The Rise and Fall of Ontario's Relative Income

 

As part of my work on Ontario’s fiscal history since Confederation, I have also been putting together long-term series on Ontario output and population.  Such information is useful given Ontario’s historic role as Canada’s largest economy and key industrial powerhouse.  Much of this data is now available at Finances of the Nation which has Ontario nominal GDP back to 1926 as well as population back to 1867 and CPI (for Canada back to 1867).

 

The larger issue is how to estimate GDP for Ontario prior to 1926.   However, given that Canadian GDP is available back to 1867, using Ontario’s average share of Canadian GDP from 1926 to 1950, one can apply that estimate (0.445) to Canada’s GDP from 1867 to 1925 (also available at FON) and obtain an estimate.  This is not that unreasonable an approach given that past studies have suggested that at the dawn of Confederation, Ontario’s per capita incomes were already nearly 60 percent above Nova Scotia and New Brunswick and 25 percent higher than Quebec.

 

In terms of Gross Value Added as estimated by Alan Green (Regional Inequality, Structural Change, and Economic Growth in Canada. 1890-1956, Econ. Dev & Cult. Change, 1969) in 1890 Ontario’s economy was 49 percent of the Canadian economy while by 1910 it was at 41 percent and by 1929 it was 39 percent which averages out to 43 percent.  So, the Alan Green numbers are used to estimate Ontario’s GDP for the 1867 to 1925 period using 49 percent to 1890 and 43 percent to 1925. It is important to note that these are estimates and far from perfect, but they nevertheless tell a long-term story.

 

Ontario’s per capita GDP is plotted alongside the rest of Canada’s (ROC) real per capita GDP in Figure 1.  In 1867, Ontario’s real per capita GDP in $2020 was $3,428 compared to $2,768 for the rest of Canada – a 24 percent difference.  By 2022, Ontario’s real per capita GDP has grown to $66,600 and the ROC’s to $67,258 – practically the same.  What happens in between is a period of per capita income divergence till approximately the eve of the Second World War and then a period of convergence – with a fair amount of fluctuation.  

 

 

 

Figure 2 plots the ratio of Ontario’s real per capita GDP to the ROC’s.  There is a brief period during the wheat boom Prairie settlement era from about the early 1890s to about 1902 when Ontario per capita incomes fall relative to the rest of Canada, but this coincides with both the recession of the early 1890s and the scaling down of the Green Adjustment factor from 0.49 to 0.43 and may be a statistical artifact.  The Ontario per capita income advantage generally rises during the leadup to World War I and continues to rise afterwards peaking in the 1930s.  It then falls as the rest of the country economically develops and grows and by the first decade of the 21^st century, Ontario real per capita GDP is pretty close to the average of the rest of the country.  On average, for the entire period 1867 to 2022, Ontario's real per capita GDP has been about 30 percent higher than the rest of Canada. The average since 2000 has only been 7 percent.

 

 

 

Ontario’s early economic advantage and dominance fueled by the economic protectionism of the national policies enabled it to grow its per capita income relative to the rest of the country.  With the economic development and diversification of the post-World War II period and the growth of western resource-based economies, the per capita income difference has fallen.  In many respects, this process of long-term convergence can be viewed as a long-term Canadian economic success story that has seen a muting of regional economic differences  There are of course still regional economic differences in terms of per capita incomes across Canada’s provinces and Ontario is still Canada’s largest economy and one of its wealthiest provinces, but it is not the cash cow you might think it is when it comes to per capita incomes at the moment. 

 

Population Growth and Property Taxes in Ontario’s Top 30

 

The last decade has been marked by rapid population growth in Ontario with total population rising from 12.852 million to 15.109 million - nearly 18 percent growth.  This growth has largely been in urban areas and some municipalities have grown substantially faster than others.  Figure 1 presents population growth rates from 2011 to 2022 for Ontario’s thirty largest municipalities.  These municipalities range from 2.928 million for Toronto to just under 100,000 for Niagara Falls and their population total in 2022 was 10.645 million people or about 70 percent of Ontario’s total population. Population growth rates ranged from a high of 69 percent for Milton followed by 34 percent for Brampton, and 32 percent for Waterloo.  At the bottom of the list were Mississauga, Thunder Bay, and Chatham-Kent.  Of these 30 communities, about half grew faster than Ontario as a whole while the remainder grew more slowly.  

 

 

 

Now the determinants of municipal population growth are complex but largely revolve around socio-economic incentives of one type or another including general economic opportunities and employment, access to locational amenities and services, the ability to provide housing via both availability and affordability and municipal taxation.  Taxation is an intriguing variable at the municipal level because on the one hand one would expect higher property tax levels all other things given to discourage population inflows and reduce population growth.  On the other hand, rapid economic growth and population growth expands municipal tax base and allows for lower rates on a broader base and hence lower average property taxes paid – residential, commercial, and industrial.  Needless to say, the resolution of the effect of property taxes on population growth is ultimately an empirical question and a fairly complicated estimation process that would need to account for this bi-directional effect.  

 

 

 

Nevertheless, it does not hurt to look at some charts.  Figure 2 presents the percentage change in average detached residential bungalow taxes (Source: BMA Municipal Reports and several municipal websites) for the period 2011 to 2022 for Ontario’s 30 largest municipalities ranked from highest to lowest.  The largest increase appears to be for Richmond Hill which saw average property taxes essentially double.  It should be noted that Richmond Hill was in the bottom third of these 30 Ontario municipalities when it came to population growth.  There is then a steep drop off going to 53 percent for Markham  and then a gentler downward slope ending with Windsor at 19 percent.  

 

 

 

 

 

In terms of the relationship between residential property taxes and population growth, there are two more figures.  Figure 3 looks at population growth from 2011 to 2022 as a function of the average bungalow taxes in place at the start of the period – taxes in 2011.  This does not control for anything else but does suggest a slightly negative relationship.  That is, places with higher property taxes in 2011 saw slower population growth in the decade afterwards.  Figure 4 looks at the relationship somewhat differently plotting population growth against the percentage change in average property taxes paid by a bungalow and here the relationship is slightly negative.  However, if you dropped the two obvious outliers in this chart (Richmond Hill and Milton), you get a more negative linear relationship between population growth (vertical axis) and property tax growth (horizontal axis) (see Figure 5).

 

 

 

So, the long and short.  Do higher property taxes affect population growth in a negative way?  Probably, but the relationship is only one of many factors that affect population growth.

Helping Laurentian Recover the AI Way

 Laurentian University is coming out of CCAA protection and apparently is required to come up with a new strategic plan that apparently will require hiring consultants according to a story in Northern Ontario Business.  According to the story: "Laurentian University is finalizing the hiring of a couple of third-party consultants to help guide the institution into the future.  Just who those consultants are has not yet been publicly revealed. The university’s president, Sheila Embleton, gave an update on this process during the April 18 meeting of LU’s senate. One of those consultants will lead a comprehensive operational restructuring of the university, while the other consultant will assist with the development of a new strategic plan for Laurentian. Laurentian is required to hire both of these consultants under the terms of its plan of arrangement after it exited insolvency under the Companies’ Creditors Arrangement Act (or CCAA) last year." 

One suspects that this is not going to come cheap.  So in line with my last post on how AI can help administer universities and even draft strategic plans, I inputted a query into my AI to see what it could come up with in terms of a simple report charged with providing a strategic plan for Laurentian's future.  Here it is and at a cost that does not even come close to the average high priced Toronto based consulting firm.  You will notice the query tries to kill two birds with one stone - a restructuring and a strategic plan.

My Query

Laurentian University in Sudbury is coming out of bankruptcy and needs a new strategic plan that will position the new university for recovery and growth. Please draft a five point strategic plan addressing Laurentian’s needs.

 AI Response

Introduction:

Laurentian University in Sudbury recently declared bankruptcy due to significant financial issues, requiring the development of a strategic plan to position the university for recovery and growth. This five-point strategic plan proposes a roadmap that Laurentian University can adopt to overcome its challenges and rebuild itself as one of Canada's top-performing universities.

1. Financial Stability:

Laurentian University needs to prioritize financial recovery and stability. This can be achieved through strategic cost-cutting measures, including but not limited to reducing unnecessary expenses, optimizing resource utilization, increasing revenues from non-core operations, and increasing enrollment numbers. A strong financial foundation will ensure the university's long-term viability and enable it to implement future plans.

2. Program Review:

Laurentian University should undergo a comprehensive review of its academic programs. It is essential to identify courses that need improvement, eliminate underperforming programs, and strengthen leading programs to improve the quality of education. The programs should be relevant to the current market demand and could offer co-op opportunities, internships, and real-world training to create well-rounded graduates.

3. Research Excellence:

Laurentian University should invest in advanced research to uphold its research and innovation community. The University should create funding and partnership opportunities that incentivize leading researchers to the university, promote interdisciplinary collaboration between researchers, and strive for national and international recognition. A rigorous research agenda will lead to groundbreaking discoveries and provide state-of-the-art facilities and support services for faculty and students.

4. Strategic Partnerships:

Laurentian University needs to forge strategic relationships with industry leaders, government organizations, and other academic institutions to drive growth in Sudbury and Northern Ontario. Such partnerships will increase resources, create technology transfer opportunities, bring world-class talent to the University, and enable financial and research support. Partnerships will also improve the university's visibility, and foster relationships with alumni and international students.

5. Campus Infrastructure:

Laurentian University should prioritize the development of its campus infrastructure. Investing in modernizing and upgrading the physical infrastructure will enhance student living and learning, increase research capabilities, provide advanced technological resources, and may lead to an increase in revenue opportunities. Additionally, a well-maintained campus will attract and retain faculty, researchers and students.

In conclusion, Laurentian University should employ these five strategies to achieve financial stability, improve academic quality, enhance research excellence, establish strategic partnerships, and modernize its infrastructure. The combination creates a strong foundation for recovery and growth and positions the University as a leading institution committed to providing a high-quality education and impactful research located in Sudbury.

 

Needless to say, all this is probably summarizes anything a consulting company will be able to come up with on this matter. 

 

AI, the Creative Class, and Universities

 

The concern over AI usurping human functions and activities continues to grow.  A recent article in The Economist lays out how AIs like ChatGPT could replace many white collar employees such as telemarketers, traders and even teachers.  Indeed, some of the sectors that will be most impacted include securities and commodity traders, insurance carriers, data processing and hosting, publishing, and believe it or not, monetary authorities and central banks (this one is actually quite amusing as many people feel central banks have computer like personalities anyway).   In terms of the least impacted sectors,  after a century of automation, it is the revenge of the blue collar workers as the least impact of AI will be in areas like agriculture and forestry, woods products, mining, and food  and drink services.  Most exposed are industries which rely on programming and writing skills or what is sometimes termed the creative class.  Indeed, teachers especially those in literature, languages and history are also expected to be heavily affected. 

 

In the university sector, never one to shirk from the fad of the day, one suspects that there may indeed be a push towards AI instruction and course provision especially in subjects deemed heavy in language intensity. It will certainly be interesting to see how all of this evolves over the next decade and whether there will indeed be a substitution of AI instructors and course managers for in person teaching in a range of subjects.  Of course, the use of AI need not apply only to faculty.  University administration is also language intensive and rule driven and one could easily conceive  situations where universities dispense with administrators and replace them with semi-sentient AIs that devise, apply and enforce assorted rules for both students and faculty.  Try arguing with the AI for an assignment extension or sabbatical leave.  However, the cost savings would probably be significant given that nearly two thirds of university budgets these days are not directly faculty/teaching related.  Even assorted adjudication processes at a university such as university tenure committees could theoretically be done by an AI.  Indeed, the committees would be tireless and would always have quorum.  It would be a brave new world indeed.

 

Looking for an example of how AI can be applied to language intensive university administrative processes? I asked one of the AIs that I use to provide me with the executive summary of the quintessential university administrative slog – the strategic plan.  No university was named, so it is applicable to all.  Here is what I got:

 

ME: Draft me an executive summary of a five year university strategic plan that encompasses academic excellence, diversity and inclusiveness, innovation and research excellence.

 

AI: Executive Summary

This five-year strategic plan outlines the vision, goals, and objectives that will guide the university's growth and development in areas of academic excellence, diversity and inclusiveness, innovation, and research excellence. The plan focuses on enhancing the university's profile as a leading institution of higher education, which is committed to providing a supportive and inclusive environment for all students, faculty, and staff.

Academic Excellence

The plan emphasizes academic excellence, which is at the core of the university's mission. To achieve this goal, the university will focus on providing innovative, high-quality academic programs designed to meet the needs of the current and future job markets. The university will also evaluate and enhance its teaching methods, assessment practices, and curriculum to achieve academic rigor and reflective of modern pedagogy.

Diversity and Inclusiveness

The plan recognizes that diversity and inclusiveness is a strength that enhances the university's educational experience. To create a diverse and inclusive community, the university will champion efforts to recruit, retain, and support underrepresented student groups and faculty members. The university will also prioritize anti-bias training and provide resources to foster an inclusive and equitable campus for all.

Innovation

To promote innovation, the university will leverage the resources of the institution to support initiatives that spur entrepreneurship, creativity, and industry partnerships. The university will invest in technology and research infrastructure to improve its innovation capabilities and promote a culture of invention and commercialization.

Research Excellence

The university aims to be a leading institution in research excellence. The plan outlines objectives to promote research collaboration, increase funding, and support the recruitment of high-impact researchers. The university will establish interdisciplinary research initiatives that foster innovative discoveries and contribute to societal and economic development.

In conclusion, this five-year strategic plan is designed to strengthen the university's commitment to academic excellence, diversity and inclusiveness, innovation, and research excellence. Through these efforts, the university will attract and retain top talent, enhance its reputation, and advance the social and economic well-being of the local and global communities.

 

Can you tell the difference?  Will we be able to tell the difference between a class well-taught in person by a knowledgeable and versatile human being with social skills and a faceless AI? Maybe.  Will we ultimately be able to tell the difference between a university administrative process done by humans or an AI?  I think we all know the answer to that.  

 

 

Revisiting the Federal Finances

 

In the wake of the Federal 2023 spring budget, it is useful to take a look at the historical picture to see how the present and the immediate projected future fits into the long-term pattern of federal spending.  The key defining issue of recent public finance and government spending was of course the pandemic and the enormous amount of federal fiscal stimulus that was injected into Canada’s economy.  Federal spending rose from $363 billion in fiscal 2019-20 to reach $639 billion in 2020-21 – an increase of 73 percent.  It then declined reaching $480 billion as reported in Budget 2023 but is set to resume an upward trend and is expected to reach $556 billion by 2027-28.  As of the 2022-23 fiscal year, federal spending is 37 percent higher than going into the pandemic meaning an average annual increase in spending of about 12 percent.  This has been funded by deficits which in turn have increased the federal net debt dramatically going from $813 billion in 2019-20 to $1.3 trillion by 2022-23 and expected to reach just over $1.4 trillion by 2027-28.

 

A key feature of the pandemic is what appears to be a dramatic reversal of the decline in federal program spending as a share of Canada’s GDP – the so-called “federal fiscal footprint”.  Figure 1 uses data I compiled for my 2017 federal fiscal history with updates from the federal Fiscal Reference Tables and Budget 2023 to look at the program expenditure to GDP ratio for Canada from 1867 to 2022 and then projected forward to 2028. Fitting a simple linear trend shows that over time, there has been an expansion of federal program expenditures relative to GDP rising from about 5 percent in the 1870s to about 15 percent by the 1980s and with the COVID expenditure bump approaching 17 percent. 

 

 

 

Of course, there have been ebbs and flows around this linear trend with notable spikes during WWI and WWII.  It is noteworthy that the COVID spending spike represents the second highest federal program expenditure to GDP share with World War II as the highest.  After the spike and drop of the war era, the post WWII period saw a gradual rise in the federal fiscal footprint that saw it rise from about 10 percent in 1948 to peak at nearly 19 percent in 1982 and then decline, reaching 11 percent by 2000.  Since 2000, it has risen with a spike in 2021 at the height of the pandemic that brought the program expenditure share of GDP to 23 percent.  It has since declined to about 15 percent.  However, going into the pandemic it was just under 14 percent, up 1 percentage point since 2014 and the forecast of 15 percent means the federal footprint has returned to the size it had in the late 1970s to mid 1980s. 

 

Of course, we all know what happened after that.  There was a rise in the federal debt as a result of accumulated deficits and high interest rates that at first squeezed out program spending – note the decline into the 1990s even before the federal fiscal crisis – and then of course the transfer cuts and program expenditure reductions of the federal fiscal crisis. This of course makes the role of debt charges and interest rates of particular interest and Figure 2 plots two series: federal government debt charges as a share of total federal government expenditures and the effective interest rate on the federal net debt (defined as debt charges divided by net debt).  

 

 

 

The period from 1870 to WWI saw a decline in interest rates and not surprisingly a decline in the debt charge share of federal spending.  What surprises most people is that as a result of all the provincial debt the federal government took on at the dawn of Confederation, about 30 cents of every federal dollar of expenditure was going to service the debt in 1867.  Spending on nation building infrastructure such as railways saw debt levels and debt charges accumulate in the 1870s and 1880s but then came the great boom of prairie settlement after 1896 .  World War I saw an accumulation of debt and a rise in interest rates and with the budgetary and economic shocks of the Great Depression, debt charges as a share of total federal spending remained at over 25 percent.  Indeed, there is probably an interesting economic history thesis in explaining why there was a federal fiscal crisis in the 1990s but not the 1920s. 

 

The post WWII era saw a rise in interest rates that surpassed even the rise of the pre-WWI era and as significant budget deficits and debt began to accumulate after the mid-1970s, debt charges as a share of total spending began to rise.  However, with the positive budgetary balances of the post fiscal crisis era as well as the decline in interest rates, both interest rates and federal debt charges as a share of total spending hit historic lows.  In 2021, federal debt charges as a share of total federal spending was just below 5 percent and the effect interest rate on the net debt was about 1.8 percent.  Those numbers will be ones for the economic history books in the years to come as the debt service share of federal spending approaches 10 percent and the effective interest rate is just under 4 percent.  At least, that is what is currently forecast.