NORTHERN ECONOMIST 2.0

Wednesday, 6 March 2024

Ranking Recent CMA GDP Growth in Canada

In the wake of the pandemic, with inflation, lagging productivity growth and a slowing economy, it is sometimes useful to look back on what economic performance was like in the "before time" particularly amongst Canadian urban areas. Statistics Canada currently provides GDP estimates for Canadian CMAs for the period 2009 to 2020. While 2020 sees a dip in GDP for everyone, the 2009 to 2019 period provides a snapshot of which parts of the country were growing the fastest prior to the pandemic. The accompanying figure provides the growth rate in nominal GDP from 2009 to 2019 for Canada's 36 CMAs and ranks them from highest to lowest.

The expansion of GDP over ten years across these 36 CMAs averaged 45 percent and ranged from a high of 66 percent for Guelph, Ontario to a low of 16 percent for Saint John, New Brunswick. Three of the top five CMAs are in Ontario - Guelph, Kitchener-Cambridge-Waterloo and Toronto. At the same time, four of the bottom five CMAs are also in Ontario - Thunder Bay, St. Catharines-Niagara, Peterborough and oddly enough, the Ontario portion of Ottawa. Western Canadian CMAs in general did quite well with the exception of Victoria and Edmonton which placed in the bottom third. In northern Ontario, Sudbury fares substantially better than Thunder Bay while in southern Ontario, the worst performers are Peterborough and St. Catharines-Niagara along with London, Windsor and Kingston.

What happens as we continue to move forward from the pandemic will be interesting. Vancouver and Toronto until the pandemic were major areas of GDP growth with their economies also totaling over 600 billion dollars or over one-third of Canada's economy. If you add in Montreal, these three CMAs account for about half of Canada's economy. With the run-up in housing prices and rents during the pandemic as well as general labor shortages in pandemics wake, one wonders how successful they will continue to be as urban growth leaders in Canada's economy.

Sunday, 25 February 2024

Ontario's Housing Woes-a supply side problem

This post originally appeared on the Fraser Institute Blog, February 24th, 2024.

Housing prices in Ontario, like in much of the rest of Canada, have soared because of several factors including supply constraints combined with rising demand fuelled by robust population growth. The most recent installment in this ongoing saga is the federal government’s move to cap international student visas to which Ontario has announced measures requiring universities and colleges to guarantee student housing—though how this is to be done is a good question.

These short term reactive regulatory actions at both the federal and provincial level will ultimately do little to solve the problem of scarce and expensive housing because they do not address the root of the problem—the supply side, particularly the high cost of building new homes, which results in meagre efforts to build new housing stock.

Aside from the recent labour shortages and run-up in construction costs in the pandemic’s wake, there are two additional facets to the supply and cost-side issues of housing in Canada in general and Ontario in particular.

First, there’s the role of government in driving up the cost of new housing through regulatory actions at the provincial and municipal level. Housing in early 21st century Ontario has been treated not as an investment but as a source of cash for governments, which always seem to need more money. According to a CMHC report, government charges on new housing development via warranty fees, municipal fees, development and permit fees easily add 20 per cent to the cost of building a new home. Indeed, the regulatory charges for a new home in a place such as Markham can easily add up to $180,000 with some of the higher costs imposed on higher density row homes and high rise units relative to single-detached homes. This is not an inconsequential amount given housing prices in Markham average about $1.3 million.

Second, housing supply has not kept up with population growth. This is not a new story—the addition of new per-person housing stock in Ontario peaked in the 1970s. The chart below plots total housing starts for Ontario from 1955 to 2023. While there have been cyclic highs and lows, the overall trend has been upwards. Even so, the total number of starts peaked in 1973 at 110,536 starts. By way of contrast, 2023 saw 89,297 new home starts. In 1973, Ontario’s population was 8.1 million people whereas by 2023 it was estimated at 15.8 million.

When one calculates the number of new starts per person and constructs an index with 1955 equal to 100, it becomes clear that new housing starts per person have been on a long-term decline. Compared to 1955, we’re building 45 per cent fewer new homes per person. If you compare it to the per-person peak in the 1970s, Ontario in 2023 built nearly 60 per cent fewer new homes per person.

To add to the stock of affordable housing, the Ontario government has set the target of 1.5 million homes to be built by 2031. To this end, it created a Building Faster Fund that would provide up to $1.2 billion to municipalities that meet or exceed the government housing target set for that community and provide strong mayoral powers to municipalities to help cut through municipal red tape and speed up construction. The government has also set housing targets for municipalities to meet to receive the funding.

Keep in mind that to reach a target of 1.5 million new homes by 2031, Ontario would need to add 187,500 new homes a year until 2031. As the first chart illustrates, since 1955 there has not been a single year where Ontario has come close to that number. Indeed, if one compares housing starts as a per cent of the target set by the provincial government across municipalities based on data from its Housing Tracker (see chart below) it’s clear that as of late-January 2024, barely one-quarter of municipalities had met their 2023 housing target. Not the most auspicious start.

What’s Ontario to do? The province’s housing availability and affordability problem will likely get worse before it gets better. Along with boosting the supply of skilled trades people to help construct more homes, it must reduce the regulatory and zoning barriers that slow down the construction of multi-unit residential projects, reduce the governmental development charges particularly on “missing-middle” density builds that emphasize family-sized units, and provide further tax incentives geared to building high-rise multi-unit builds with family-sized units. Governments should also increase efforts to leverage surplus public lands at the federal, provincial and municipal levels to help construct affordable housing as the current approach has paid little attention to having a constant and ample supply of shovel-ready sites.

Only such a multi-pronged approach will have any hope of meeting the housing needs of Ontarians over time.

Monday, 12 February 2024

Municipal Spending Evolution in Thunder Bay

As the 2024 municipal budget season wraps up, it is worth looking at where Thunder Bay has been going over the last decade in terms of the composition of its total municipal expenditures (all spending, tax and grant supported, capital and operating). Using multi-year financial data (2002 to 2022) from the Ontario Ministry of Municipal Affairs Financial Information Review, one can obtain an overview of the trends. In 2012, total municipal expenditures in Thunder Bay were 505.4 million dollars and in 2022 they were 599.8 million making for an increase of 19 percent. Compared to some other municipalities, this was actually a rather modest increase as over the same period, Greater-Sudbury saw an increase of 41 percent, Windsor 26 percent, Barrie 29 percent and Kingston 41 percent. At the same time, over this entire period, Thunder Bay nevertheless still managed to have the largest municipal expenditure to GDP ratio of these cities.

What is more interesting is the evolution in functional composition. Figure 1 illustrates that in 2012, the City of Thunder Bay spent 5 percent of its budget on general government, 14 percent on protection of persons and property, 12 percent on transportation, 12 percent on the environment, 5 percent on health and emergency services, 13 percent on social and family services, 9 percent on cultural and recreation services, 2 percent on planning and development and 28 percent on "other". This last category reflects Thunder Bay’s ownership of its municipal telecom utility (TBayTel) as well as differences in the way Thunder Bay approaches social housing given we have a district board – the District of Thunder Bay Social Services Administration Board.

Figure 2 presents the 2022 composition. General government showed a decline to 4 percent, protection to persons and property rose to 21 percent, transportation remained at 12 percent as did the environment. Meanwhile, health and emergency services grew to 7 percent, social and family services declined to 7 percent, and both recreation and culture and planning and development remained the same at 9 percent and 2 percent respectively. Meanwhile, the "other" category's share declined to 26 percent.

Of course, for the composition to change, it means that these categories have grown at different rates and so Figure 3 presents the percent change in total spending by category over the 2012 to 2022 period. In accord with general local perceptions, the largest increases in spending have indeed been in protection services and health and emergency services at 76 and 73 percent respectively. Next is recreation and culture at 25 percent, followed by the environment at 14 percent, planning and development at 13 percent, "other" at 12 percent and transportation at 11 percent. There were two categories that saw declines in total spending: general government fell by 6 percent (there have indeed been some administrative economies) while social and family services fell by 32 percent.

Given that social issues have been front and center in Thunder Bay over the last few years, this allocation does provide some insight into how Thunder Bay is dealing with some of its social issues. Resource allocation appears to have targeted the more direct outcomes and fallout of the assorted social ills afflicting the streets of Thunder Bay. This is to be expected. What is somewhat more disturbing is that there has been an expenditure drop in family and social services which one might expect would be a longer-term spending approach to addressing some of the causes of social issues. Whereas, in 2012, 64.4 million was being spent on family and social services, this has declined to 44 million by 2022.

It is interesting to note that of the five cities mentioned at the start of this post, between 2012 and 2022, Thunder Bay saw the largest percent increases in dollars spent on protection to persons and property as well as health and emergency services. With respect to spending on family and social services, only Barrie saw a decline while Greater-Sudbury, Windsor and Kingston all saw increases. Windsor, Barrie, Greater-Sudbury, and Kingston also all increases in social housing spending (though Greater-Sudbury's was quite small). However, in the case of Thunder Bay it is difficult to tell from these numbers if we are indeed spending more in social housing in the "other" category. Ultimately, such differences across urban centers will provide an interesting laboratory experiment on how municipalities are dealing with issues like poverty, addiction and crime.

Sunday, 4 February 2024

Measuring Municipal Public Sector Size

Public sector size and its impact on the economy is a long-standing research question in public finance. In the case of Canada with its federal system of government, measures of public sector size often focus on either total public sector size or break it down into measures of federal and/or provincial public sector size. These measures commonly take government spending or government revenues as a share of GDP to estimate the size of the public sector footprint. Less common are attempts to related municipal public sector size to the size of their local economies.

Data is always an issue when trying to get an empirical handle on measuring things like public sector size. Fortunately, in the case of Ontario municipalities, it is possible to get annual data on total municipal government expenditures and revenues from the Ontario Ministry of Municipal Affairs Annual Financial Information Returns which are filed by municipal governments. Also fortunate is that Statistics Canada now provides some estimates of GDP for major census metropolitan areas going back to 2009. While the data is a bit onerous to compile and put together, the preliminary results for Thunder Bay and three other Ontario municipalities are interesting.

Figure 1 plots total municipal expenditure as a share of CMA GDP from 2009 to 2022 for Thunder Bay, Greater Sudbury, Windsor, and Barrie. These are relatively smaller Ontario urban centres well outside the GTA/Niagara region with two in northern Ontario. Greater Sudbury is always an automatic comparison for Thunder Bay on many levels given that it is the largest city in northern Ontario with Thunder Bay second. Also, note that for 2021 and 2022, GDP was estimated using the annual average growth rate of GDP for the 2010 to 2020 period.

The results reveal that total municipal expenditures in these four cities as a share of GDP reveal that Thunder Bay has a larger municipal footprint than the other three. Over the entire period 2009 to 2022, Thunder Bay’s municipal expenditure to GDP ratio averages 9 percent while Sudbury is at 6 percent, and Windsor and Barrie each at 5 percent and 4.7 percent respectively. In terms of trends over time, since 2011, Barrie has been trending slowly downwards, Windsor is stable, Sudbury has been growing while Thunder Bay managed a small decline that was reversed during the pandemic. Indeed, the two end points of this chart are both associated with economic trauma in that the start is marked by the aftermath of the Great Recession and Financial Crisis and the end by the COVID-19 pandemic.

Nevertheless, the results suggest that based on this albeit limited sample, the two northern Ontario municipalities have larger municipal public sectors than ones in southern Ontario. Even within the north, Thunder Bay is certainly in a league of its own when it comes to the size of its municipal footprint. Some of these differences across the cities can of course be ascribed to the generally more robust southern Ontario economic environment and better economic growth performance which naturally spills over into GDP. At the same time, Thunder Bay is different, and the question as always is why?

One might argue that the municipal public sector in Thunder Bay is larger than these other cities because it has a weaker economy. Given that so much municipal spending is mandated or guided by the province, Thunder Bay does not spend more per se but does relative to the size of its economy. This is the “province makes us do it defence”. On the other hand, one could argue that more spending is also a choice and Thunder Bay and the Lakehead cities that preceded it have always because of their isolation engaged in more municipal spending to provide services they feel ought to be available. In this regards, part of the difference between Thunder Bay and other cities lies in municipal utilities given that the City of Thunder Bay essentially owns TBayTel- its own municipal telecom utility.

In some sense, neither explanation is terribly flattering in explaining why Thunder Bay’s municipal public sector can be nearly twice as large as that in some other southern Ontario cities. We have a weak economy which despite all efforts continues to be weak and our municipal government plays the role of an economic stabilizer. Or, ownership of TBayTel aside, we may simply like to spend more than other cities and are quite comfortable with the City of Thunder Bay being as large an economic driver as it is. One suspects both these explanations are potentially inconvenient truths no one in Thunder Bay really wants to hear.

Friday, 2 February 2024

Ontario Economic Decline is Real and Substantial

This post originally appeared in the Fraser Institute Blog.

A spectre is stalking Ontario, and it’s the spectre of decline. For most of post-war Canadian economic history, Ontario has had a per-capita real GDP substantially above the Canadian average. At the same time, Ontario has had real per-capita GDP growth relatively close to the Canadian average.

This dominance was rooted in Ontario’s role as Canada’s industrial heartland that developed in the wake of Confederation. Ontario was indeed a beneficiary of Canada’s national economic development policies based on development of the Canadian prairie wheat economy, a tariff wall to protect domestic manufacturing and an east-west railway transport corridor. At the same time, Ontario’s economy was also marked by prosperity driven by market-based economic development best described in the words of economic historian Ian Drummond as “progress without planning.”

Ontario’s performance can be summarized in two charts using data from the Macro-data Base of Finances of the Nation. The first chart below plots real per-capita GDP separately for Ontario versus the rest of the country (Canada without Ontario) from 1990 to 2022.

CanvasJS.com

The second chart plots the average annual growth rate for Ontario, the rest of the country and all of Canada for the 1990 to 2022 period and the approximately 30-year period preceding it. The evidence suggests that during the 1990s, Ontario fell dramatically below the rest of the country in terms of its real per-capita GDP growth. In 2006, the rest of the country surpassed Ontario’s real per-capita GDP and remained higher for a decade before converging from about 2015 to the pandemic era. However, in the immediate post-pandemic era, Ontario has once again fallen behind the rest of the country.

CanvasJS.com

During the 30-year period prior to 1990, Ontario’s real GDP per-capita growth was quite close to the overall Canadian average and that of Canada without Ontario. What’s remarkable is what’s happened since.

Ontario’s average annual growth rate of real per-capita GDP fell from 2.6 per cent to 0.6 per cent. To be fair, a productivity decline has also marked the rest of the country. Indeed, Ontario and the rest of Canada appear locked as partners in a long-term productivity and growth decline, but Ontario’s performance is both dire and unique. The rest of Canada since 1990 saw its per-capita income growth rate cut in half. While hardly a sterling performance, compared to Ontario it was a veritable boom given that Ontario’s post-1990 average annual growth rate was barely one-quarter that of its 1960 to 1990 growth rate. One can argue that Ontario is dragging down the overall Canadian growth rate.

One can construct all kinds of palatable and soothing stories to explain why this has happened and why it’s not as unflattering as these statistics suggest. For example, one can argue that convergence of income is a good thing as it provides for a more economically balanced federation and is a logical outcome of economic development spreading across the country. At the same time, convergence could also mean that once per-capita incomes have equalized, growth rates should be similar, too, which is not the case here.

One could argue that Ontario was exceptionally hard hit by the economic adjustment its manufacturing base underwent during the 1990s in the wake of the 1998 Canada-U.S. Free Trade agreement and then NAFTA. Yet most of that adjustment was done in the 1990s and a breakdown of growth rates in the 1990 to 2022 period shows 1990 to 2000 had higher per-capita income growth than afterwards. One could also argue that the real per-capita slowdown is an illusion fuelled by rapid population growth. This of course ignores the reality that Ontario’s population has been growing about the same as the rest of the country and its share of total Canadian population today remains pretty much the same as 30 years ago.

Another potential argument is that the relatively better performance of the rest of the country is the result of natural resources with Alberta, Saskatchewan and Newfoundland and Labrador doing much of the heavy lifting. Yet this ignores that Ontario, and especially its north, is resource rich with abundant minerals and hydropower resources. Yet Ontario has been planning for more than two decades to access its Ring of Fire and little yet emerged. If the early 20th century could be characterized as “Progress without planning” then the early 21st may as well be “Planning without progress.”

Finally, one could argue it’s all just a rough patch for Ontario and that things are about to turn around. At the 1960 to 1990 growth rate, Ontario’s per-capita income would double in about 30 years. At the post-1990 average annual growth rate, the next doubling will take more than a century.

These are all ultimately unconvincing stories strung together to provide a comforting and bearable account as to why we shouldn’t worry and indeed shouldn’t do anything at all. Yet the first step to a solution is acknowledging a problem exists. Unfortunately, Ontario seems serene in the confidence it does not have to worry. Ontario needs to wake up and realize it has a problem.

NORTHERN ECONOMIST 2.0