Northern Economist 2.0

Sunday, 19 March 2017

Economic News Around Northern Ontario: March 19th Edition

Well, another week has come and gone and there are many economic stories bubbling around northern Ontario and even farther afield with implications for northern Ontario.  For example, this morning's Thunder Bay Chronicle-Journal reported on upcoming talks between the forest sector and the federal government on preparing for the upcoming Canada-US softwood lumber negotiations.  However, little information was provided in the story as to what strategy options are being explored as Canada moves into negotiations with the Trump administration on this file.

Stakes high for forestry sector, Chronicle-Journal March 19th, 2017.

The policies of the Trump administration will soon also be front and center with respect to environmental funding dealing with the Great Lakes.  The budget proposed in the United States has put forth rather large cuts to program spending and one area that will have a direct impact on northern Ontario is what seems to be the complete elimination of $300 million dollars annually for the Great Lakes Restoration Initiative with plans shifting the responsibility onto state and local governments.  See:

Canadian politicians outraged at Trump Great Lakes funding cuts.  The Globe and Mail, March 17th, 2017.

In brighter news, while northern Ontario reports the lowest optimism when it comes to construction activity in the Ontario Construction Secretariat 2017 Construction confidence Indicator, it is nevertheless up from 2016 and part of that optimism is due to a number of post-secondary construction projects in Sudbury and North Bay at Laurentian University and Canadore College.  However, the Trump effect is again rearing its head here as: "Despite the boost in overall confidence, nearly half of the 500 contractors surveyed report they expect the Donald Trump presidency to have a negative or harmful effect on Ontario’s economy and construction industry. This sentiment is most acute in Windsor-Sarnia where 59 per cent of respondents believe Trump’s government will harm Ontario’s economy." See:

Post-secondary projects generate optimism in North Bay, Sudbury-survey. North Bay Nugget, March 16th, 2017.

In business activity and expansion news:

Explor Resources starts drilling program on Timmins-area property. Northern Ontario Business. March 16th, 2017.

Prime Gelato makes the leap to grocery stores and restaurant menus in Thunder Bay. CBC News. March 17th, 2017.

U.S. Coast Guard ready to break ice from Duluth to Thunder Bay. CBC News. March 15th, 2017.

Seminar offered to help local firms export to the U.S. Saultonline. March 14th, 2017.

When it comes to civic issues and municipal government, a couple of items.  The urban renewal legacy of the 1970s haunts us still.  In Thunder Bay, they are revisiting the future of Victoriaville Mall.  In the 1970s, both the north and south downtowns in Thunder Bay (corresponding to the old cities of Port Arthur and Fort William) received urban renewal makeovers that in the long run were less than successful.  The Keskus Mall in downtown Port Arthur was eventually demolished to make way for the Casino but Victoriaville which was built right on the main downtown intersection and permanently affected traffic patterns lingers on and apparently costs the City of Thunder Bay $500,000 annually.  Victoriaville hit tough sledding right off the bat in the recession of the early 1980s as its anchor store -the Chapples family store - went under.  Keskus did not lose its major retail anchor until the late1990s when Eaton's went under. 

Thunder Bay city council considers step towards Victoriaville mall demolition. CBC News. March 15th, 2017.

And in Sudbury, the big municipal fiscal issue is the contentious reorganization of its fire and paramedic services with a big meeting slated for March 21st.  For my take on the issue and links to some of the news stories, see my earlier blog post here.

In Sudbury mining news, see:

Vale to mothball century-old Ontario nickel mine. Mining.com. March 13th, 2017.

It is also Federal budget week with the budget coming down March 22nd and we will have to see what emerges specifically geared towards northern Ontario.  For my contribution to federal budget debate this week, see here. Have a great week. 


Friday, 17 March 2017

Fire Services in the North: The Case of Sudbury



Sudbury is in a bit of a tizzy over proposed changes to its fire and paramedic services.  The proposed plan will see nine of the current 24 fire halls closed and a move to reduce the number of volunteer firefighters and hire more full time firefighters. The staff report estimates that the full-time compliment would go from 108 to 166 within the next decade, while the volunteer ranks would be almost cut in half from the current staffing level of 350.

Sudbury is a very large and dispersed municipality with the central core area served by full time firefighters and outlying areas served by volunteers who are paid part-time employees. Under the new plan, Sudbury's municipal government maintains that firefighters would be able to reach 90 percent of Greater Sudbury within nine minutes, as opposed to the current 69 percent.  Part of what is planned is an equalization of services to standardize and improve coverage and response times.  However, part of the plan also involves composite stations staffed by both full-time and volunteer firefighters, as well as increases in taxes in the areas currently served by volunteer firefighters.

It is useful to see where Greater Sudbury stands in its fire service costs relative to other cities in Ontario.  Figure 1 uses data from the BMA Management Consulting 2016 Municipal Study to plot the net per capita fire service costs (including amortization of any capital assets) for cities in Ontario with more than 100,000 of population as well as the Northern Ontario Five (N5) – Thunder Bay, Timmins, Sault Ste Marie, North Bay, and Greater Sudbury.  The results show quite a difference in per capita costs ranging from a high of $273 in Thunder Bay to a low of $102 in Milton.  Sudbury’s costs are quite modest coming in at $149 – the lowest among the N5 – and placing 22nd among the 27 cities in Figure 1. 
Of course, one can understand the concerns of ratepayers in Greater Sudbury that the proposed changes will raise costs and therefore raise taxes. The costs of fire fighting according to the BMA Municipal Study 2016 Report can vary as a result of a number of factors, which include:

1. The nature and extent of fire risks: The type of building construction, i.e. apartment dwellings vs. single-family homes versus institutions such as hospitals
2. Geography: Topography, urban/rural mix, road congestion and fire station locations and travel distances from those stations
3. Fire prevention and education efforts: Enforcement of the fire code, and the presence of working smoke alarms
4. Collective agreements: Differences in what stage of multi‐year agreements municipalities are at and also differences in agreements about how many staff are required on a fire vehicle
5. Staffing model: Full‐time firefighters or composite (full‐time and part‐time)

Costs in the end are an interactive function of the geographic area that must be served as well as the population base in that area that is available to cover the costs as well as its compactness - in other words, population density is a factor.  The importance of population density as a determinant of fire service costs is highlighted in Figure 2, which plots the net costs per capita of Figure 1 against population density (population per square kilometer) and reveals an inverse relationship when a linear regression is fitted to the data.  It of course does not control for any other variables and there is a fair amount of dispersion (the R-squared is also very low) around the fitted relationship but if Sudbury’s population density is plugged into the relationship, all other thing given, the per capita cost of its fire services rise to 181 dollars per capita.  Thus for Sudbury to be at 149 dollars per capita it must mean there are other factors affecting its costs or it is doing something to keep its costs well below – nearly 20 percent below - what is predicted by its population density alone.
It is the volunteer staffing model which has probably been a factor in keeping Sudbury’s fire fighting costs per capita relatively low given the large land area that must be served and the accompanying low population density.  Moving away from this model will probably bring Sudbury’s per capita costs more in line with other major Ontario municipalities.  No wonder ratepayers are upset.  At the same time, making the changes needs to weigh the improvements in service and response time that are expected to emerge against the expected additional costs.  It is an important cost-benefit analysis and should make for an interesting City council meeting in Sudbury on March 21st.

Thursday, 16 March 2017

A Brief History of Federal Budgets


The following op-ed appeared in the Waterloo Region Record, March 16th, 2017 and the New Brunswick Telegraph-Journal, March 13th, 2017.

The upcoming federal budget comes in Canada's 150th year — an important milestone for what is perhaps the most successful country in the world. The evolution of federal finances since 1867 reflects a changing economy and offers important lessons regarding the perils of persistent deficit spending and growing indebtedness.
Canada's federal government has indeed grown. In 1867, it had a budget of $14 million, an expenditure-to-GDP ratio of approximately five per cent, a net debt of $75.7 million, and a net debt-to-GDP ratio of 20 per cent. Transportation, communications and economic development accounted for a quarter of federal spending, and transfers to other governments 20 per cent. Meanwhile, debt service charges were 27 per cent due the newly formed federal government assuming provincial debts. There were no transfers to persons.
By comparison, total federal government spending in 2017 is estimated at $331 billion with an expenditure-to-GDP ratio of nearly 16 per cent and a net federal public debt of $760 billion, resulting in a debt-to-GDP ratio of 36 per cent. Assorted transfers to persons and other levels of governments now account for nearly two-thirds of federal government spending.
Until the First World War, customs duties dominated federal government revenue. The war effort sparked the search for new revenues leading to the creation of the first personal and corporate incomes taxes and the first federal sales tax. Over time, the importance of these three new revenue sources grew, and in 2017 it's anticipated that the personal income tax alone will make up 51 per cent of federal government revenue, with corporate taxes comprising 13 per cent and commodity taxes (GST, excise taxes and customs duties) making up 17 per cent.
The 150 years since Confederation have seen the federal government's primary focus transition from the active economic development of a country grounded in liberal economic principles to an activist role partly aimed at bringing about a more egalitarian society via social spending. Despite the benefits, expanded federal spending in the post-Second World War era — given the subsequent slowing of economic growth, rising interest rates and the absence of more concerted fiscal discipline — ultimately resulted in the 1990s federal debt crisis.
Prudent government spending is useful, such as the construction of the transcontinental CPR railway where subsidies encouraged the building of a risky transportation project. However, the same strategy also saw over-subsidization of the CPR and substantial subsidies to two other less-successful rail lines. More government spending is not always better, and that also applies to deficit financing.
Over the period 1867 to 2017, Canada's federal government ran a deficit nearly three-quarters of the time, with the largest deficits-to-GDP ratios during the two world wars and the great divergence between revenues and spending leading to the 1990s debt crisis. Large deficits and interest rates greater than the economy's growth rate during the 1970s and 1980s lead to a rising debt-to-GDP ratio and the federal fiscal crisis of the early 1990s.
The important policy decisions when it comes to spending are when to spend, what to spend, how much, and how to pay for it. The wrong answer to any of these questions has negative fiscal implications.
Given the surge in federal deficit financing in the wake of the 2016 budget, one wonders if the lessons of the 1990s have already been forgotten. While interest rates remain at historic lows, economic growth is also low, making a case for fiscal prudence given the dynamics of deficits and debt. The progress made in reducing the federal net debt-to-GDP ratio below 40 per cent will be largely squandered if we allow debt to once again grow uncontrollably.

Livio Di Matteo is a senior fellow at the Fraser Institute and professor of economics at Lakehead University. He is the author of “A Federal Fiscal History: Canada, 1867-2017.” Distributed by Troy Media