Op Eds - 2014

Bob Plamondon: Canada is finally back to where it was in 1967

Published on: October 11, 2014Last Updated: October 12, 2014 10:35 AM

To the outside world, Canada is the poster boy of financial rectitude. We had the discipline to dig ourselves out of the deep financial hole we were in back in the 1990s. We weathered the global economic crisis that overwhelmed the world in 2008 with no bank bailouts or falling house prices. Our federal accounts are now virtually in balance.

We even have a habit of exceeding our financial goals. The good news last week was that we were $10.7 billion closer to balancing the books than was projected not that many months ago in the government’s Economic Action Plan. That’s not small potatoes and works out to about $800 per household.

While the rest of the world is mired in deficits we are talking about tax cuts. But before we pop champagne corks, how about this for a reality check: for all our progress, the financial position of the federal government is not much better today than what it was in our centennial year.

But it was not long after our centennial celebrations that we lost our economic and financial bearings. It was not a case of a few good years followed by a few bad years. We shed financial probity altogether. In good times and bad, our federal government spent more, borrowed more, and made it easier for us to live off the state. As a consequence we have spent much of the past 25 years fixing the damage that was done in the 1970s and 1980s.

In 1967, when we were still paying off war bonds, our debt-to-GDP ratio was a modest 27.3 per cent. By the mid 1990s, the relative debt had almost tripled to 67.1 per cent of GDP. Last week we learned that our federal debt is only nearing 1967 levels, at 32.5 per cent of GDP.

Federal program spending in our centennial year was 14.3 per cent of GDP; then peaked at 20.6 per cent in 1983. Today it’s lower than 1967 levels, at 13.2 per cent of GDP. If we were spending at 1983 levels today, federal government expenditures would be an additional $140 billion, or about $10,500 per Canadian household. If we wanted to balance our books with that level of spending today, personal income tax revenues would need to be doubled. Thankfully federal revenue as a per cent of GDP is lower today than it was in 1967.

In 1967, servicing the federal debt cost us 1.8 per cent of GDP. Accumulating debt and high interest rates caused that burden to peak at 6.5 per cent of GDP in 1990. If we were paying interest costs at that level today, the bill would come in at $122 billion. We actually paid $28 billion in interest costs last year. At 1.5 per cent of GDP, that’s below 1967 levels.

While our overall financial position today is largely comparable to our centennial year, how the federal government spends our money is different. The portion dedicated to social programs (Old Age Security, children’s benefits, Employment Insurance) has risen by almost 40 per cent. The portion going to transfer payments for other governments has more than doubled. But the relative cost of running other government programs, including the military, has been reduced by about 1/3 from 1967 levels. That means individual Canadians are getting more from their government in 2014 than they did in 1967, and it is costing them less.

So yes, as we approach our sesquicentennial there is cause to celebrate our modest financial success. But let’s not get carried away and launch another spending and borrowing binge when our 150th birthday party is over. The hangover is rarely worth the excess.
Bob Plamondon is a public policy consultant and author. Twitter.com/plamondontweet

Plamondon: Hydro One's rising costs
Ottawa Citizen - May 23, 2014

Hydro rates in Ontario are going up – by some reports as much as 42 per cent over the coming five years.

But oddly enough, hydro rates have been rising while electricity demand has fallen. It’s no mystery as to why. The annual reports provided by Hydro One over the past five years spell it out in black and white. While we are consuming less, costs at Hydro One have risen dramatically, far outstripping inflation and the growth in our population.

Before asking for a relief in rates, better that we focus on controlling costs at Hydro One:

12 Per cent increase in the number of Hydro One regular employees over the past five years
6.8 Per cent increase in the population of Ontario over the past five years

57 Percentage of the Hydro One workforce that made more than $100,000 in 2012
924 Thousands of dollars paid to the Hydro One CEO in 2008
728 Thousands of dollars paid to the Hydro One CEO in 2013 (yes, it was lower in 2013)

38.5 Per cent increase in the costs of power at Hydro One over the past five years
3.6 Factor by which the cost of power at Hydro One exceeded the rate of inflation

5.7 Average per cent increase in Hydro One revenues over the past five years
1.8 Average inflation rate in Ontario over the past five years
32.1 Total per cent rise in Hydro One revenues over the past five years

61 Per cent increase in Hydro One profits between 2008 and 2013
10.8 Hydro One profits as a percentage of revenue in 2008
13.2 Hydro One profits as a percentage of revenue in 2013
7 Billions of dollars paid by Hydro One in dividends into the Ontario government coffers between 2008 and 2013

37 Per cent increase in Hydro One long-term debt between 2006 and 2012
7.8 Billions of dollars of debt on the books at Hydro One in 2012
1,612 Hydro One debt (2012) in dollars when divided by the number of Ontario households
0.1 Average per cent decrease in terawatt-hours (TWh) distributed by Hydro One over the past five years


Ontario’s race to the bottom
BY BOB PLAMONDON, OTTAWA CITIZEN MAY 2, 2014 12:15 PM


Thursday’s Ontario budget gave us a new set of numbers to assess the financial condition of the province and the performance of our economy. The trend over recent years, at least when compared with other provinces, has been decidedly negative. If the projections in this budget plan become reality, it will be another four years before Ontario’s books will be in balance and the debt will begin to decline. As Ontario heads into an election, this is the trend for the Liberals to defend, and their rivals to attack.

Deficits
10: String of deficits, actual and projected, beginning in 2009 and ending in 2018
1: Number of provinces in 2013-14 with a higher relative deficit than Ontario
$2,300: Ontario’s 2013-14 deficit, when divided by the number of provincial households

Debt
1: Number of provinces at present that have a higher relative debt load than Ontario
$27,000: Ontario debt when the Liberal government came into office expressed on a per household basis
$63,000: Ontario debt projected at 2015-16 when expressed on a per household basis
27.5%: Ontario debt as a percent of GDP when the Liberal government came to power
40.8%: Projected Ontario debt-to-GDP ratio for 2015-16

Revenue
$97: Billions of revenue in 2009 when the provincial books were last in balance
$133.6: Billions of revenue projected in 2018, when the books are next expected to be in balance
10%: Average per cent increase in federal cash transfer to Ontario from the federal government from 2004 to 2014

Expenses
1: Number of provinces where relative spending increased at a rate higher than Ontario over the past ten years
5.5%: Average annual percent increase in Ontario spending over the past 10 years
3.8%: Average annual percent increase in Quebec spending over the past 10 years
34%: Percent increase in the amount of interest expense Ontario will incur from 2014 to 2018
1.7%: Projected percent increase in spending over the coming 4 years that is required to bring Ontario’s books into balance

Other Facts
$1,263: The amount an Ontario worker making $70,000 will be required to pay into the proposed Ontario Retirement Pension Plan scheme
$1,263: The payroll tax that an employer in Ontario will have to pay for each employee making $70,000 per year for the proposed Ontario Retirement Pension Plan
$33,962: Ontario primary household income per capita
$34,084: Canadian average primary household income per capita
7.5%: Current unemployment rate in Ontario
7.0%: Current unemployment rate in Canada

Sources:
Ontario Ministry of Finance
Finance Canada
Statistics Canada
RBC Capital Markets Canadian and Provincial Fiscal Reference Tables
© Copyright (c) The Ottawa Citizen

The truth about Toronto’s budget
BY BOB PLAMONDON, OTTAWA CITIZEN APRIL 29, 2014

It’s easy for the country to look down on Toronto these days. We have always had the Maple Leafs to ridicule, but now it’s their politicians that have become a worldwide laughing stock.

When I asked a friend from Toronto what’s in the water at City Hall that provokes such inexplicable behaviour, he responded, “whatever it is, I hope they keep drinking it because it’s the only city in Canada that has controlled its spending.”

Really? Just because Mayor Rob Ford says he has saved Toronto taxpayers a billion dollars, that doesn’t mean it’s true. The mayor is known for many things, but truthfulness is not among his virtues.

But we should at least be curious about the claim to taxpayer savings. Indeed, property taxpayers across the country should want to know if such a Sisyphean feat is even possible.

To support his savings assertion, the mayor points to a briefing note from Toronto’s chief financial officer where he stated that to maintain tax increases below or in line with inflation, “the City implemented and approved a number of initiatives in the 2011 to 2014 operating budgets totalling $923.4 million.”

The gist of the analysis goes something like this: had Council done nothing over the past four years to respond to inflationary and other identified “budget pressures” then Toronto taxpayers would have been asked to cough up almost a billion dollars more, which works out to almost $900 per Toronto household.

We should be leery of “budget savings” and how they are estimated. Of course, standing up to budget pressures is one thing: executing actual spending cuts is another.

Better that we look at actual spending, which can be plainly seen in the 90-page Financial Information Return each Ontario municipality must file annually with the provincial government. Although audited results for 2013 likely won’t be available before midsummer, that still leaves us actual results for the first two years of council’s current term: 2011 and 2012.

According to Toronto’s Consolidated Statement of Operations, annual spending rose slightly in 2011 before declining in 2012. When both years are considered, actual spending was $156 million lower than would have been the case had council simply spent the $10.5 billion that the predecessor council disbursed in 2010. It’s not chump change, but it’s a big leap to get from there to a billion dollars in savings.

Beyond straight year-over-year comparisons of nominal spending, a more meaningful analysis would compare how Toronto council fared on spending relative to other Ontario municipalities. After all, municipalities across the province face similar financial pressures: be it the price of fuel, the cost of carrying debt, or rising wages. Equally important is how a city council responds to public and bureaucratic demands for new spending initiatives.

In 2011, the increase in spending for all other Ontario municipalities was 2.4 per cent, while Toronto’s spending was largely flat, edging up only 0.25 per cent. For 2012, spending for Ontario municipalities went up 2.8 per cent, while it went down in Toronto by 2.0 per cent — a significant 4.8 percentage point swing.

This suggests most Ontario municipalities allowed spending to rise with inflation before adding new programs and initiatives into the mix. In Toronto, they not only unearthed sufficient savings to offset inflation, but resisted the urge to find new ways to spend taxpayer dollars.

If Toronto had followed the pattern of other Ontario municipalities, it would have spent $222 million more in 2011 and $735 million more in 2012. That’s a cumulative total of $957 million over the first two years of a mandate.

It is not much of a stretch to think that over four years, the total could well exceed $2 billion, which is the equivalent of about $1,800 per Toronto household (in reality, the savings would be spread over different classes of taxpayers and users of city services). That’s double the “savings” that Toronto’s CFO reported in his memo to council.

Evidence of a decline in spending is also seen from the 4.9-per-cent decrease in the number of full-time staff in Toronto over the years 2011 and 2012. Elsewhere across the province, municipalities saw a 4.3 per cent increase in full time employees.

It could well be that Toronto’s predecessor council had injected fat into the system and that the city was ripe for spending cuts. Indeed, over the period 2006-2010, Toronto’s spending increased by 21.3 per cent while the provincial average came in at 17.3 per cent. Of course, getting Toronto under the provincial average on spending hikes was what voters had in mind when casting ballots in the 2010 election.

We can leave it to the residents of Toronto to assess the net impact — social and economic — of council’s spending decisions. But there is not much doubt that spending was curtailed in Toronto in ways that other Ontario cities were unable to emulate.

Now if the Gong Show that is Toronto City Council can control spending, just imagine what other cities could achieve with equal determination and without all the distractions.

Bob Plamondon FCPA is an author and consultant with extensive experience in municipal finance and budgeting.



Op-Ed: Flaherty makes prudence a virtue
BY BOB PLAMONDON, OTTAWA CITIZEN FEBRUARY 11, 2014 6:02 PM


Some will call Jim Flaherty’s 10th federal budget boring, uninspired, tepid. I call it a testament to responsible financial management. If budget making were an Olympic event, and the judge was named Prudence, Flaherty would get a gold medal.


What’s clear from a read of successive budget documents is the government has a plan and its targets are being met. So why lurch from one scheme to another just for the sake of optics? Many a finance minister has caused more harm than good by veering off course.

Of course it is hard for politicians to resist grand plans and big headlines. But just as parents instruct their teens to maintain virtue by saying no, Jim Flaherty has maintained our collective virtue by resisting the urge to spend and borrow.

Jim Flaherty’s 10th budget contained no big news, offered no dramatic shift in policy, and will cause not even a ripple on the stock markets. The opposition will claim it’s a do-nothing budget, squeezed into the Olympic calendar by a finance minister who is beyond his best-before date.

But this belies the fact our debt-to-GDP ratio is falling; our inflation rate and prime lending rates are at historic lows; jobs are being created and our unemployment rate, better than most of our peers, is below our 30-year average.

In this context Flaherty offers no major spending initiatives and no hikes in taxes (unless you are a smoker). As a consequence, even with modest economic growth, by or before 2021, the federal debt will shrink to about 25 per cent of the size of our economy, a level we have not seen since the very early days of Prime Minister Pierre Trudeau.

The announced spending measures are notable, not by the length of the list, but by the paucity in amount. In a $260-billion budget rarely does the highlight document, the Budget in Brief, make room for items such an $11-million investment over two years to strengthen the Labour Market Opinion program. You get the sense that small potatoes like this made the list because there is not that much else to say. Some of the larger ticket items, such as the $1.5-billion Canada First Research Excellence Fund, are 10-year investments, barely denting the federal treasury before the Conservatives next go to the polls.

Flaherty reports that, absent the government needing to use the $3-billion contingency reserve, the government’s book will be balanced in 2014-15 with $100 million to spare. In this the political test of the budget has been met. It is the sort of budget on which a conservative-minded finance minister could easily declare victory and move on, if he so chooses.

More revealing about Flaherty’s future was an interview this past Sunday with Chris Hall of CBC News where the finance minister talked about his ability to persuade the prime minister to accept his point of view, and how other members of cabinet were surprised at the extent to which he engages in debate with Harper at the cabinet table. This speaks to the clout that a finance minister needs to do his job, and a prime minister who is prepared to compromise, even when political benefits are not immediate. We get the sense watching the finance minister yesterday that he is very much at peace with the job he has done.

Short of a few wonky and unexplained initiatives that reflect a weak belief in the forces of competition and free enterprise (price controls on cell phones and cross-border price discrimination, a fact of life within Canada where the price of beer and milk varies dramatically across provincial borders), this budget will bolster Flaherty’s conservative credentials as a prudent manager of the government accounts.

It is the steady downward track on government debt that is the hallmark of this and his recent federal budgets. Indeed, outside of a recession and a temporary dip in revenues, it is unconscionable that the government, on our behalf, would run a structural deficit. The evidence is now clear that within the existing taxation envelope the government has the capacity to balance the books, just as it did before the 2008 economic crisis hit us hard. Those who want to spend more can always do so responsibly, provided they are prepared to increase taxes and take the ensuing political heat.

When we face the burden of an aging population, a time when we should be recording substantial surpluses as a matter of fundamental justice to Canada’s youth, Flaherty has made the responsible choices we need. We could be tempted to look for the next big program and spending scheme from government, or decide, as Flaherty has done, that prudence has its virtue.

Bob Plamondon is the author of Blue Thunder: The Truth About Conservatives from Macdonald to Harper. Twitter.com/plamondontweet
© Copyright (c) The Ottawa Citizen

Brown, Macdonald and Confederation

BY BOB PLAMONDON, OTTAWA CITIZEN JANUARY 17, 2014

I have no quarrel with John Boyko when he asserted in a recent Citizen opinion article that George Brown was among the more indispensable Fathers of Confederation. But we risk misunderstanding the nature of Confederation, and the nation as we know it today, unless we appreciate the motivations of Brown and others involved in this remarkable undertaking. To Brown, Confederation was more divorce than marriage.

In 1840, when the British Parliament passed the Act enabling the Union of Canada in 1840, an equal number of seats were assigned in Parliament to Canada East and Canada West. That became a problem for Brown when the 1851 census revealed that Canada West had grown in size and was then more populous than Canada East. Brown, who was anti-Catholic and anti-French, was an advocate of proportional representation as a means of diminishing French power.

Macdonald felt that representation by population would divide Canada and abrogate the deal that had been struck to form the 1840 Union. Maintaining that union, including its bilingual provisions and its connection with Great Britain, was essential to Macdonald.

George Brown sought a Conservative coalition that, in part, stood for the end of French-Canadian strength in the legislature. Macdonald was clear that his goal was to unite all the peoples of Canada, regardless of language or religion.

When George Brown attacked the notion of religious schools, Macdonald defended the historical rights of French-Canadian Roman Catholics. When the Separate School Bill passed in 1855, George Brown called it French-Canadian tyranny, and reaffirmed his commitment to representation by population.

Macdonald believed that any attempt to assimilate or dominate the French was pointless and ignored reality: “(We) must make friends with the French, without sacrificing the status of his race or religion or language (we) must respect their nationality. Treat them as a nation and they will act as a free people generally do — generously. Call them a faction and they become factious.” To Brown and his ilk, Macdonald had sold his soul for the sake of power.

So Brown sought to remake the country. He introduced a motion to form a committee that would examine alternative forms of federalism. Macdonald was opposed. Brown would have been happy with a mini Confederation of Canada East and Canada West, but Macdonald, who was a relatively late convert to Confederation, determined that the Atlantic Provinces would join in the pact.

Within Canada West and Canada East, the Confederation debate and resulting resolutions drew generally positive conclusions, but for different reasons. In Canada East, George Brown triumphantly declared, “constitution adopted — a most credible document — a complete reform of all the abuses and injustices we have complained of. Is it not wonderful? French-Canadianism is entirely extinguished.”

Brown’s newspaper, the Globe, elaborated: “We desire local self-government in order that the separate nationalities of which the population is composed may not quarrel. We desire at the same time a strong central authority. Is there anything incompatible in these two things?”

In Canada East, Quebecers viewed Confederation as a framework that would allow them to control their own destiny. Editors at La Minerve, a newspaper closely aligned with the Tories, proclaimed, “As a distinct and separate nationality, we form a state within a state. We enjoy the full exercise of our rights, and the formal recognition of our national independence … In giving ourselves a complete government we affirm our existence as a separate nationality.”

In addition to being knighted at the time of Confederation, Macdonald was chosen by Queen Victoria, in advance of an election, to be Canada’s first prime minister. He was, of course, the logical choice. He had carried the day on matters of vision with abundant political skill. And his peers had chosen him to chair the pivotal London Conference. This latter choice was the test the Queen used to identify the man who possessed the confidence of a Parliament that did not yet exist. Being chosen prime minister before Canada’s first election gave Macdonald and his colleagues an enormous advantage that they did not fail to exploit.

Macdonald and his Liberal-Conservative party took 100 of the 180 seats in Canada’s first election. George Brown, unofficial leader of the Liberal party, lost in his constituency.

Op-Ed: How Ottawa pays for its big plans
OTTAWA CITIZEN January 2, 2014
By most measures, the City of Ottawa is in a strong financial position. It is not exactly pay as you go, but our assets are high and our debt is low.
For this we can thank conscientious leadership that goes back to the days before the 2001 amalgamation of 12 governments. Mayors Bob Chiarelli, Larry O’Brien and now Jim Watson have responsibly followed suit.

According to Ottawa’s 2013 Financial Information Return, our long-term liabilities work out to $4,702 per household. That puts us in better shape than Toronto, but behind the three next-largest, single-tier cities in Ontario.

The cost of servicing the debt, at only $435 per household, is minor when compared with the $30,475 Ottawa has on its books for tangible capital assets and construction works-in-progress.

Put another way, every Ottawa resident has a $30,475 stake in the roads we drive on, the Transitway we take to work, the sewers in the ground, the rinks where our children play hockey and even city hall. Our mortgage against our assets, at $4,702 per household, is a scant 13.3 per cent of their net book value.

I doubt there are many property owners in their 80s who would be keen to see their current tax bill go up to pay for transit system improvements we will be using for the next 50 years. Borrowing for major capital improvements is an equitable form of “user pay.” That’s why there is nothing inherently wrong with borrowing for long-term capital assets so long as the carrying costs are affordable.

The virtue of our low debt-to-asset ratio legacy is not something we should surrender without a compelling reason. Is light rail that reason? And will borrowing for light rail put us in a vulnerable financial position?

The first question to ask is does Ottawa have the legal capacity to borrow what’s needed for light rail and other capital projects? Provincial rules cap municipal debt servicing charges at 25 per cent of a city’s own-source revenues. By this measure, Ottawa’s debt is at 40 per cent of its maximum, which leaves statutory room to borrow a whopping $5 billion. But maxing out the city’s credit card is far from a desirable outcome.

Getting the light-rail central-core line ready for its first passenger will cost $2.13 billion. Of this, $1.2 billion will be covered by federal and municipal grants, leaving $930 million, plus any extras that arise, to Ottawa taxpayers to fund.

The Rideau Transit Group, the consortium that will build and maintain the light-rail system, is financing the first $300 million. But their terms for their 30-year loan are steep.

The city admits it could borrow these funds at 3.82 per cent, but prefer to pay the consortium 6.32 per cent, presumably so we could withhold loan payments if we determine they are in violation of contract terms. This premium interest rate alone costs us a hefty $7.5 million in the initial years of the loan. If the contract goes bad, the ability to withhold payments may prove to be prescient, but it is evidence of skepticism on the city’s part towards its contractor of choice and a considerable burden on taxpayers.

City staff say the remaining $630 million will be financed by federal and provincial gas taxes, development charges and transit taxes. While it is true that these sources are sufficient to carry the residual debt, this is not the complete story.

Gas taxes and development charges are not necessarily dedicated or incremental to our current light-rail project. By dedicating these funds just to light rail it is not clear if other pressing capital projects will be neglected — for roads, bridges, or even the replacement of buses — or whether the city will have to turn to property taxpayers to carry these other priorities. We frequently hear about a massive infrastructure deficit in the municipal sector, so it is unlikely we can avoid investments for very long.

When council approved the light-rail project, they added $584 million in debt authority. The interest on that debt alone is close to $30 million per year, which represents more than a 2.5 per cent increase in property taxes. By the city’s calculations, its debt servicing charges over the coming 20 years will more than double, from six per cent of its own-source revenues to over 14 per cent.

That does not mean the light-rail project is not the best option for the city, something a business case would help to prove. Unfortunately a proper business case was never prepared so we are operating somewhat in the dark.

Regardless, council needs a long-range financial plan — something last tabled at city hall in 2006 when Bob Chiarelli was mayor — to assess the city’s ability to sustain a comprehensive capital program.

My hunch is that to maintain our hard assets and deliver light rail — not just in the city core, but to the suburbs — the city will need to reduce the portion of its budget dedicated to operating costs. Whether it’s a more efficient government, contracting out, or a cut in services, something will have to give. Or, taxes can simply go up.

That’s a discussion we should start having today rather than in another decade when our assets are deteriorating and our debt load is rising.
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