Canada's Weak Employment Market

Now that Stephen Harper's long-serving Finance Minister, Jim Flaherty, has resigned, it's time to take a look at how Canada's economy is really doing, particularly on the employment front since this is where the Harper government really likes to promote its accomplishments through those nauseating Economic Action Plan promos that have cost Canadian taxpayers tens of millions of dollars.

Let's open by looking at what has happened to Canada's unemployment rate since 2006:

While the job situation in Canada has improved, the jobless rate is still elevated compared to pre-Great Recession levels.  

A policy brief by the Canadian Chamber of Commerce looked at the performance of Canada's labour market in 2013 and found the following:

1.) In 2013, net new job positions totalled only 99,000, down from 307,900 in 2012.  This works out to 8,250 net new jobs per month in 2013 compared to 25,658 per month in 2012, a decline of 17,408 jobs per month or 67.8 percent.

2.) The private sector created 120,500 net new jobs in 2013 and public sector payrolls dropped by 25,600.

3.) Of the net new jobs created in 2013, 95 percent were part-time jobs in contrast to 2012 where all of the net new jobs created were full-time jobs.  This is of great concern because it means that many Canadian workers are underemployed.

4.) Nearly 70 percent of the net new jobs were created in one province and more than 86,500 or 87.4 percent of the net new jobs created were in one industry, the services-producing sector which includes professional, scientific and technical services.  This sector includes legal services, surveying and mapping, design, scientific research and development and advertising among others.

5.) Job areas with significant net losses included educational services which saw a net decline of 39,600 jobs and public administration which saw a net decline of 29,600 jobs.

6.) The average duration of unemployment remained at elevated levels in 2013 compared to pre-Great Recession levels.  In 2013, the average length of unemployment was 20.7 consecutive weeks compared to only 15 weeks prior to the 2008 recession and down only slightly from the  post-recession peak of just under 23 weeks in 2011.

Here is a chart showing the year-over-year changes in employment by industry for 2013:

Here's how the provinces performed:

Of the 99,000 net new jobs, 67,900 or 68.6 percent of the total were created in Alberta.  Canada's unemployment situation would look far worse if Saskatchewan and Alberta statistics were not included.  With Alberta and Saskatchewan excluded, Canada would have only created 18,600 net new jobs, hardly a shining example of federal fiscal success.  Canada's unemployment rate would also jump substantially to somewhere in the mid-eight percent range rather than the headline 7.2 percent rate.

Lastly, some provinces are still experiencing very high levels of labour market slackness which is defined as the number of unemployed people for every job vacancy.  Here is a graph showing how difficult the situation still is for unemployed workers in Eastern Canada:

In Alberta and Saskatchewan, there were only 2.2 and 2.4 unemployed workers respectively for every job opening compared to 14.3 in Newfoundland and Labrador, 9.4 in Nova Scotia, 11.1 in New Brunswick and a whopping 15.0 in Prince Edward Island.  This explains the great exodus to the west from Maritime Canada.

According to the Bank of Canada, a recent survey of businesses found that 53 percent of businesses expected to add employees during 2014 with 36 percent planning to keep the employment level status quo and 11 percent decreasing their level of unemployment.  With Canada's number of potential workers growing through both immigration and maturing of the post-baby boomer generation, it will be interesting to see whether the economy can create enough new jobs to push Canada's unemployment rate down to its pre-Great Recession level of 6 percent anytime soon.  In any case, we can clearly see that the Harper government's bragging about their economic prowess may be a bit overstated, particularly given the weakness in Canada's labour market in 2013.

Jim Flaherty's Budgets - The Best Laid Plans

Now that Mr. Flaherty is about to deliver his ninth budget (if you include both 2011 budgets), I thought it was prudent to take a look back at the accuracy of his budgets past, particularly his first, way back when Canada had experienced a string of budget surpluses.

Mr. Flaherty's first budget was released way back on May 2nd, 2006 for fiscal 2006 when the Great Recession was a concept not yet germinated.  The Canadian government, thanks to years of economic growth and the steady hand of Paul Martin, was coming off a series of budget surpluses, estimated at $13.4 billion in 2005 - 2006 and projected to be $15.0 billion in 2006 - 2007 and $16.4 billion in 2007 - 2008.  Nominal GDP growth was 5.1 percent in 2005 and was projected at a whopping 6.0 percent in 2006, slowing to "only" 4.6 percent in 2007.  Ah, those were the days, weren't they?  Interestingly, the economy was expected to grow at a very healthy rate even though short-term interest rates on three month treasury bills were projected to hit 4.1 percent in 2007, up from 2.7 percent in 2005.  Doesn't it seem odd that now, with interest rates at near zero levels, the economy cannot muster up growth rates that are better than lukewarm at best?

Here is a graph showing Mr. Flaherty's 2006 projections for Canada's debt-to-GDP ratio:

Mr. Flaherty proposed debt reductions (i.e. paying down the federal debt) of $3 billion per year between 2006 and fiscal 2014 - 2015 and, with this in mind, the Harper government projected that the debt-to-GDP ratio would be reduced to 25 percent by 2013 - 2014, down from 38.3 percent in fiscal 2004 - 2005, thanks to those nasty Liberals.  

Now, let's look at Mr. Flaherty's most recent budget, delivered on March 29, 2012.  In this budget, Economic Action Plan Part Umpteen, Mr. Flaherty now proposed that the deficit would continue to decline to $1.3 billion in fiscal 2014 - 2015.  The federal debt was projected to decline to 28.5 percent of GDP in 2016 - 2017, still well above the 25 percent mark proposed for fiscal 2013 - 2014.  

Here is a graph showing what really happened to Canada's federal debt-to-GDP ratio over the intervening years, keeping in mind that this is the level of net debt or total liabilities net of financial assets of all levels of government:

Here is a bar graph showing the past and projected budgetary balances from fiscal 2011 - 2012 to 2016 - 2017:

So much for paying off the debt $3 billion at a time!  Keep in mind that in 2008 - 2009, the debt was $516.3 billion and rose to $641.8 billion in 2011 - 2012, an increase of 24.3 percent in four years as shown on this graph:

I did stumble on this interesting graphic from Mr. Flaherty's first budget.  It shows the average length of Canadian economic expansions since the end of World War II:

As noted on the graph, since 1947, the average length of time that the Canadian economy has expanded after two consecutive quarters of contraction is 31 quarters or just under eight years.  If you exclude the lengthy expansions in the period between 1958 and 1980, an economic anomaly thanks to baby boomers and cheap energy, the average length of economic expansions looks far different.  In fact, the average length of time that the Canadian economy expands after a recession drops to just over 21 quarters or just over five years.  According to the National Bureau of Economic Research, the latest recession ended in June 2009, nearly four years ago.  If history repeats itself, we could well have a recession in the next year and a half, an issue that will once again throw all of Mr. Flaherty's fiscal dreams into the round bin.

Some Really Scary Numbers

This evening, Prince Edward Island Provincial Treasurer Wes Sheridan appeared on CBC's Compass to discuss the Federal Budget released late this afternoon by Finance Minister Jim Flaherty. In an interview with Bruce Rainnie, Minister Sheridan discussed the financial state of our Island's economy. He stated that for the 2009-2010 fiscal year, the Provincial Treasury was running a deficit of $85 million. As well, Minister Sheridan informed us that transfer payments from the Federal Government that were expected to grow from $340 million this fiscal year to $356 million have, in fact, been capped at $330 million this fiscal year resulting in an additional shortfall of $26 million. When the deficit and the transfer payment shortfall are added, our Island will be running a deficit of $111 million for the 2009 - 2010 fiscal year.

Prince Edward Island had an estimated population of 139,400 in 2008. The Provincial Treasury's deficit of $111 million is a deficit of nearly $800 for every man, woman and child on the Island. Every week during the last fiscal year, PEI's debt grew by over $2 million. As well, according to the CFIB, by the end of this fiscal year, PEI's provincial debt will reach $1.6 billion. That's a provincial debt of $11,500 for every man, woman and child on the Island. Yes, that includes the babies born today at Queen Elizabeth Hospital in Charlottetown!

Unfortunately, Minister Sheridan and the Provincial Treasury find themselves between a rock and a hard place when it comes to balancing the budget. Islanders already pay the second highest marginal income tax rate (at most income levels) in Canada. Since our personal income taxes are no longer linked to Federal tax rates (for example our Dividend Tax Credit is lower), we are actually taxed more onerously than we think. At an effective rate of 10.5%, we already pay the highest sales tax of any jurisdiction in Canada. As a consequence, Minister Sheridan's ability to balance the budget by increasing either personal or sales taxes is severely limited. Minister Sheridan's ability to cut spending by freezing or rolling back public sector pay is also severely restricted. Memories run deeply on this Island and the 7.5% public sector pay cut dished out by the previous Liberal administration nearly 15 years ago is still very fresh in the minds of the electorate. Most importantly, Prince Edward Island's next provincial election is scheduled to be held on October 3rd, 2011. It would be political suicide to raise taxes or cut/freeze public sector pay at this juncture.

What is particularly frightening is the looming spectre of further cuts to transfer payments and increases in interest rates. In today's budget, Minister Flaherty projects that the federal deficit for 2010 - 2011 will be $49.2 billion and this is projected to decrease markedly to $27.6 billion for fiscal 2011 -2012. How this drop of $21.6 billion in one year will be achieved is uncertain. Deep spending cuts will have to be made and these cuts may include further cuts to transfer payments. If the economic expansion stalls and the economy does not grow as projected (and in light of the huge deficit/debt issues with our major trading partner to the south that is not a remote possibility), all bets are off. Another wildcard in this scenario are interest rates. If, as expected, interest rates increase by as little as 2 to 4 percentage points, all bets are off for deficit projections at both the federal and provincial levels.

After reading Canada's Parliamentary Budget Officer Kevin Page's fascinating Fiscal Sustainability Report dated February 18th, 2010, I am more certain than ever that Prince Edward Island, in particular, is now in a position of having a structural deficit. No matter how much the economy grows, the government will be unable to balance its books. This is particularly frightening when one takes into account our aging demographic and our growing need for social programs to assist the elderly.

It is most unfortunate that our elected officials expend so much energy placating the public over the short term so they can be re-elected and so little time looking at what impact their actions have on the more distant future.

References:

Report from Canada's Parliamentary Budget Officer Kevin Page

http://www2.parl.gc.ca/Sites/PBO-DPB/documents/FSR_2010.pdf