THUNDER BAY, ONTARIO ---- November 27, 2014 ---- Troy Media ---- - Ontario’s economic prospects have declined, with implications – despite Finance Minister Sousa’s insistence he can balance the budget – for both its future standard of living and its fiscal position.
Although employment, fueled by a lower dollar, has rebounded, the province’s economic fall from grace over the last two decades is evident from a number of key economic indicators.
While still the largest economy among the 10provinces, its share of provincial output dropped from 42 per cent in 1990 to 37 per cent by 2013. Its real per capita GDP was the second highest (after Alberta) in 1990 but has dropped to fifth place, behind British Columbia and above Manitoba. Its real per capita GDP growth has been one of the lowest in the country.
Ontario’s economy reached a crucial point after the 1980s economic boom that saw free trade with the U.S. and a shift away from the traditional east-west economic alignment. After the jarring recession of the early 1990s, its decline was forestalled by both a combination of a lower dollar and booming U.S. economy, which drove Ontario’s export sector, and a public sector restructuring that lowered taxes.
But this boost petered out in the early 21st century with the return of more interventionist government economic policy, with a corresponding increase in taxes, and a flawed green energy industrial strategy that raised energy costs. Economic productivity faltered and the 2009 tilt into recession was compounded by an appreciating Canadian dollar and Ontario’s trade dependence on the United States for its manufacturing exports.
Ontario has demonstrated a poor record on GDP growth, productive capital investment and private sector employment creation, and its economic decline is reflected in the deterioration of its public finances as it seeks to maintain a high level of public spending while faced with weak economic productivity and revenue growth. The result is persistent deficits and rising debt.
According to new Statistics Canada government finance statistics for the 2008 to 2012 period, Ontario’s government had a negative cumulative gross operating balance – in essence accumulated deficits – of $84 billion. The next worst performer was British Columbia, with a negative cumulative gross balance of only $8 billion. Ontario has three times the population of B.C. but a negative gross operating balance that is 10 times worse. Moreover, in 2013, Ontario’s net public debt of $267 billion represented 50 per cent of provincial net debt. It is only by the grace of low interest rates that Ontario’s debt service costs have not been more problematic.
Despite having the lowest per capita public expenditures in the country, Ontario has acquired a structural gap between its revenues and expenditures with its expenditure-to-GDP ratio consistently above its revenue-to-GDP ratio. Ontario needs to cut expenditures, raise revenues or engage in some combination of the two. However, given the anaemic economy, raising taxes would be counterproductive while cutting expenditures is politically unpopular.
The result is a tendency for Ontario to blame the federal transfer system for its chronic deficits and argue for an improved federal fiscal framework that better supports Ontario. Yet, even here, the evidence shows Ontario is already a much greater beneficiary of the federal transfer system: As a result of its large population, Ontario’s per capita federal cash transfers are indeed the third lowest in the country – ahead of only Alberta and Saskatchewan – but between 1990 and 2013 per capita transfers in Ontario grew the fastest of the 10 provinces and Ontario’s share of total federal cash transfers rose from 23 to 32 per cent. Ontario has supplanted Quebec as the largest federal total transfer recipient in the country.
Ontario must boost its economic productivity and innovation, diversify its export sector to take advantage of the Asia-Pacific region, reduce the cost of electricity, and provide better value for its public sector services. Ito needs to grow its economy to provide a stronger revenue base for its public services.
It is a travesty that in a generation, Ontario has gone from being a high-flying economic eagle to a lurching albatross seeking to benefit from a gust of federal cash transfers.
By Livio Di Matteo
Professor of Economics