The Economy and Demography Challenges and Opportunities for the oneNS Coalition Thomas Storring, NS Department of Finance and Treasury Board, 2014-09-16

1. The Economy and Demography
Challenges and Opportunities for the oneNS Coalition
Thomas Storring, NS Department of Finance and Treasury Board, 2014-09-16

2. What can I tell you?
Economics and Statistics Division informs the government on:
–How the economic conditions and outlook for the province affect the fiscal situation
–How taxation and fiscal policies affect the economy
Economies of scope:
–Spend our time in detailed examination of economic conditions in the province
–Understand what influences our economy; in the short run vs. in the long run
Plan for today
–Show you the important facts and how to interpret them
–How the facts fit together to explain long run growth
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3. Slower Economic Growth in NS…?
3
2.36%
4.50%
1.64%
3.62%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Real
Nominal
Growth 1990-2012 Compound average growth rate
Canada
NL
PE
NS
NB
PQ
ON
MB
SK
AB
BC

4. …Or Slower Demographic Growth?
4
1.31%
2.71%
1.88%
1.47%
1.58%
1.32%
1.08%
1.45%
1.79%
1.45%
1.06%
1.04%
-0.42%
0.49%
0.17%
0.10%
0.66%
1.21%
0.56%
0.35%
1.94%
1.47%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
1990-2012
Compound Average Growth Rate
Population
Real GDP per capita
NL: Net

5. Where does GDP come from?
5
Factors of Production
Utilization Rate
Productivity
Labour, Capital, Natural Resources
Share of factors currently employed
Output/income generated per employed factor of production
Accumulate slowly over time; can diminish
Fluctuates a lot in the short run, but stable around long run average
Grows slowly over time
Demographics
Capital investment
Resource exploration & exploitation
Business cycle
Demand in key markets
Shifts in tastes/preferences
Fiscal/monetary policy
Technology, capital per worker, skills, trade, infrastructure, entrepreneurship
Significant influence on long run growth
Little influence on long run growth
Significant influence on long run growth
What is it?
Pace of change
What causes it to change?
Influence on growth

6. Why do we focus on demography?
Labour is the most significant factor of production
Share of nominal income generated by production (GDP)
6
0%
50%
100%
Canada
NL
PE
NS
NB
PQ
ON
MB
SK
AB
BC
Taxes
Capital Consumption of Fixed Capital
Capital Operating Surplus
Labour

7. Why do we focus on demography?
7
-3%
-2%
-1%
0%
1%
2%
3%
4%
0-17
18-64
65+
All
NS demographic indicators have been weak… 1990-2013, CAGR
Canada
NL
PE
NS
NB
PQ
ON
MB
SK
AB
BC
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
2015
2019
2023
2027
2031
2035
2039
…future looks worse millions
Actual 0-17
Actual 18-64
Actual 65+
Actual Total
Forecast 0-17
Forecast 18-64
Forecast 65+
Forecast Total

8. Why do we focus on demography?
-1000
0
1000
2000
3000
4000
5000
6000
1990/1991
1991/1992
1992/1993
1993/1994
1994/1995
1995/1996
1996/1997
1997/1998
1998/1999
1999/2000
2000/2001
2001/2002
2002/2003
2003/2004
2004/2005
2005/2006
2006/2007
2007/2008
2008/2009
2009/2010
2010/2011
2011/2012
2012/2013
International growth replaces natural
Natural Change
Net International Change
-6000
-5000
-4000
-3000
-2000
-1000
0
1000
1990/1991
1991/1992
1992/1993
1993/1994
1994/1995
1995/1996
1996/1997
1997/1998
1998/1999
1999/2000
2000/2001
2001/2002
2002/2003
2003/2004
2004/2005
2005/2006
2006/2007
2007/2008
2008/2009
2009/2010
2010/2011
2011/2012
2012/2013
Internal Migration:
a Youth Issue
Net Interprovincial Change: All Others
Net Interprovincial Change: 20-34
Net interprovincial migration
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9. Why do we focus on demography?
-1.2%
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
NL
PE
NS
NB
PQ
ON
MB
SK
AB
BC
Youth Internal Migration – Influence on Population
Ages 20-34 as a share of overall population change
1990/1991
1995/1996
2000/2001
2005/2006
2010/2011
2012/2013
9

10. What can we do about demography?
10
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
1971
1977
1983
1989
1995
2001
2007
2013
2019
2025
2031
2037
Added Internal Migration
2014-2039 Added Migration 0 to
17 years
2014-2039 Added Migration 18
to 64 years
2014-2039 Added Migration 65
years and over
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
1971
1977
1983
1989
1995
2001
2007
2013
2019
2025
2031
2037
Added Fertility
2014-2039 Added Fertility 0 to 17
years
2014-2039 Added Fertility 18 to
64 years
2014-2039 Added Fertility 65
years and over
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
1971
1977
1983
1989
1995
2001
2007
2013
2019
2025
2031
2037
Added Immigration
2014-2039 Added Immigration 0
to 17 years
2014-2039 Added Immigration
18 to 64 years
2014-2039 Added Immigration
65 years and over
Neither of these has happened recently on a sustained basis.
Replicating baby boom is difficult

11. Labour, Capital, Natural Resources
Share of factors currently employed
Output/income generated per employed factor of production
Is that it? Demography is our destiny?
Factors of Production
Utilization Rate
Productivity
11
Accumulate slowly over time; can diminish
Fluctuates a lot in the short run, but stable around long run average
Grows slowly over time
Demographics
Capital investment
Resource exploration & exploitation
Business cycle
Demand in key markets
Shifts in tastes/preferences
Fiscal/monetary policy
Technology, capital per worker, skills, trade, infrastructure, entrepreneurship
Significant influence on long run growth
Little influence on long run growth
Significant influence on long run growth
What is it?
Pace of change
What causes it to change?
Influence on growth
Greater population of working age
More capital investment (physical & IPP)
Find & exploit more resources
[Not a determinant of long run growth]
Find/improve technology embodied in capital
Increase capital/worker
Increase resources/worker
Increase skills per worker
More effective trade
Better infrastructure
Greater entrepreneurial skill/attitude
What can be done about it?

12. Capital Stock and Natural Resources $2002 per worker, 2000-2013
12
0
100000
200000
300000
400000
500000
600000
700000
Industrial Sector 16.4% of NS workers
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0
20000
40000
60000
80000
100000
120000
Non-Industrial Business Sector
53.7% of NS workers
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
NS: 69% of national average, and falling…
Much higher concentration in energy-producing provinces
NS: 85% of national average, but rising…
Higher concentration in Western energy-producers

13. What does this tell us?
Increasing the volume of capital employed per worker can substitute for declining labour inputs to production
–Added benefit of newer vintage technologies
NS has lagged national averages in both industrial and non-industrial businesses
–Comparison against winners of the resource lottery are inappropriate
–(Until we find our own winning ticket)
Business capital investment can grow quickly, but it depends on how businesses make their choices
–Factors that matter: natural resource endowments, access to clients’ markets, cost of inputs (labour, materials), foreign exchange rates, financing & interest rates, taxes…
–Factors that matter: natural resource endowments, access to clients’ markets, cost of inputs (labour, materials), foreign exchange rates, financing & interest rates, taxes – compared against everywhere else
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14. Trade and Natural Resources (More to come…)
NS trade situation: exports 63 per cent of Canadian average
–NS exports less internationally than other Provinces, even accounting for winners of the energy lottery
–NS imports are similar to other Provinces (94 per cent of Canadian average)
–Interprovincial trade is bigger than international trade for NS
Why do economies trade?
–Exporting surplus output of our specialties allows us to import
–What do we import? Things that are cheaper, better or more varied than we could make for ourselves
–Being a big importer does not preclude positive trade balance (add value to imports or import productive capital equipment)
How does trade contribute to long run growth?
–Specializing and concentrating production in areas of competitive advantage improves productivity
–Import the things we don’t produce as well as our specialties, so we can focus our resources where we are most productive
Like capital investment trade depends on how businesses make their choices
–Factors that matter: natural resource endowments, access to clients’ markets, cost of inputs (labour, materials), foreign exchange rates, financing & interest rates, taxes…
–Factors that matter: natural resource endowments, access to clients’ markets, cost of inputs (labour, materials), foreign exchange rates, financing & interest rates, taxes – compared against everywhere else
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15. Skills and Education 2013 – share of population aged 15+
15
0%
5%
10%
15%
20%
25%
30%
35%
40%
No degree, certificate or
diploma
High school graduate
High school graduate, some
post-secondary
Postsecondary certificate or
diploma
University degree
Canada
NL
PE
NS
NB
PQ
ON
MB
SK
AB
BC
What does this tell us?
NS has more high school dropouts, comparable portions with post-secondary education (more weight to certificates & diplomas).

16. Research and Development $ per capita 1990-2011
16
0
100
200
300
400
500
600
700
Canada
NL
PE
NS
NB
PQ
ON
MB
SK
AB
BC
Business Sector
0
100
200
300
400
500
600
700
Canada
NL
PE
NS
NB
PQ
ON
MB
SK
AB
BC
Higher Education
0
100
200
300
400
500
600
700
Canada
NL
PE
NS
NB
PQ
ON
MB
SK
AB
BC
Gov’t/Non-profit

17. Innovation Spending Share of enterprises, 2012
17
0%
10%
20%
30%
40%
50%
60%
$0
$0-$50k
$50-$150k
$150-$500k
$500k+
Process Innovation
Canada
Atlantic
Quebec
Ontario
Alberta
MB+SK+BC+Terr
0%
10%
20%
30%
40%
50%
60%
$0
$0-$50k
$50-$200k
$200-$1000k
$1000k+
Product Innovation
Canada
Atlantic
Quebec
Ontario
Alberta
MB+SK+BC+Terr

18. What does this tell us?
NS has the worst business R&D in the country
–But among the best higher education R&D
–It is not necessary to develop the technology to improve productivity
–Imported technology also enhances productivity (albeit for lower risk, lower return)
Expenditures on process and product innovations are lower among Atlantic companies
–So neither in-house nor imported innovations are apparent
–Particularly for product innovations; not finding the next ‘new thing’
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19. Productivity Growth and Gaps
19
-5%
0%
5%
10%
15%
1997-2002
2002-2007
2007-2013
Agriculture, Forestry, Fishing
Productivity growth, CAGR
Canada
NL
PE
NS
NB
PQ
ON
MB
SK
AB
BC
-1.0%
0.0%
1.0%
2.0%
3.0%
1997-2002
2002-2007
2007-2013
Business Sector-Services
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
1997-2002
2002-2007
2007-2013
Industrial Production
17.4%
0
40
80
120
160
200
240
Industrial
production
0
10
20
30
40
50
60
Business
sector, services
0
10
20
30
40
50
60
Agriculture,
forestry, fishing
Productivity $2007 chained per hour

20. What does this tell us?
What is productivity?
–It is the effectiveness with which the production sector combines labour, capital and natural resources to generate valuable output, measured as real GDP per hour worked
–It represents: capital/technology per worker, skills, entrepreneurship, innovation (product & process), trade, resources
NS productivity gap has been hard to close
–Not closing organically even with limited labour supply growth
–Sectoral composition of productivity is hard to shift
–Weak investment, research/innovation, trade underpin weak productivity
–Potential role of entrepreneurship, but difficult to measure
What can we do about it?
–There are no direct channels to improve productivity, it’s indirect
–More skills in the labour force, more advanced technology in production, more valuable outputs, find/import cheaper inputs
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21. What does ALL OF THIS tell us?
Our demographic challenge is like a glacier – immutable, but slow.
–Influence on population is limited; overwhelmed by baby boom retirement
–Attracting and retaining youth will help; but it depends on all the other long run determinants of economic growth
–Place priorities on capital investment, innovation, skills, trade, entrepreneurship
–Get those right and the rest will follow
We don’t have same natural resource endowments as other provinces
–(Yet)
–Some economic gaps will not be closed; that’s an issue for the Federation
Most of these decisions are made by individual businesses (and households) in response to market conditions, prices, business cases
–Government has some, but not overwhelming influence on these variables
–Business cases must ultimately determine where production takes place; a bad business case propped up by crutches is still a bad business case….
–…unless the business case is impeded by crutches that exist elsewhere.
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22. The Bottom Line
Think about the time in the future when you aren’t going to have those inexpensive, well-educated baby boomers on which to rely for our production and income…
Businesses: How can you make the business case for investment, training, trade and innovation to cope with this?
Communities: How can you turn our attitude towards entrepreneurship and competition while adjusting to the changes that are coming?
Governments: How can you contribute to the real foundations of business cases (without building crutches for bad ones)?
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