Ontario Can’t Be Canada’s ATM

Commentary, David MacKinnon, Equalization, Uncategorized

In recent years, evidence has grown that the federal government has been using Ontario the way American consumers used home equity loans – as an ATM. It has withdrawn large amounts from the province, put much less back in and done so in the false belief that it was ensuring equal access to government programs across Canada.

The government has generally acted in a haphazard way. In 50 years, it has not conducted a public study of the economic impact of the Canadian system of regional subsidies and transfers on Ontario or any other region. This is rather like the ATM user who never checks the balance but hopes that something remains in the account.

There is nothing new in this. These circumstances have been actively explored by banks, think-tanks and academics for years. The new element in the equation, however, is the recession. It has made the problem much worse.

First, continuing growth in federal transfers is at variance with current patterns of economic activity. In 2008, Alberta, Ontario and British Columbia, the three contributing provinces, experienced negative real growth, even while the subsidies to other provinces grew rapidly and the receiving provinces all had positive growth except for Newfoundland, which was static.

Second, the evidence suggests that the amounts taken from Ontario and Alberta have produced bubble economies elsewhere that now are so protected by transfers that they are insulated, at least in the short term, from the global recession. Unemployment is now higher in Ontario than in most recipient provinces. Personal bankruptcies are now much higher in British Columbia, Ontario and Alberta than in Quebec, Manitoba, New Brunswick, Nova Scotia and P.E.I.

These are not minor discrepancies. In the past year, the bankruptcy rate in Alberta has been double the rate in Quebec. The differences in unemployment rates are dramatic. Unemployment in Toronto, Kitchener, Oshawa, St. Catharines and Windsor is now higher than in all the major cities in Atlantic Canada and Manitoba.

Third, while all provinces have experienced deterioration in their provincial finances, Ontario’s provincial government deficit is by far the highest in relation to the size of the economy, in part because of the extent to which recipient governments are subsidized by Ontario taxpayers while Ontario’s tax options are limited because of the tax policies of nearby American states.

This means that Ontario will have greater difficulty in eliminating the deficit when the recession ends and that access to government programs will continue to lag other provinces. Ontarians will fall further behind other Canadians in access to universities, doctors, teachers and nurses and Ontario will become less and less competitive as the impact of these patterns is felt.

The federal government has taken several recent steps to ease the problem but we are at the point where even substantial steps – such as auto bailouts, the sales tax harmonization payment and recent changes to both equalization and the Canada Health Transfer – do not eliminate the overall deficit Ontario experiences in relation to the rest of Canada. Some of these are one-shot events, leaving the systemic problem largely intact.

We have three vivid examples of where an economy that generates economic bubbles and tolerates policy carelessness can go. They are California, Iceland and Spain.

Ontario could be in trouble on a similar scale soon.

It is not hard to imagine a scenario that could get us there: a continuing fiscal deficit to support other Canadians who already have more accessible government programs than Ontario, a dollar that rises rapidly to parity or above because of commodity prices, and productivity performance that continues to be well below American levels.

It is evident that the policies to exit this trap permanently will not likely come from the federal government and recipient jurisdictions. There isn’t much space between the subsidy addicts and the enabler, at least not yet.

The leadership must come from Ontario. It should pursue several basic policy shifts.

First, the fairness campaign pursued by the provincial government should be based on capacity, not fairness. Fairness is something that can be debated endlessly but capacity can’t. The lack of capacity to feed the federal ATM is already evident to most Ontarians and it could be explained to other Canadians if the province makes the effort to do so.

Second, Ontario needs to demonstrate just how divisive Canadian regional subsidies could become. Broadly speaking, the money is disproportionately coming from immigrants and the entrepreneurial to support long-established regions where entrepreneurship is less well established. This is particularly true because much of the funding comes from the polyglot populations of Toronto, Calgary and Vancouver.

Third, Ontario should embrace Western Canada as never before. With the exception of Manitoba, it is not dependent, it has relatively high productivity and it is oriented to Asia, the new epicentre of the global economy.

Fourth, the main lens of provincial policy needs to shift toward productivity because without dramatic productivity gains, Ontario’s future in manufacturing is very limited. The fundamental importance of productivity improvements for Canada and Ontario is probably one thing on which all economists would agree. Unfortunately, regional subsidies in Canada are closely associated with poor productivity in recipient provinces even as they weaken Ontario.

Five, Ontario should give the federal government a deadline to reform employment insurance so that all Canadians are treated equally or, failing that, Ontario would implement its own plan.