The Federal Government and Ottawa’s Economy: The Sky is not Falling

At the February 2012 official opening of Invest Ottawa (the City’s economic development / investment attraction agency),  Mayor Jim Watson stated,

“One of my priorities . . . was to establish Invest Ottawa to help attract more investment and foster greater economic growth in our nation’s capital. . . Recent headlines surrounding public service job losses underscore the need to diversify our local economy, and Invest Ottawa is going to help us do just that. Invest Ottawa is a clear commitment to inspire more entrepreneurs to build our prosperity to meet the challenges of today and tomorrow.”  (Invest Ottawa opening Mayor Watson))

Later in the year, the Mayor further elaborated in his 2012 State of the Economy address on the challenges facing the City resulting from the federal government’s austerity measures. He stated that “in this new federal government dynamic, we have the most to lose but we also have the most to gain”. To prevent Ottawa from becoming “a shadow of its former self”, the Mayor added that “we can no longer depend on the federal government to shelter us from [economic] storms or drive our economy … instead, we will construct a new economic engine … an engine that is more diverse – that runs on more than just one industry” (2012 State of the Economy link). This doom and gloom shows up even the City’s Economic Development Strategy stating that the local economy is in peril as a result to the federal government’s budget cutbacks. 

Similar pessimism was expressed during the later years of the 1970s when the federal government significantly downsized by some 12,000 jobs which resulted in local predictions of Ottawa becoming a ghost town. This downsizing was not driven to reducing the budget deficit but more to political objectives to share the federal government pie by decentralizing government activities from the National Capital Region to other Canadian communities. The need for increased economic diversification was also expressed by Mayor Marion Dewar who pointed out in 1982 that local municipalities have been “aggressively pursuing a program of economic diversification since the late 1970s when the growth of the federal civil service was severely curtailed.  Interestingly, Mayor Dewar also pointed to the same future growth areas as did Mayor Watson did 30 years later – tourism / hospitality and entrepreneurship / advanced technology.

Between the two mayoralties was another significant period of federal government downsizing that occurred in the mid 1990s, Prime Minister Chrétien’s Liberal Government announced in 1995 that it was cutting 45,000 federal government jobs with 15,000 being eliminated with the National Capital Region over the next three years.

Indeed, one can go back over a 100 years to find another Ottawa Mayor expressing the need to reduce the reliance on the federal government by encouraging economic diversification. Approximately 50 years after Queen Victoria picked Ottawa as the capital of the United Province of Canada, Mayor James A. Ellis presented the following challenge to City Council:

“ I think the time has come when Ottawa must decide whether it is for all time to be simply the seat of Government and a Departmental City, or whether it not become also an industrial centre … with all these advantages [excellent rail facilities and unrivalled water power], I seen no reason why Ottawa should not become a great industrial centre” (City of Ottawa Council Minutes 1906). 

A century later, it seems that Ottawa has indeed remained a single industry government town.

Just how dependent is Ottawa’s economy and job growth on the federal government?

It is not that straight forward to come up with a single number of federal government jobs in the National Capital Region as different sources have different ways of counting public servants. According to the Treasury Board of Canada Secretariat, for example, the total population of the Federal Public Service (federal government departments/agencies “reporting” to Treasury Board) in the National Capital Region (NCR) was 108,433 representing  41.3% of the federal government total as determined by the Regional Pay System as of March 31, 2013. This total includes employees in Core Public Administration as defined under the Financial Administration Act)  and Separate Agencies such as the Canada Revenue Agency, Canadian Security Intelligence Service, National Capital Commission and National Research Council of Canada.  The number of jobs also include part-time and casual employees. The Federal Public Service however excludes Federal Business Enterprises that operate as commercial ‘for-profit’ corporations such as Canada Post Corporation, Atomic Energy Canada, Canada Mortgage and Housing Corporation and Via Rail Canada Inc. Canadian Forces members and RCMP Regular Force members are also excluded.

Statistics Canada once collected federal government employment and income data for metropolitan areas. The data represented a full census of all government departments and agencies – that is, the data were provided directly by departments and corresponded to ‘place-of-work’ employees. The data were collected for the month of September in each year and as such probably represents the best estimate of the number of federal government employees but the survey was terminated after 2011 due to budget cutbacks.  According to Statistics Canada, there were a total of 135,865 employees in the federal government in the Ottawa-Gatineau Census Metropolitan Area or CMA (similar in geography to the National Capital Region) accounting for 43% of the total for all CMAs in Canada in September 2011 (CANSIM Table 183-0003). This total includes members of the Canadian Armed Forces and RCMP but excludes Federal Business Enterprises. In 2011 total employment for Federal Business Enterprises was 102,319 for all of Canada. Assuming the same percentage share of 43%, Federal Business Enterprises could potentially add another 44,000 employees to Ottawa-Gatineau’s federal government job base resulting in a grand total of approximately 180,000 federal government employees in the National Capital Region in 2011.

Statistics Canada also collects employment related data by industry category through its often cited monthly labour force survey. However, unlike the previous Statistics Canada data source, the labour force data are based on sample survey of population or households as opposed to departmental employers. The labour survey is useful in that employment trends can be compared between different economic sectors and metropolitan areas.

Since the data are collected from sample surveys, they may display significant month to month fluctuations. To smooth out such variations due to small data sampling, Statistics Canada publishes city based data using moving three month averages. Employment numbers are published for the Public Administration industry sector which includes the federal government, including members of the Canadian Armed Forces but not Federal Business Enterprises, provincial and municipal government levels. Employment data can be obtained just for the federal government but only through special tabulations for a fee. Federal government employment numbers are often quoted in the local media. In terms of an annual average, there were 148,700 employees in Public Administration in the Ottawa-Gatineau CMA in 2013 compared to 165,300 in 2012, a level which remained fairly constant over the three year period from 2010 to 2012 (Source: Statistics Canada CANSIM Table 282-0111).  The federal government accounted or 131,500 or about 89% of the total Public Administration jobs in 2013 (based on media publications) For the first five months of 2014, federal government employment dropped to a low of 120,600 in March but then increased over the next two months to 125,800 in May.

Staying with the labour force survey data, the Public Administration sector accounted for 21.3% of the 2013 total employed labour force (annual average) living in the Ottawa-Gatineau CMA. The federal government represented about 18.9% of this total keeping in mind that the data exclude Federal Business Enterprises. This percentage would be approximately 25% if the latter agencies were included assuming similar proportional Ottawa-Gatineau share of total federal government employment.

2013 Emp Pie

With approximately one in four employed persons working for the federal government, Ottawa-Gatineau’s economy is indeed very specialized, a characteristic that is perhaps even more unique given its population size of about 1.1 million. The metropolitan area has a high concentration of public administration jobs as measured by its location quotient of 4.0 in 2013 meaning that the concentration of public sector jobs in Ottawa-Gatineau is four times the areas expected national share – the location quotient is often used by urban geographers to measure the concentration of an industry sector in a community by measuring its share of employment to the industry’s share of national total employment. Not only is Ottawa’s economy highly specialized in one industry sector it is also highly dependent on effectively just one company and one CEO, the Prime Minister of Canada.

In comparison, federal government workers made up ‘only’  14.1% of the total employment in the Greater Washington metropolitan area in 2013. Based on data analyzed by Richard Florida, the percentage goes up to 36% if indirect and induced employment resulting from multiplier effects in those industries that supply the government with goods and services are added. The percentage then climbs to 52% if ‘proximity jobs’ are included – jobs that locate in Washington to be close to key political decision makers – e.g. lobbyists, trade associations. Federal government peaked at 387,500 in the summer of 2010. The largest industry sector in Greater Washington in 2013 was also not the federal government but Professional, Scientific and Technical Services which accounted for 15% of total employment.

Federal government employees also spend a significant portion of their salaries and wages on goods and personal services from local businesses and merchants ranging from new homes to restaurants as well as on entertainment. This local consumer spending further supports jobs in population serving sectors like retail leading to a second round of income multiplier effects.

According to Statistics Canada, the total wages and salaries earned by the 135,865 federal government employees in September 2011 was $808 million. On an annualized basis, the total income earned by federal government employees represented 24% of the total income reported by all tax filers from Ottawa-Gatineau in 2011 (Source: Statistics Canada CANSIM Table 111-0041). This percentage would increase to approximately  32% if the estimated employees in Federal Government Enterprises are added in. In 2011, Ottawa-Gatineau had the highest median total family income of all CMAs at $93,440 according to personal income tax returns. The median total income for families living in the Ontario side of Ottawa-Gatineau was even higher at  $97,010.

The federal government as a business organization is also a huge consumer of goods and services.  According to Public Works and Government Services Canada (PWGSC), the Government of Canada purchases about $16 billion worth of goods and services every year. Based on its online data base of contracts awarded by PWGSC on behalf of federal departments and agencies, the department managed a total of approximately 32,500 contracts worth $9.5 billion in Fiscal Year 2013-14. Of the total number of contracts, 8,374 or 26.8% were awarded to suppliers with addresses in Ottawa-Gatineau which was the same as the region’s share of total contract values. It is important to note that an undetermined but significant amount of the $2.4 billion worth of contracts awarded to Ottawa-Gatineau suppliers would leak outside the metropolitan economy as many local suppliers function primarily as sales or service offices for companies / business operations located elsewhere. 

There are other examples of how important the federal government has been to the evolution of Ottawa as a major Canadian city. Ottawa has a rich diversity of arts and culture with institutions like the National Museums and the National Arts Centre, a diversity that typically is found in much larger urban centres. The presence of such institutions as well as agencies like the National Capital Commission with its support of festivals and management of federally owned lands and heritage buildings represent the foundation of the tourism industry in the region. Clearly, the role of Ottawa as the Nation’s Capital is the reason for the high quality of life that is critical for attracting skilled workers and for supporting technology firms and entrepreneurship. 

Another perspective of the dependency of the local economy on the federal government is measuring its overall contribution to the total market value of final goods and services produced in the metropolitan economy referred to by economists as the Gross Domestic Product (GDP). According to the Conference Board of Canada, the public administration sector accounts for 25% of Ottawa-Gatineau’s overall economy (Source: Conference Board of Canada Metropolitan Outlook 1 Spring 2012). It should be noted that this measure is a derived percentage based on econometric assumptions and methodology and likely underestimates the federal government’s real share of the metropolitan GDP. For example, the federal government fuelled almost 40% of the Washington DC metropolitan economy in 2010 but represented a significantly smaller share of total employment compared to Ottawa-Gatineau. If the ratio of Washington’s federal government shares of total employment to its GDP is applied to Ottawa-Gatineau, the federal government’s contribution to the Ottawa-Gatineau metropolitan GDP would be closer to 70%.

Federal Government Employment Historical Trends: Ottawa’s Not So Shrinking Public Service Sector

The following graph depicts changes in federal government employment in the Ottawa-Gatineau CMA / National Capital Region since 1990 based on the 3 different data sources and data collection methods. The impact of the federal government’s downsizing / deficit cutting measures in the 1990s is clearly reflected in the chart with employment declining steadily between 1992 and 1997/98. Federal government employment then increased relatively steadily for over the next 12 years until the most recent austerity measures. As noted earlier, federal government employment continued to increase even during the 2008/09 “Great Recession” as new major economic stimulus programs were being implemented. Federal jobs have then declined sharply after 2011 according to Statistic Canada’s Labour Force Survey and Treasury Board data. The first 5 months of 2014 show a levelling off and even a slight gain in public administration jobs from the Labour Force Survey.

The other notable observation is the deviation in trends that exists between the different sources especially with respect to the Labour Force Survey results for Public Administration. This deviation appears to be greater during more recent years compared to the 1990s decade and particularly acute during the Great Recession / Economic Action Plan years. On the other hand, the different trend lines display convergence during the downsizing years. Notwithstanding the different methods of data collection, the more dramatic surges in public sector jobs may be the result of short term contract or temporary hirings when new program expenditures are first being implemented. A more detailed comparison of the data sources would be needed but the graph does draw attention to the need to be cautious when interpreting  longer term trends and cycles using employment data from the Labour Force Survey.

FedGovEmp 3 sources

From the next chart, Public Administration’s share of total employment in Ottawa-Gatineau has remained between 19.4% (lowest point reached in 2001) and 24.0% (the highest percentage reached in 2010) since 1987. The shares did decline between 1992 and approximately 2000 which reflected the combination of federal government job cuts and a booming high technology sector. Subsequently, Ottawa-Gatineau’s employment supply experienced an increasing concentration in the public sector with the exception of a short-lived interlude during 2005 and 2006 and then again during the last two years with the current downsizing phase. The higher degree of concentration is the result, obviously, of the public administration sector generating jobs at a greater rate than the rest of Ottawa-Gatineau’s economy.

Public Administration’s 21.4% share of total employment in 2013 has also dropped sharply from the 23.2% in 2012 and 24.0% in 2010 which reflects the impact of the recent federal government’s job cuts. However, the 2013 percentage is the same as the overall annual average since 1996.

Ec Specialization LQ

Also, Ottawa-Gatineau’s economy has generally become even more specialized in public administration over the past 27 years especially since the late 1990s relative to Canada’s economy as measured by the Location Quotient.

Federal Government Employment and Budget Trends

The federal government has been hit by a series of budget spending cutbacks, program reviews and downsizing over the past several decades. Mention was already made earlier about the decentralization of some 12,000 federal government from Ottawa-Gatineau to other Canadian communities during the late 1970s. The Progressive Conservatives government took power in 1984 with an election promise to take strong action against the federal deficit without raising taxes. The intention of the 1985 budget was to reduce the size of the federal public service by 15,000 within 3 to 5 years. Complementing this commitment was the creation of the Nielsen Task Force on Program Review. Following the Liberal party election victory in 1994, Finance Minister Paul Martin brought forward the 1995 Budget setting the stage for the biggest downsizing in history with a $17 billion reduction in spending and a cut of 45,000 jobs with 15,000 from the National Capital Region over the next 3 years. 

The Conservative government again took aim at spending cuts in 2006 with a $1 billion target reduction by 2007-08. The Parliamentary Budget Office estimated cuts in the 2010 and 2011 budgets eliminated 4,000 jobs. The downsizing gained momentum with the 2012 budget / Economic Action Plan calling   for the elimination of 19,200 jobs over three years with about 32% coming from the National Capital Region. At the end of 2012, Treasury Board stated that 11,000 jobs were already eliminated with 7,500 positions deducted through attrition including retirement. 

The following chart compares the federal government’s annual surplus / deficit between Fiscal Years 1990-91 to 2013-14 to the total federal government employment in the National Capital Region / Ottawa-Gatineau CMA. The budget dollar numbers are adjusted for inflation by applying the annual Consumer Price Index and are expressed in 2013 dollars.

Budget Surplus_Deficit

Total federal government employment in Ottawa-Gatineau declined 5 consecutive years from a peak of 107,014 in 1992 to 90,615 in 1997 based on Statistics Canada data. Federal government employment then increased 14 years in a row up to 2011 when it reached 135,865 employees. The growth was the strongest during the latter part of the first decade with 2008-09 experiencing the largest annual growth of 7,759 jobs for a an increase of 6.2%. This increase may be the result of a jump in hiring to implement the new policy initiatives announced as part of the Economic Action Plan. There was a short lived period of small increases in federal employment during between 2003 and 2005 which also corresponded to a reduced budget surplus in FY 2004-05.

Treasury Board public service numbers reflect the same overall trends but a return to declining jobs in 2012 and 2013 when the public service population in the National Capital Region dropped from 116,357 in 2011 to 108,433 in 2013.

The federal budget surplus in FY 1997-98 was the first surplus achieved after 27 years of consecutive deficits. Taking into account the time lag between budget and employment trend line changes, the above graph clearly shows the close relationship in federal government employment change and the federal government year-end fiscal positions. The period between 1990 and 2013 was also marked by two recessions the first one from Q1 1990 and Q2 1992 and the “Great Recession” from Q3 2008 to Q2 2009 which was and still continues to be followed by a weak global recovery and continued financial uncertainty. The Great Recession also brought on the federal government’s Economic Action Plan with major expenditure programs to simulate the economy which, together with recession driven smaller tax revenues resulted in the large deficit experienced in FY 2009-10 and subsequent years. There was also a mild recession between Q1 2001 and Q4 2001 in the United States and other developed countries but was avoided in Canada.

The next chart is similar to the previous one except that it compares federal government total program expenditures (excluding debt charges) in 2013 dollars with total federal government employment in Ottawa-Gatineau since 1990. As expected, one can see a close relationship between total government spending and the number of employees in Ottawa-Gatineau. During the 3-year Economic Action Plan introduced in 2009 as the result of the 2008 “Great Recession”, federal government expenditures did peak in 2009 with the launching of $25 billion in stimulus measures (link to Final Report on Canada’s Economic Action Plan) which, as noted earlier, resulted in a short burst in new but temporary hirings.  Employment levels have more recently dropped back down to historical trend lines as have the projected government expenditures over the next 5 years. 

 

Fed Govt Expenditures

How has the rest of the economy performed in terms of jobs during federal government downsizing / hiring periods?

Ottawa-Gatineau’s unemployment rate did increase sharply in the late 1980s and remained relatively hight during the federal government downsizing period between 1992 and 1997. However, the overall trends were consistent with other Canadian metropolitan areas and the national average which can be attributed to the recession experienced between 1990 and 1992 and the slow job recovery afterwards. Ottawa’s higher unemployment rate did persist a little longer during the bottoming out years in the budget spending cutbacks hitting its highest point of 9.1% in 1995, the only year the unemployment rate was above the national average over the 27 year period. Unemployment rates increased again between 2000 and 2002 following a general economic slowdown in Canada combined with the collapse of Nortel and the dot-com bubble bust. The rates then returned to its downward trend hitting the lowest point of 4.8% in 2008. The Great Recession brought in another two years of rising unemployment. Unemployment rates have continued to climb gradually since 2011 and into the first five months of 2014 with the current phase of federal government cutbacks but still have remained below the national average as well Montreal and Toronto.

Unemployment Rates

The following graph compares employment trends in Public Administration with other major economic sectors for Ottawa-Gatineau since 1990. The other economic sectors include Information and Communications Technology (Advanced Technology), Health and Educational Services and Remaining Private Sector (total employment minus the other three industry sectors). Health and Educational Services are grouped together because they are similar to Public Administration in that they are public services which are directly influenced by government policies (largely provincial).

The remaining sectors can then be considered to be largely private sector jobs although one can find a few public type economic activities and non profit organizations. For example, National Museums which are Federal Business Enterprises would be classified under the Arts, Entertainment and Recreation industry sector. Economic activities in this industry group as well as in the Accommodation and Food sector also obtain revenues in part from tourists and other visitors to the region. The largest sector included in the Remaining category is Retail and Wholesale Trade which accounted for 20.4% of the total employment in this group of industries in 2013 and 11.9% of all employment in Ottawa-Gatineau making it the second largest single industry sector next to Public Administration. Moreover, the majority of industries in the Remaining group  include businesses that provide goods and services for local consumption including retail, construction and professional services and, as such, are likely to be most sensitive to changing local economic conditions such as federal government downsizing.

 

The above table indicates that Ottawa-Gatineau’s job performance over the past decade in fact is quite different than described by Mayor Watson. Ottawa-Gatineau experienced strong job growth between 2002 and 2008 in terms total employment with and without Public Administration, with growth rates below only Calgary and Edmonton which is not surprising in light of the fact that the energy/resource sector has been the primary economic driver in Canada and Alberta in recent times. In contrast, Ottawa-Gatineau experienced one of the worst declines in jobs during the Great Recession years especially in the non-government sectors.

Overall, the employment trends do not display any signs that the current federal government downsizing and austerity measures will have long term negative impacts on other sectors. Interestingly employment levels in the ICT sector appear to run counter to jobs in Public Administration – increasing during periods of government contraction including since 2012 and decreasing when the federal government is growing.  Health and Education maintained relatively steady growth after 2000 and is expected to be a significant job growth sector, especially in health care services, with the aging Baby Boomer population. Employment in the Remaining sectors does show some sensitivity to the peaks and troughs in Public Administration job levels with declining / stagnant job numbers during the mid-1990s federal government downsizing followed by steady and sometimes strong growth afterwards. This broad sector again experienced a decline in jobs matching the trend observed in Public Administration during the most recent phase of federal government employment cuts. Both sectors have shown a levelling off in job losses in 2014 with even a moderate but positive gain in May.

Eco Sectors Employment

I also want to assess Mayor Watson’s statement that the federal government protects Ottawa’s economy during recessions but employment growth in the Nation’s Capital tends to lag other major Canadian cities during economic recoveries. The following table compares employment growth for the 6 largest metropolitan areas in Canada with the Kitchener-Cambridge-Waterloo CMA thrown in because this region is often seen as being Ottawa’s replacement as “Silicon Valley North”. The Canada total is also included. Employment growth is compared over 4 time periods: 2002-2008 representing a period of economic expansion in Canada; 2008/2009 corresponding to the Great Recession years; 2009-2013 which marks the post Great Recession recovery albeit one that is characterized as having a still weak global economy with high uncertainty and instability, and; the period from May 2013 to May 2014 to capture the latest monthly Labour Force Survey results from Statistics Canada. For Ottawa-Gatineau, I also show employment change in terms of total employment and total employment excluding Public Administration which includes the federal government.

Emp

 

During the post Great Recession period from 2009 to 2013, Ottawa-Gatineau’s job recovery was less impressive compared to other metropolitan areas although the region did perform better than the national average as well as Vancouver and Montreal. However, the lower job growth rate was strongly influenced by the large drop in employment that occurred between 2012-2013. Prior to that one year period, total employment in Ottawa-Gatineau increased by 6.0% between 2008-2012 and 6.9% without Public Administration which would have placed the region’s growth performance at the top of the list. Moreover, Ottawa-Gatineau’s job performance over the last 12 months and into 2014 shows a strong improvement. These numbers once again do not show that Ottawa’s economy is in “imminent peril”.

Conclusions

No one can disagree that significant job losses in the federal government such as those recently experienced in Ottawa-Gatineau will have a negative impact on the local metropolitan economy. Even for those who remain employed, the uncertainty over job security over the next several months or even few years may defer major household purchases such as homes and automobiles. However, there is nothing to indicate from previous analysis of economic trends that there is a threat of Ottawa becoming a “shadow of its former self” as the Mayor warned because of the current federal government’s austerity measures. Indeed, Ottawa’s economy has shown considerable resilience historically during and following the downsizing of the federal government sector especially considering how dependent the local economy is on the federal government. It would be difficult to find another example of a large Canadian city losing such a large number of jobs from one company in a relatively short time period (indeed the only other comparable instance that comes to mind is when Nortel collapsed after the turn of the century which also had the greatest negative job impact on Ottawa’s economy) .

However, it is still difficult to conclude that there is an emerging new federal government dynamic which will lead to structural changes in terms of how the local economy will generate new jobs. In fact, the extreme degree to which the local economy is dependent on the federal government has remained, at minimum, constant for the last 25 years if not 100 years, a trend which will likely to continue at least for the next decade to come.  Federal government employment and spending will continue to be influenced by spending freezes and, budget surpluses and deficits. At the same time, it is important to remember that the two most recent periods of downsizing came after 27 consecutive years of federal government deficits resulting in a massive accumulated  debt in the early 1990s and the 2008-09 Great Recession / global financial crisis from which the U.S. and world economies are still slowly recovering from. Federal government employment may start to rise again but at more modest levels up to 2018 as the Conference Board of Canada suggests but this more moderate growth does not mean that the fundamental economic growth engine has structurally changed in Ottawa.

The federal government will still have significant challenges in terms of an aging work force and continued pressure to maintain a balanced and stable budget. A recent Ottawa Citizen article, for example, argued that the federal government’s new changes to employee benefits and pension contributions may end the way of life for Ottawa’s public servants but such changes will not significantly impact on the future of the federal government’s impact on the local economy.

The above conclusions also bring the issue of economic diversification as a strategic vision for the Ottawa community to the forefront. This may be the subject of a future post.

 

 

 

 

 

 

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