balanced with an increase of 0.2 percent but instead there was an increase of 3.3 percent.  The year 2020 saw an increase of 2.7 percent but all that was needed is an increase of 0.6 percent.  Meanwhile, the surplus for 2022 means that rather than a 2.1 percent levy increase, there could have been a levy reduction of 3.3 percent. 

 

 

 

Outrageous?  Not so much as the other shoe that has dropped in the face of growing surpluses - a hefty pay increase for some City Managers.   Some managers this year will see raises as high as 12 percent with the range for 319 management and non-union staff ranging from 4 to 12 percent this year.  Given the stress of managing city services during a pandemic, one can certainly understand the need for raises.  At the same time, there have been a lot of stressed-out public-sector employees in health and education and guess what?  The provincial government held them at one percent a year for the last three years.  What should we think of all this during a municipal election year?  Well, here is another great juxtaposition – the City of Thunder Bay is offering free compost to residents while quantities last with a half-ton load limit per person.  With a $10.9 million dollar surplus, one would think the supply of compost would be endless.  They really have stepped into it this time.