Ontario is an Aging Economic Athlete

Equalization, Frontier Centre, Role of Government, Taxation, Uncategorized, Worth A Look

In the wake of his election win, Premier Dalton McGuinty appears oblivious to news that Ontario’s economy is slowing.

Much like a triumphal Roman emperor, the premier quickly moved ahead with plans to create a new public holiday in February. Indeed, during the decline of the Roman Empire, the number of public holidays and game days increased dramatically as the empire sought to placate unrest with spectacles, bread and circuses. Given recent economic indicators, Ontario is in for a difficult time and the premier’s creativity will be severely stretched to provide additional diversions from economic reality.

The Ontario government truly laughs in the face of economic danger given the irony that another public holiday could impose additional costs on employers and reduce output. The evidence suggests that Ontario is experiencing relative economic decline.

While Ontario still has the second-highest real per capita GDP in Canada, over the last five years, Ontario ranked dead last among Canada’s provinces when it comes to real per capita GDP growth.
According to data from recent provincial economic forecasts, over the period 2001-06, real per capita GDP in Ontario grew at an annual rate of 1.1 per cent. Compare this to 2.4 per cent in Alberta, 1.8 per cent for Manitoba and 5.2 per cent for Newfoundland. Even the second-lowest growth rate — Quebec’s — was 1.4 per cent.

Should these growth rates hold, by 2025 Ontario will rank fifth in real per capita income — just behind Saskatchewan — and with New Brunswick nipping at its heels in sixth place.

Over the period 2002-07, Canada created 1.5 million jobs. Ontario, with about 40 per cent of Canada’s population, managed to create 36 per cent of these jobs. Meanwhile, British Columbia and Alberta, which together have about one-quarter of Canada’s population, accounted for almost 40 per cent of this new employment.

To be fair, Canada’s West has benefited from a commodities and resource boom while Ontario’s natural resource sector — forestry — has been the victim of a high dollar, aging infrastructure and declining demand. About 20 per cent of Ontario’s GDP originates in manufacturing, and job creation in Ontario has been dragged down by declines in this sector.

Moreover, the slowing U.S. economy hurts Ontario the most. International exports make up 49 per cent of its real GDP, the largest export share among Canada’s provinces, and 90 per cent of those exports go to the U.S.
Matters worse.

To make matters worse, Ontario has embarked on a public sector revenue spree that hurts competitiveness. Over the period 2003-07, Ontario’s GDP increased by 17 per cent while provincial government revenues rose 35 per cent and expenditures 24 per cent. Ontario has become a more heavily taxed jurisdiction and increased public spending, yet curiously still ranks near the bottom in provincial per capita rankings of university funding, has a substantial proportion of its population without a family doctor and is on the verge of running out of electricity without spending billions more on hydro generation. Its hydro rates are already among the highest in North America, further eroding its competitive economic advantage.

Ontario is an aging economic athlete being met with agile new competitors who have all the latest training, innovative managers and some good luck.

While good things do grow in Ontario, sound and innovative government economic policy has not recently been one of them. Ontario must reform and lower its taxes to make its economy more competitive and attractive for new investment. Ontario must streamline and decentralize its centralized government apparatus by giving its regions greater autonomy in areas like health-care service delivery and the management of lands, hydro and natural resources.

Ontario must make investments and reforms in electrical energy generation capacity and provision so that it can regain the advantage of low energy costs that powered its industrial advantage during the 20th century.
Finally, there needs to be smarter investment in post-secondary education and human-capital formation. Governments spend too much of their time administering targeted funding to universities and colleges when the best strategy is to provide more and stable core funding, deregulate tuition and let universities and colleges find their markets.

Empire Ontario is relying on past economic mass and momentum to sustain its standard of living and role within Confederation. While barbarians from its restless northern regions have yet to invade suburban Markham, decline is encroaching.

Some of the economic changes occurring in Canada are a healthy rebalancing of economic power within Confederation but an economically weaker Ontario is bad for Ontarians and ultimately for the Canadian economy.

The 20th century is over and Ontario needs to realize that the province’s role will fade if the economic realities of the 21st century are plastered over with short-term political posturing. That Ontario has not fully come to grips with 21st-century economic realities became evident during the election campaign when religious schooling — a political issue that should be closer to 1907 rather than 2007 — came front and centre while issues like taxation, health, education, economic competitiveness and hydroelectric infrastructure took a back seat.

With the election over, the real issues are about to come home to roost.

Livio Di Matteo is professor of economics at Lakehead University.