Ontario Can No Longer Take One for the Team

Equalization, Frontier Centre, Saskatchewan, Uncategorized, Worth A Look

Thirty-five years ago, Ontario premier Bill Davis explained his province’s oversized responsibility for Canadian harmony in a lecture to a group of American college students.

Ontario “is sufficiently significant in its economic and political influence that in terms comparable to the United States it would be like combining the states of New York and California,” he said. “Ontarians contribute to our national program of equalization, are blamed for whatever goes wrong and are generally expected to set high standards of national conduct.”

Mr. Davis stood by those words a few years later when Ottawa and the provinces agreed to entrench the equalization principle in Canada’s new Constitution. Redistribution from richer to poorer provinces, until then largely dependent on the kindness of Ontario, became the law.

To be sure, the elaborate edifice of fiscal federalism erected in the Davis era was not based on altruism. It made Ontario the indispensable province whose role in making Canada function was publicly resented but secretly admired. Federal transfers to the provinces (paid for with taxes raised in Ontario) created captive consumers for Ontario’s goods from coast to coast.

Free trade and the West’s emergence into a commodities superpower has changed all that. What Ontario built, it’s now threatening to tear down. Fiscal federalism no longer works for Canada’s biggest province. Whether Canada can work without it remains to be seen.

The University of Toronto’s Mowat Centre has sought to frame the debate – which could well define Canadian politics in the next few years – with a provocative study-cum-battle cry. It identifies a “structural gap” of $11-billion annually between what the federal government collects in taxes in Ontario and returns in the form of direct spending and transfers.

"Federal spending decisions,” the Mowat study says, “are significantly skewed against the people of Ontario.”

The complaint is not new. In 2005, then-premier Dalton McGuinty argued that a net sum of $23-billion was being sucked out of his province by Ottawa and redistributed elsewhere. In comparison, that $11-billion shortfall might seem like progress.

The difference between then and now, however, is that Ontario has since come to depend on equalization payments. The rapid deterioration of its finances means the province is no longer able to fund programs (through its federal taxes) that so blatantly shortchange its citizens.

Ontario’s per capita “fiscal capacity” is now second last among the provinces, once federal transfers are taken into account. When the cost of providing public services is considered – it’s more expensive to dispense health care in Toronto than in Truro – the strain on Ontario is clearer still.

Ontario’s latest fiscal update contained uncharacteristic fighting words, arguing that the province’s net contribution to the $16-billion equalization kitty is “redistributed to other regions of Canada to subsidize programs and services that Ontarians themselves may not enjoy.”

Quebec resented the insinuation, insisting its $7-a-day daycare and other social perks are paid for out of higher provincial taxes. Still, by capping annual growth in the equalization fund, Ottawa has set up a zero-sum game that pits Ontario and Quebec against each other.

Last week, Quebec revealed it will receive $255-million extra in equalization this year, thanks to a recovery in corporate taxes in Ontario. It gets better next year, when Quebec is expecting a juicy 8-per-cent increase in equalization payments – to $8.4-billion – because its costly decision to decommission the province’s only nuclear power plant will slash Hydro-Québec’s profits. Such are the idiosyncrasies of the current equalization formula.

Quebec’s good fortune won’t last, however, if Ontario’s manufacturing sector can’t reverse its decline. As it stands, former Bank of Canada governor David Dodge has estimated that Ontario’s share of total equalization payments will grow to 30 per cent in 2020 from about 20 per cent now. That will mean less money for other provinces, setting up an inevitable clash with risky political ramifications.

This is no longer Bill Davis’s Ontario. The province can’t afford to take one for the team. The fiscal federalism Mr. Davis helped constitutionalize has become a thorn for his successors and risks undermining the unity he sought to create.

“We need to make sure that a fair share comes back,” Premier Kathleen Wynne insisted Tuesday. “There is a need for a rejigging of those formulas, including equalization.”

Can Canada survive the new Ontario?