Ontario’s economy lurches from disaster to disaster

Ontario’s economic prospects have declined, and despite Finance Minister Charles Sousa’s insistence he can balance the budget, there are implications for the province’s fiscal position and future standard of living.

A lower dollar has helped employment to rebound, but the province’s economic fall from grace over the last 20 years is evident from a number of key economic indicators.

While still the largest economy of the 10 provinces, its share of provincial output dropped from 42% in 1990 to 37% by 2013. Real per capita GDP was the second highest (after Alberta) in 1990 but has dropped to fifth place, behind BC but above Manitoba. Real per capita GDP growth has been among the lowest in the country.

Ontario’s economy reached a crucial point after the 1980s economic boom that saw free trade with the US 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 US 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 and a corresponding increase in taxes, plus 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 US for its manufacturing exports.

Ontario has demonstrated poor GDP growth, productive capital investment and private sector employment creation. This economic decline is reflected in the deterioration of public finances as it seeks to maintain a high level of public spending despite weak economic productivity and revenue growth. The result is persistent deficits and rising debt.

Ontario has three times the population of BC but a negative gross operating balance that is 10 times worse. 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 BC, with a negative cumulative gross balance of only $8 billion.

Moreover, Ontario’s net public debt of $267 billion represented 50% of provincial net debt in 2013. It’s 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.

Ontario tends to blame the federal transfer system for its chronic deficits and argue for an improved federal fiscal framework that better supports the province. Yet the evidence shows Ontario is already a much greater beneficiary of the federal transfer system. With its large population, per capita federal cash transfers are 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 all provinces and its share of total federal cash transfers rose from 23% to 32%, supplanting Quebec as the largest federal total transfer recipient.

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. And the economy must grow to provide a stronger revenue base for its public services.

It’s 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.

This article is distributed by Troy Media in Calgary. Visit www.troymedia.com.