Dependence on housing leaves Ontario economy vulnerable

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Appeared in the Toronto Sun, July 5, 2017

Ontario traditionally has been Canada’s engine of growth. However, over the past decade it has slipped to “have not” status that receives equalization payments.

While housing recently has provided a temporary boost, concern about the province’s longer term growth prospects grows. Specifically, Ontario suffers from chronically weak business investment. The investment slump, especially in manufacturing, which is the sector most exposed to international competition, is symptomatic of the high cost of doing business here.

Manufacturing remains critical to Ontario’s economy—it’s still the third largest employer despite its recent woes. Even Premier Wynne said manufacturing is “in Ontario’s DNA” although she seems to have difficulty drawing the implication that competitive costs are important. That’s why it’s worrying that manufacturing sales in Ontario are little changed since 2003 compared with gains of 14 per cent in Quebec and more than 20 per cent in British Columbia and Alberta, despite the removal of impediments such as a high dollar and oil prices.

Some of Ontario’s weakness reflects the long-term shift of auto production to the United States and Mexico. Several other components of our manufacturing sector, however, have fared even worse. Investment in Ontario has been halved since before the recession in industries such as computers and electronics, lumber, paper, printing, and rubber and plastics.

But it’s not just manufacturing where there’s a problem. Overall business investment—the lifeblood of any jurisdiction’s long-term growth—has slumped. Overall, business plans to invest $50.9 billion in Ontario this year, down from $53.8 billion before the recession.

Sluggish business investment and manufacturing, at a time of growth next door in Quebec, suggest the reasons for the slump are specific to Ontario. The high cost of doing business is a major factor. These costs include electricity rates, which are among the highest in North America and well above neighbouring Quebec, even with rebates for large industrial users. Meanwhile unit labour costs are the highest outside Atlantic Canada and will go higher after the minimum hourly wage climbs to $15. Finally, Ontario has the second highest top marginal personal income tax rate in North America, and high levels of government debt promise further increases unless spending is curtailed.

With weak business investment, Ontario is increasingly reliant on housing for growth. In 2016, housing accounted for 29 per cent of income growth. The boom in housing, which many call a bubble, has papered over the cracks in Ontario’s economy and government finances. However, this dependence on housing leaves the economy and government finances vulnerable to a market downturn. Already, house sales in Toronto in the first half of June fell 50 per cent from a year ago, after governments introduced measures to cool the market.

While little noted in Ontario, the Quebec media gleefully trumpet every sign La Belle Province is narrowing Ontario’s traditional lead in economic performance. Just last week, Standard and Poor’s lifted its rating of Quebec’s government debt above Ontario’s, a reward for years of mild-but-consistent austerity while Ontario continues to pile up more and more government debt. Unemployment, traditionally several points higher in Quebec, fell to half a point below Ontario’s in May.

To ensure strong long-term growth, Ontario must attract business investment. Unfortunately, at least partly due to government policies driving up costs, this remains a critical weakness for Ontario’s economy.

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