Ontario Budget 2020 Summary

 

Ontario delivered its 2020 budget and it did not really contain any surprises.  While it is the largest nominal deficit in Ontario history, as a share of GDP the deficit for 2020-21 is about 4.6 percent which is one third that of the federal deficit to GDP ratio.  Moreover, it is actually smaller than the one Ontario had in 2010-11 in the aftermath of the 2008-09 Great Recession when it was still at just over 5 percent. 

 

Expenditures jumped in 2020-21 to $189.5 billion as a result of the pandemic – an increase of 15 percent over the previous year.  It will remain high but not increase further for the next two years under the medium-term scenario going to $185.4 billion in 2021-22 and $188.3 billion in 2022-23 but all of these expenditure figures contain several billion dollars in contingency reserves. 

 

Revenues fell 3 percent in 2020-21 as a result of the pandemic – not as big a hit as might be expected because federal transfer payments as a result of COVID jumped from $25.4 billion to $33.4 billion – an increase of 31 percent.  However, those transfers will decline to $27.1 billion and 27.6 billion over the next two years.  As a result, even with the projected economic recovery and its impact on tax revenue, total revenues are not expected to grow much until 2022-23 when they reach $160.2 billion.

 

The deficit is projected at $38.5 billion in 2020-21, $33.1 billion in 2021-22 and $26.2 billion in 2022-23 while the net debt will grow from $355 billion in 2019-20 to $473 billion by 2022-23.  GDP is expected to grow by about 6 percent a year after this year so the net debt to GDP ratio is projected to only rise to just under 50 percent at 49.6 percent.  

 

 

Why Makings Things Matters in the Age of COVID: A Tale of Three Cities

 

The Covid-19 pandemic has come with a huge cost in terms of employment loss with the retail, food and accommodation, and travel sectors exceptionally hard hit.  The employment impact in Ontario has been substantial also with total employment falling about 13 percent from February 2020 to June of 2020.  The rebound since June has been insufficient to make up all the employment losses and as of September total employment in Ontario was still about 6 percent lower than February 2020.  The impact has also varied across major cities in Ontario with Kitchener-Waterloo, Thunder Bay and Peterborough and Hamilton hit the hardest whereas Guelph, Brantford, Oshawa and London experienced softer blows.

 

The composition of employment seems to be a factor and this post drills down a bit into the employment composition by broad industry sector – goods and services. The goods sector consists of employment in agriculture, resources, utilities and oil and gas, construction and manufacturing. Everything else ranging from wholesale and retail trade and transport, finance and real estate, health and education to food and accommodation and public administration are the services. 

 

 

 

Figure 1 plots the composition of employment across these two industry sectors for three cities in Ontario: Hamilton, Thunder Bay and Guelph. What is quite interesting is despite their industrial, agricultural and resource extraction histories, Hamilton, Guelph, and Thunder Bay, are now all remarkably service intensive - part of the trend everywhere in high income economies. Hamilton’s goods production sector accounts for 21 percent of employment whereas Thunder Bay is the lowest of the three cities at 17 percent.  However, Guelph on the other hand still has a relatively large share of employment in goods production at 27 percent. 

 

 

 

Figures 2 and 3 plot the percentage change in employment for total, goods, and service sector employment for the three cities for two periods: the onset of the pandemic between January 2020 to May 2020 and the period of employment recovery as the first wave was brought under control from May 2020 to September 2020.  The data is non-seasonally adjusted three-month average monthly employment data from Statistics Canada.  

 

 

 

From January to May, all three cities saw a drop in monthly employment, but Guelph was hit half as hard with a drop of about 6 percent compared to more than twice that for both Hamilton and Thunder Bay.  What is also interesting is the employment hit was harder in Guelph for the goods sector with a 25 percent employment drop compared to 17 percent for Thunder Bay and 13 percent for Hamilton.  However, service employment dropped about 13 percent in both Hamilton and Thunder Bay during the first wave of the pandemic, but Guelph’s was essentially stable.

 

As for the recovery period from the first wave from May to September, all three cities saw employment grow: 4 percent for Hamilton, 9 percent for Thunder Bay and 8 percent for Guelph.  The performance across sectors is more interesting.  Employment in Guelph’s goods sector rebounded robustly growing 57 percent compared to only 21 percent in Hamilton and 26 percent in Thunder Bay.  Construction was the major source of the rebound in all three cities but manufacturing reinforced the rebound in Guelph whereas in Thunder Bay manufacturing employment continued to decline even from May to September.  Services did not recover as well as goods production in all three cities with Guelph actually seeing some service sector employment losses from May to September.  For whatever reason, the service sector job losses in Guelph were delayed compared to the other two cities.

 

What explains this?  Good question but one cannot help but wonder if the CERB played a role.  On average, foods sector jobs are higher paying than service sector ones though where the service jobs are is important- for example, retail and food and accommodation versus health and education.  The CERB kicks in during the pandemic and millions took advantage of it over the summer and into the early fall.  The CERB and its income support may have provided more of a disincentive to return. Having a large goods production sector relative to service sector did not insulate against employment loss in the first wave of the pandemic but may have slowed the rebound in the presence of the CERB. 

Saving Money in a Roundabout Way

 

The theme at the November 2^nd Thunder Bay City Council, Meeting will be “saving money in a roundabout way.”  Despite all the hand wringing and gnashing of teeth during the spring and summer over the impact of COVID-19 it turns out that for 2020 the City of Thunder Bay will be seeing a positive variance on their operating budget – that is, a surplus – of about $1 million.  However, this positive outcome is not really the result of any great fiscal sacrifice or structural reforms on the part of our municipal councillors but mainly the result of money from other levels of government coming to the rescue. 

 

While there was indeed some cause for concern as user fee revenues dried up when the pandemic took hold, the City has been bailed out by other levels of government.  First, there was over $9 million dollars in assistance from federal and provincial levels of government of which some will carry over into 2021. Second, the city was quick to issue temporary layoffs to about 800 workers which was not as regrettable as city officials might have you think because with layoffs in early April, most would have ended up on the Federal CERB – more government money. 

 

The positive variance for 2020 means another $1 million will end up going to reserves which again means business as usual as the last five years will have now seen nearly $14 million dollars in accumulated positive variances.  The City of Thunder Bay seems to typically overestimate spending and underestimates revenues and the inevitable resulting surplus is then banked.  Taxpayers are thus not only paying for services but also for an indirect roundabout municipal savings program with tax levy increases since 2015 ranging from 2.3 to 5.7 percent. 

 

There is fiscal prudence and then there is crying wolf. Indeed, between the “accidental surpluses” and the deliberate direction of funds into reserves as part of operating and capital budgets, the City of Thunder Bay has seen its reserve funds grow from approximately $99 million in 2015 to an estimated $137 million in 2019. Returning at least a portion of the “accidental” surplus to ratepayers in the form of lower tax levies is not something the City seems interested in doing given its insatiable need for more legacy projects.  For 2021, ratepayers in Thunder Bay have already been prepared in a roundabout way for a tax levy increase of 3.45 percent as bringing about only a two percent increase would require $5 million in “savings”.   

 

And speaking of savings and roundabouts, the other way to save money that will come up at this week’s meeting is a proposed roundabout at the intersection of Redwood and Edward.  The concept of a traffic roundabout is actually quite good and common in many other cities – particularly in Europe.  It can help smooth traffic flow provided they are properly constructed and properly used given the average Thunder Bay driver’s pathological inability to manage a merge lane.  There is a small roundabout at Marina Park but that is not a real test under traffic flow conditions as it essentially connects road access within the park to parking lots.

 

The initial proposal was for a roundabout at Ford and Victoria but the City’s Engineering Division after a study said the intersection did not warrant one.  A proposal for one at Edward and Redwood seems odd given that the intersection was just fixed and repaved but apparently there is more sewer work planned so now is a time to replace more expensive traffic lights with a roundabout.  While building the roundabout will cost $1 million dollars compared to $850,000 for regular traffic signals, savings will emerge over time in a roundabout way through lower operating costs over 20 years which will be $150,000 annually compared to $275,000 annually for traffic lights. That seems like a lot for annual maintenance for either option given that in other cities the annual maintenance estimates are closer to $10,000 but hey this is Thunder Bay so let us go with it.

 

If you simply sum up the costs over 20 years, the traffic lights will cost $5.6 million over that period but the traffic roundabout $3.85 million generating a total cost difference of $1.75 million at the end of 20 years.   If we assume that the numbers for maintenance over 20 years are instead totals over 20 years then what you actually get is a total cost of $1.15 million for the roundabout and $1.125 million for the traffic lights - making the roundabout only slightly cheaper over 20 years.  So, what really should be done is a cost benefit analysis under differing interest rate/discount rate scenarios.  That is, there needs to be not only an estimate of the costs but a monetary estimate of the benefits in terms of commuting time saved or lives saved and injuries from the expectation of fewer accidents in a roundabout relative to traffic lights. 

 

And you also need to apply a discount factor or interest rate given the weighting of benefits over time – a dollar today is not the same as a dollar tomorrow.  Basically, projects with high-up front benefits and lower-upfront costs tend to be favored in any cost-benefit analysis but we have really no way of determining that in this case because all we have are cost estimates and no publicly available monetary estimate of anticipated benefits.

 

Still, costs are what are going to be used and it looks like savings so the Councillors will go for it whether there really are going to be savings over the next 20 years or not.  It is likely none of them will be on council 20 years from now for a final reckoning.  The Councillors are desperate for some feel good achievements given the beating they have taken over the spending on the turf facility and their cone of silence on the pinhole leak issue.  At the midpoint of their mandate, they are not doing so well politically given a recent TBNewswatch Poll grading their performance that saw 50 percent of respondents give them a collective “F” and another 25 percent a D. Only 1.6 percent gave them an A.  With those kinds of marks, none of them will be going to Thunder Bay’s political graduate school – higher political office.

 

 

 

The Importance of Manufacturing in the Age of COVID-19

 

Ontario’s economy has been hit hard by the Covid-19 pandemic.  Seasonally adjusted monthly employment in Ontario between February 2020 and September 2020 fell 6.3 percent - from 7,551,900 jobs to 7,077,600 jobs.  However, as illustrated in my last post, the employment drop varied across its CMAs.  The worst hit CMAs are Kitchener-Waterloo-Cambridge and Thunder Bay - which saw declines of 11.2 and 9.2 percent respectively while at the other end are Guelph and Brantford, which despite early losses have now recovered and in the case of Guelph even seen a small increase.  The question of course is what might account for this variable performance?

One’s first thought is that it is the result of the impact of Covid-19 with cities harder hit by the virus getting a bigger employment wallop.  However, a plot of the percent change in employment levels across Ontario’s 15 largest CMAs from February 2020 to September 2020 (Figure 1) against Covid-19 cases per million population as of mid-October show only a slight relationship between more negative employment growth and higher case counts.  

 

 

 

 

 

 

 

 

 

 Can the effect of Covid-19 on employment depend on a community’s employment structure?  For example, are communities more dependent on occupations in health, social services, education and public administration  (HSEP)– which are mainly broader public sector jobs – more insulated from employment effects of Covid-19?  Figure 2 illustrates this relationship for Ontario’s 15 largest CMAs and again there really is not much of a relationship.  Indeed, outside of Ottawa, Kingston and Thunder Bay have the largest HSEP shares in Ontario at 42 and 37 percent respectively and they are not exactly coasting. And, if one looks at the share of employment in food and accommodation services (not shown) it is also a pretty flat curve.  Indeed, the employment drop across CMAs seems to be impervious to being more service intensive as well as the specific effects of Covid-19. 

 

 

However, there is one more figure that is worth considering. Figure 3 plots the percent of employment in manufacturing against the percentage change in employment. What is interesting here is that the relationship is a positively sloping one – that is, on average, larger employment shares in manufacturing seem to be associated with a smaller employment drop over the February to September period.  It is of course by no means an ironclad relationship.  Kitchener-Cambridge-Waterloo, for example has a manufacturing employment share of 17 percent but nevertheless experienced the largest employment drop of the 15 CMAs at 11 percent. 

 

However, the four CMAs with the largest manufacturing employment share are Windsor (23%), Brantford (19%), Guelph (19%) and Kitchener-Cambridge-Waterloo (17%).  They average 19.4 percent in manufacturing as a share of employment and their average employment drop was 4.5 percent.  Meanwhile, the four cities with the lowest manufacturing employment share are Thunder Bay (6%), Kingston (5%), Sudbury (3%), and Ottawa (2%). They averaged a manufacturing employment share at approximately 4 percent, but an average drop in employment of 7 percent.  What is it about manufacturing that may insulate your economy more from Covid-19 related employment drops over the longer term?

Good question. Obviously, it is easier to shut down things are deemed non-essential such as personal services and perhaps even some broader public sector service activities.  Moreover, some of these sectors are relatively low-paying and the fairly generous CERB payments probably more attractive than returning to work.  These are very labour-intensive activities and when hit hard can generate a lot of employment losses.  On the other hand, manufacturing – especially advanced manufacturing – is already quite capital intensive so it is relatively more difficult to shed employment.  Moreover, once the economy reopened – it was things that were needed be they masks or toilet paper or metal products – and production resumed as quickly as possible. And, manufacturing is much higher paying making staying on the CERB less attractive.

 

The relative robustness of employment in the Covid-19 era as a result of manufacturing intensiveness may have global implications for economic recovery.  Economies around the world have been hit hard with large drops in GDP and employment. However, many countries over the last few decades have seen an evolution of their economies away from goods production and towards services.  The G-7 countries certainly are in this category.  This means countries that are currently more manufacturing intensive will likely do much better in the short to medium term especially if they are producing goods in high demand.

 

This also explains China’s seemingly robust economic recovery.  Given that so much of the world’s manufacturing has relocated to China over the last two decades, they are poised to dominate economic recovery over the next couple of years.  China’s success however may be fragile. First, their longer-term export success requires that other economies recover.  Being a mercantilist means you want to expand your national economy and power by exporting high value-added products and importing low value-added items.  However, having your export markets devastated by Covid-19 is going to be bad for business. Second, most other countries are about to embark on a manufacturing repatriation program as they realize that having a mercantilist and authoritarian country with a monopoly on goods production does place your supply chain at risk and ultimately your national economic welfare.

 

 

Ranking Employment Change in Ontario CMAs During COVID

 The economic impact of Covid-19 has affected output and employment in economies around the world and of course, Ontario is no exception.  However, just as the economic impact varies across countries around the world, so does it vary within countries and within regions.  Seasonally adjusted monthly employment in Ontario between February 2020 and September 2020 has fallen from 7,551,900 jobs to 7,077,600 jobs - a percentage drop in employment of 6.3 percent.  The drop was steepest from February to June - which saw a drop of 13 percent but the rebound since has recovered some but not all of the jobs lost.  

The accompanying figure plots the percentage change in employment level for the province along with its major CMAs during this eight month period of the pandemic for which Statistics Canada has released the seasonally adjusted monthly employment numbers.  The results are interesting. The worst hit CMAs are Kitchener-Waterloo-Cambridge and Thunder Bay - which saw declines of 11.2 and 9.2 percent respectively.  At the other extreme are Guelph and Brantford, which have now recovered all of their lost employment and in the case of Guelph seen a small increase.  

There is no apparent pattern to the impact of employment losses based on the impact of  COVID.  Thunder Bay had a very mild impact from Covid-19 in terms of cases and mortality (to date Thunder Bay District is at a total of 114 cases and one death - one of the lowest rates in the province given a population of about 140,000) and yet it had the second highest percentage employment losses.  Toronto and Ottawahave had higher rates incidence and mortality compared to Hamilton and yet are in the middle of the pack in terms of employment losses while Hamilton has done worse than they have  The employment losses really make little sense in terms of the impact of the virus.

 There also seems to be no obvious patterns in terms of location.The hardest hit in terms of employment losses are in northern Ontario, the Golden Horseshoe, central Ontario and eastern Ontario. The smallest hits are in central Ontario, eastern Ontario and southwestern Ontario.  Good and bad performance is spread everywhere which brings us to perhaps factors such as local response to the pandemic by employers and health authorities as well as composition of the local economy.  

Were some communities quicker to implement lock downs and shutdowns and with more stringent rules and slower return to work? The case of the two northern Ontario CMAs may be a case in point given the share share of public sector employment in those cities and yet their poorer employment performance. 

The Kitchener-Waterloo area is exceptionally dependent on students and the businesses servicing those students so maybe that is a factor.  A detailed look at the restaurant, accommodation, hospitality, recreation and cultural/entertainment shares of local employment may also yield insight into why some CMAs did so poorly relative to others given these sectors were exceptionally hard hit.  Of course, as we move into winter one grows concerned that additional impacts on these sectors may have permanent long-term effects.

Until we drill down into more detailed data, the differential impact is a bit of a puzzle.