Goodbye, Fat City
The global debt crisis has us in its grip — and won’t soon let go
BY JAMES BAGNALL, OTTAWA CITIZEN
SEPTEMBER 27, 2013
Finance Minister Jim Flaherty made it seem so straightforward 18 months ago when he tabled his eighth budget. To help trim federal spending, he said the Conservatives would eliminate 19,200 federal government jobs across the country by 2015 — about five per cent of the total workforce.
Flaherty’s colleague, Foreign Affairs Minister John Baird, suggested the impact on the National Capital Region would be relatively gentle. Just 7,700 federal positions would be cut here, including 4,800 layoffs, he asserted in the wake of the budget — roughly in line with the region’s 40 per cent share of the government’s workforce.
Turns out he was the supreme optimist. The most recent data from Statistics Canada reveal that Ottawa-Gatineau has suffered a loss of nearly 17,000 federal government jobs since Flaherty’s 2012 budget — representing 86 per cent of the government’s downsizing.
Not only does that far exceed original Conservative estimates, the drop is just short — by a few hundred — of what the National Capital Region experienced after former Liberal finance minister Paul Martin’s “hell or high water” budget in 1995.
In relative terms, Martin’s cuts were more dramatic — a 19-per-cent slide in government employment locally compared to an 11-per-cent drop so far since Flaherty’s 2012 budget.
But the Conservatives aren’t done yet. While the initial rush of layoff notices to civil servants has slowed, the government is continuing with efforts to streamline operations — notably in the area of information technology.
This is expected not only to eliminate more federal government jobs but also to reduce the need to buy IT services from the private sector.
Indeed, it’s little wonder that the Conference Board of Canada on Friday ranked the National Capital Region 12th in growth prospects this year — ahead of only Victoria among Canada’s 13 largest cities. The Ottawa-based think tank also predicted the National Capital Region’s economy would be the most anemic within this group — though tied with Quebec City — during next four years. The Conference Board predicted Ottawa-Gatineau’s $63-billion annual economy would improve no more than 0.8 per cent this year after inflation — and that was revised downward from its 1.3 per cent projection published in the spring. Ottawa-Gatineau’s gross domestic product is expected to improve just 2.1 per cent annually until 2017.
The National Capital Region is proving uniquely vulnerable in the aftermath of the very unusual 2008-09 economic recession.
Unlike most downturns — which are triggered by escalating interest rates — the latest one erupted from a crisis in the global banking sector, brought on by a collapse in housing.
The U.S., the U.K. and other developed nations shovelled hundreds of billions of dollars into shoring up their financial institutions.
Then, to preserve confidence in their economies, they allowed government spending deficits to balloon, adding trillions of dollars to the national debt. Governments are now faced with working this down.
Although the Harper government never had to support the country’s well-run banks, it did run up more than $150 billion in new debt to help offset the collapse in private-sector spending.
In the past three years, Flaherty has moved with relative pace to plug the leakage.
After swelling to $55 billion in fiscal 2010 (ended March 31), the budget gap is expected to tumble this year below $19 million — about 1 per cent of Canada’s GDP. RBC Capital Markets of Toronto predicts the government will generate surpluses again in another two years.
The effort to eliminate the deficit has naturally squeezed federal departments and agencies. But with the federal budget balance approaching break even, attention is turning to the provinces — which control funding for schools and hospitals. The latter employed 139,000 last month in Ottawa-Gatineau, about 20 per cent of the region’s workforce. That’s roughly the same proportion as the federal government, though some workers in health and education are employed by private firms.
Ontario and Quebec are carrying the heaviest debt burden among the provinces — both absolutely and in relative terms. Quebec’s net debt is nearly 50 per cent of GDP while Ontario’s is approaching 40 per cent, according to RBC. However, Quebec at least appears to be getting a handle on its current spending, with a break even result expected this year. Ontario, in sharp contrast, is expected to rack up an $11.7-billion deficit over the same period, with no surplus in sight until at least 2018.
It’s not clear that provincial spending reductions, when they come, would bite into employment rolls at schools and hospitals. If they do, it would not likely be to the same extent as federal downsizing hurt the public service. Nevertheless, with four workers in 10 in the Ottawa area depending directly on government paycheques, the region is unlikely soon to return to its former status as Fat City.
Consider the contrast with Edmonton: Though it is a provincial capital, just 22 per cent of its workforce is concentrated in government, education and health. The city obviously has the considerable advantage — and risks — of an oil economy. Indeed, earlier this spring, Edmonton pulled ahead of Ottawa-Gatineau for the first time in jobs, if not in population. Calgary first overtook the region in 2002, during the depths of the tech crash that hurt so many Ottawa firms. But as recently as three years ago, Calgary’s employment base was still barely 1 per cent bigger than ours. Now the gap is 11 per cent in Calgary’s favour.
Ottawa-Gatineau has slid from fourth-largest job market in the country to sixth.
In the immediate wake of the 2008-09 economic recession the federal government continued adding staff while Alberta’s energy industry retrenched. In some respects, the recent and rapid retrenchment in the region is just the unwinding of an artificial boost in government hiring. Both nationally and locally, federal government employment levels are back to where they were in the fall of 2008, just prior to the recession. The portion of federal civil servants that worked in the Ottawa area last month was about 37 per cent of the total, down several percentage points from when Flaherty got serious about trimming jobs. Nevertheless, that’s still far above the concentration experienced in the mid-1990s, when just 30 per cent of the federal government’s workforce was employed in Ottawa-Gatineau.
Given the knock-on effects of a shrinking public service on housing, retailing and other sectors, the surprise is that the Conference Board of Canada expects Ottawa-Gatineau to grow at all. The board points out that several major construction projects — from light-rail transit to the Lansdowne Park redevelopment — are helping to offset a decline in new housing starts. The research group also expects retail sales to improve 3.4 per cent next year to $18.1 billion.
This may be optimistic, depending on the spending patterns of current and former government employees. There’s little question that Ottawa-Gatineau’s retailers have been hit hard. Second only to manufacturers, they have lost the most jobs in percentage terms since before the economic recession. Part of retailers’ pain has been caused by the methods used to trim government workers — an exercise that involves multiple stages of swapping positions and competing for surplus jobs, spread over many months.
The number of federal workers warned about the possibility of losing their jobs far exceeded the actual job reductions. The result, not surprisingly, was a reluctance to spend money in local shops. Nevertheless, the worst of the downsizing is likely over, which should eventually reduce the overhang.
A second reason for caution about the strength of retailing has to do with the aging of the public service — although government workers enjoy indexed pensions, people at or near retirement tend not to be big spenders. They are too busy saving. And the younger government employees are faced with escalating contribution requirements as their employer shifts more of the responsibility for funding pensions to workers. By 2015, many employees will be contributing 7.05 per cent of the first $51,100 of their annual salary towards pensions, compared to 6.3 per cent today and less than 5 per cent in 2008.
There’s room for some optimism in the National Capital Region which continues to rank among the country’s most livable and affordable urban areas. Among other things, it is benefiting from a rural to urban shift, though to a lesser extent than is the case with the country’s other large cities. Since the beginning of the recession Canada’s 33 largest urban areas have added 730,000 employees while the rest of the country has lost 427,000. Ottawa-Gatineau’s contribution to the plus side was a modest 7,800, but positive nevertheless.
Unfortunately, the size of our workforce, which includes people looking for jobs, grew even faster which is why our jobless rate is up. The same pattern was true of Canada’s other big cities but it was more pronounced in Ottawa-Gatineau. The region’s unemployment rate last month touched 6.9 per cent (when adjusted for seasonal influences). Not only is that sharply higher than the 5.1 per cent rate posted five years earlier, it came close to matching the national jobless rate for the first time since the tech recession nearly a decade ago.
This is why the region requires some economic catalysts, especially from high-tech. Despite the industry’s recent troubles — and the likely impact of more BlackBerry layoffs — it still accounts for 7 per cent of the region’s workforce, about the same ratio as during the mid-1990s. There is a base of talent here capable of considerable growth under the right circumstances. Whether this will happen is simply unknowable. But whatever success tech firms enjoy, the vast bulk of their revenues will be generated through sales from outside the region, primarily exports. This is wealth that flows directly back to the region — in much the same manner that oil exports wash through Edmonton and Calgary.
The city — indeed the country — remains vulnerable to any reversal in economic growth globally. Bank of Canada governor Stephen Poloz noted recently that the recession “delivered a direct, sharp blow to Canadian business” — especially in the export sector, the only component of the country’s gross domestic product that remains below where it was when the recession started in 2008. Poloz added that “it was a good thing households had the capacity to expand their spending” to make up for the collapse in business investment and exports. His point was that because Canadians had earlier been prudent, they had room in their budgets to accommodate extra borrowing — and that this saved the economy. The downside, of course, is that Canadians are carrying near-record high debt as a percentage of income. This ratio peaked at 25 per cent of income in 2009 according to TD Economics, and has since receded to just below 24 per cent.
“Canadian households remain highly leveraged,” wrote TD economist Leslie Preston, “and it will take quite some time for measures of leverage to return to historical norms.”
The amount of debt on Canadians’ personal books isn’t necessarily a problem if interest rates increase gradually and the global economic recovery continues, especially in the U.S. A survey of economists by the Economist Magazine suggests U.S. GDP this year will grow 1.6 per cent, about the same as Canada, and accelerate to 2.7 per cent next year (versus 2.3 per cent for Canada).
As for how quickly, or even if, interest rates rise, so much depends on the ability of central banks to unwind trillions of dollars in risky financial debt accumulated since the beginning of the recession. Some financial analysts, such as Harry Dent, author of The Great Crash Ahead, are convinced that the bursting of the debt bubble will produce an era of deflation and another stock market crash. Eric Sprott — the principal of Sprott Asset Management — has an equally dim view of central bankers’ strategies but believes the end result will be debilitating inflation, with only precious metals such as gold and silver holding their value. Assuming the central bankers do get it right — that is, they preside over a gradual reduction of debt and an increase in economic growth, the consensus is that we’ll get through this, albeit slowly.
There is, in fact, no precedent for what we’re about to witness. In this environment, a city economy such as Ottawa-Gatineau is not a bad place to be. Nor is it a bad thing to lose our status as Fat City — there’s enough resentment of Ottawa in the rest of the country as it is. Canada’s headquarters for administration shouldn’t rub it in.
jbagnall@ottawacitizen.com
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