As U.S. President Donald Trump proceeds with tariffs on many Canadian exports, sparking retaliatory tariffs from Canada, countless sectors and communities across the country will be affected. But what about Ottawa? OBJ spoke with Ian Lee, associate professor at Carleton University’s Sprott School of Business, on how tariffs will affect the Ottawa-Gatineau region, from tourism […]
As U.S. President Donald Trump proceeds with tariffs on many Canadian exports, sparking retaliatory tariffs from Canada, countless sectors and communities across the country will be affected. But what about Ottawa?
OBJ spoke with Ian Lee, associate professor at Carleton University’s Sprott School of Business, on how tariffs will affect the Ottawa-Gatineau region, from tourism to agriculture and from tech to the public service.
This transcript has been edited for length and clarity.
Q: Given the recent changes to the relationship between Canada and the United States, what will that mean for the size of the federal public service?
I think the consequence of the trade war is that the next government, and that doesn't matter whether it's (Mark) Carney, assuming he is the Liberal leader, or (Pierre) Poilievre, either government Liberal or Conservative, are going to have to confront the need to spend a lot of money they weren't spending before. I don't mean $200 million, I mean in the billions and billions, principally because of defence spending. They have to radically increase their defence spending. I just don't believe that the next government can double the deficit from $50 billion to $100 billion. They're probably going to need to spend another $50 billion on border protection and tariff protection for businesses that are really going to be hit.
I'm with the C.D. Howe Research Institute. They said it's not sustainable to double the deficit to $100 billion. If one accepts that argument, it means that they're going to have to find the savings by cutting existing spending. They’ll have to go for low-hanging fruit. They're not going to cut health care. They're not going to cut old age pensions. We know that they're not going to cut unemployment insurance. I'm not saying they're going to get rid of every last public servant they hired in the last nine years. I'm saying that there's the possibility that there's going to be a significant downsizing of the public service. I don't have a number for you. I wouldn't be shocked if it was in the 50,000-plus range. I'm not predicting it, but I think it's going to be big, because the savings are huge.
There's going to be another strategic program review like the one that occurred in 1995. (The government) put (programs) into three categories: absolutely cannot cut, nice to have but not absolutely essential, and then the third category was the low-hanging fruit, programs that really aren't working anymore and aren't really producing any benefits. I think we're going to have a strategic program review. They may call it something else, but it's going to be analogous to where you analyze all your programs to decide which ones are the easiest ones that aren't working and you can cut, and they're going to reduce the size of the public service. I think they will look at transfers to the provinces, because they're going to need somewhere easily in the range of $50 billion-plus of new money, or money to spend, and they're going to have to come up with $50 billion in cuts, or something pretty close.
I am not predicting a depression, but I do believe we'll feel it. Anytime you get rid of that many people, it's going to affect the economy, and I think it'll reduce our GDP dramatically in the National Capital Region. We may even go into a mild recession.
Q: What might be the impacts on new and resale housing markets in Ottawa?
(If we go into a mild recession) that will, in turn, feed into the real estate markets, which suggests to me, they'll go flatline, as they did the last time. Flatline, meaning they just don't grow. They might go down a little bit in value. Real estate (values) are notoriously sticky, to use the language of economists. They're like wages. Even in a recession, wages don't go down. Unemployment goes up, but people don't take wage cuts, by and large. I think you'll see the same thing with real estate.
(As for the housing markets), it will probably make (houses) more expensive. We import a lot of stuff. We import a third of our GDP. The materials and inputs to renovations and to new home construction are going to see increases in prices which are put into real estate prices. When I say flatline, I don’t mean we’re going to see a double-digit increase. Because the Canadian dollar is going down in value and the tariffs are driving up the price of goods in Canada, I think the Bank of Canada is going to be forced to raise interest rates again. That will affect the real estate market because real estate is incredibly sensitive to interest rates.
Q: With a trade war between Canada and the U.S., what do you think the impact might be on the tech sector in Ottawa?
Tech is human capital. There aren’t a lot of inputs. Your inputs are typically bright, young people who are highly trained. The impact is not going to be on the inputs that they buy or don’t buy. It's going to be on whether the tariffs sufficiently discourage economic growth such that there just isn't the same demand for the products of Canada. That may encourage some people to say, ‘You know what, things are looking pretty grim here for the next few years. I think I'm going to get a job in the States, because they're in high demand.’ It may accelerate or incentivize brain drain. I don’t really see it affecting anything on the price side.
Q: What might be the impact on consumer spending in Ottawa?
I think it’s going to go down. First off, it’s going to create a lot of uncertainty across the country, not just here. When people become uncertain, what do they do? They pull back their spending. I think if you’re a young person, especially if your position at work is precarious, the last thing you want to do is take on a big new expenditure. You don’t want to go and do a home renovation if you’re already a homeowner or go and buy a house if you haven’t bought one yet. I think it’s going to put a lot of those decisions on hold. It’ll cool the Ottawa economy as a consequence of tariffs.
Q: What do you think might be the impacts on Ottawa’s tourism industry?
It shouldn’t have any impact. Tourism is not capital-intensive. Tourism is capital-light. The intrinsic advantages of Ottawa for a tourist, Parliament Hill and all that stuff, won’t go away. If anything, people may decide to take holidays closer to home, rather than going to the States or Europe. Inevitably, some may come to Ottawa.
Q: How might tariffs affect the rural or agricultural sectors in and around Ottawa?
Agriculture is an interesting industry. (The media talk about) the vital importance of farming and agriculture in Eastern Ontario and, forgive me, that’s not true. If you look at agricultural statistics from government data, the vast majority of our agricultural output is in Western Canada. The farmers around here are hobby farmers, tourist farmers. I don’t think it’ll impact the agricultural production around here. Certainly, Eastern Ontario is not a centre of agricultural major production. It may incentivize Western Canada, the big agro farms out there, to try and, to the extent that the climate allows it, produce more agricultural products in Canada.
Q: How might tariffs affect the professional services sector in Ottawa?
It’ll probably have a negative impact because of the downsizing of the public service. It’s hard to say, but my initial reaction is that, when you reduce the public service by that magnitude, you’re going to cut programs at the same time. If there are fewer programs, there’s going to be less need for people. I’m not saying there’s going to be zero consulting. Consultants will always be there, but I don’t think there’s going to be huge opportunities there. If the federal government is doing all that cutting, they could hardly go out and hire all kinds of high-price consultants, because the optics are terrible. Any prime minister, whether it’s Carney or Poilievre, will know that. I don’t think there will be boom times in that space for the next five, six, seven or 10 years.
Q: How might tariffs affect Ottawa at the municipal level?
On the municipal side, I don't think there's gonna be big cuts there, partly because they'll be very sensitive to the fact that the federal government's downsizing. They probably won't want to downsize. Secondly, in the last provincial election, the mayor was able to solve the elephant in the room, which is, ‘What on Earth are we going to do to fund and afford mass transit?’ He persuaded, or convinced, (Ontario) Premier (Doug) Ford to say, ‘I'll take LRT off their hands,’ which was huge. That's almost like winning the lottery for a municipal government. My point is that they're not going to be facing armageddon because they've given up responsibility and funding requirements for LRT. That's now (in the hands of the province.) I think that they will probably practise counter-cyclical program policies, meaning they're not going to be doing any major cutting, because they're going to want to have some kind of a mild offset for the federal cuts that are going to be inevitable. 
