It's The Economy, Stupid

My column yesterday reviewed highlights from a report published 15 years ago warning of grave consequences if the province’s demographic challenges were not addressed.    Most of the reports demographic predictions were right on the money – but the fiscal consequences that were hinted at in the report have not really manifested themselves.  The NB government does have a large fiscal deficit but I would argue most of that – to now – has been a cyclical deficit not a structural one.

It seems to me that predicting the future is extremely hard if not impossible.   The report’s authors in 1995 were basing their future predictions on past performance of the economy.  Remember in 1995 we were still trying to dig out of huge budget deficits and we had faced fairly hard recessions every 7-8 years in the previous three decades.  I am not sure any economist in 1995 was predicting Canada was at the start of the longest sustained period of economic growth in the past 140 years –  1993 to 2009.   I don’t think any economist was predicting Alberta would have 15 years of China-style economic growth from its oil and gas boom.  Further, in 1995 Saskatchewan was an economic basket case – and it has gone through an enormous period of economic growth due to its resources – oil, potash, etc.    And even Newfoundland, though a small province, was crippled under a huge debt/GDP ratio and the largest per capita equalization payments in the country.  Now the province is equalization free.

I think it is fair to say in 1995 we didn’t think that this huge resources boom would drive up the Canadian dollar (one of the factors) and put the squeeze on Ontario’s manufacturing sector (our forestry sector as well got hit hard).  There has been a bit of Alberta’s gain is Ontario’s drain in this period but Ontario has done quite well on many measures – it just hasn’t been nearly as strong as the two main oil provinces – SK and AB.

So that is why I alway couch my future predictions because there are too many unknown variables.  In 1995, the Internet was just starting to crank up.  David Foot’s demographic crisis across Canada was mitigated somewhat in Ontario, Alberta, Quebec and BC with a huge increase in immigration.  And we had the aforementioned resources boom.

But if we were to write the demographic report now (redo the 1995 report projected to 2026) the numbers would look even more scary.  The median age of the population is going to increase to over 50 years old (from 24 years old in the mid 1970s).    Health care costs will consume 90% of the discretionary budget (it can’t get to that, however).    It’s impossible to predict the broader fiscal implications of this but a rudimentary assessment would indicate New Brunswick will need dramatic increases in federal transfer payments.

But, maybe, we will get a 1993-2009 style economic growth boom.  Maybe oil will go to over $200/barrel and royalty revenues will drive the economy (Dutch disease).  Maybe Ontario will be able to adjust to the high value of the Canadian dollar and build an export-based IT and services economy (because a struggling Ontario could drag down the rest of Canada even with $200/barrel oil).  It is likely that the resources boom will continue for the foreseeable future although I believe there are structural reasons why oil will not get to $200 anytime soon (not the least of which is the price of natural gas which has decoupled from oil in recent years).

But are we willing to take that chance?  Are we willing to roll the dice and hope that economic growth elsewhere will fund the consequences of New Brunswick’s demographic crisis?

I prefer a New Brunswick-based solution that leads to significant economic growth here, the creation of a new class of export-focused entrepreneurs, the attraction of global firms and an aggressive strategy to fuel the workforce and population needs that will come with that economic growth.

We could be stuck in that paradigm where we think that coming out of this recession we will go right back to the growth of the late 1990s and much of the 2000s.  Just like those in 1995 were using 1982-1993 as their reference period.   But as the U.S. Treasury Secretary said recently, it is likely going to be a decade or more before the U.S. finally sorts out the effects of its housing collapse.  That right there would auger against any kind of U.S. boom that would be felt in Canada – as much of our recent boom was dependent on U.S. growth.

In the end, New Brunswick is going to always be somewhat at the mercy of global forces.  But if we build a stronger foundational economy here – it would be better for the long term.