Don’t blame feds for Ontario’s fiscal woes

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Appeared in the Toronto Sun, December 23, 2015

A long-running narrative from Queen’s Park holds that federal stinginess with respect to transfer payments is a significant cause of Ontario’s fiscal woes. In fact, following the 2014 federal budget, Ontario’s finance minister claimed the federal government had delivered a “kick in the teeth” by making “massive cuts” to the province.

The reality does not square with this overheated political rhetoric. Over the weekend, the federal finance minister announced that federal transfers to Ontario will increase by 4.2 per cent next year. But significant annual increases in federal transfers to Ontario are nothing new. In fact, federal payments to Ontario have been increasing rapidly over the past decade.
First, let’s clarify what “federal transfers” are.

All provinces receive payments from the federal government to help fund health and social services, based on population. In addition to these per-person transfers, some provinces receive equalization payments. These only flow to jurisdictions deemed unable to raise enough revenue to finance adequate public services.

Federal transfers are a perennial bone of contention between several provinces and the federal government. Provincial governments frequently claim they are not getting enough money from Ottawa, and partially blame this supposed shortfall for their fiscal problems. Certainly, Ontario has been vocal in making this argument in recent years.

The numbers, however, tell another story.

From 2005/06 to 2015/16, major federal transfers to Ontario rose from $10.9 billion to $20.4 billion—an increase of 87.8 per cent, the second largest increase among all provinces during this timeframe.

This rate of increase substantially outstripped what would have been necessary to keep pace with increasing overall prices (inflation) and the province’s growing population. As a result, inflation-adjusted per-person transfers to Ontario increased by 43.4 per cent between 2005/06 and 2015/16—again, the second largest increase in Canada.

And it’s not as though growth in federal transfers to other provinces has been stingy. In fact, major federal transfers to the provinces taken as a whole increased by more than 60 per cent during this decade.

In other words, the overall federal transfer “pie” has been increasing over the past decade, and Ontario’s “slice” has grown larger as well.

The key reason Ontario’s transfers have increased so quickly is the province’s emergence as an equalization-receiving province. Ontario, historically an engine of economic growth in Canada, became a “have-not” province in 2009/10 and began to receive equalization payments for the first time. Since then, the province has received more than $14 billion in equalization payments, contributing to rapid growth in the size of its overall transfer envelope.

Ontario’s fiscal problems have emerged because the provincial government has failed to restrain its spending growth. As a result, the province has continued to spend more than it takes in, running persistent budget deficits even as increased transfers continued to pour in from Ottawa. The province’s overall revenue growth (driven partly by increased transfers) has been more than enough to offset the combined effects of inflation and population growth. The problems have developed because the province hasn’t been able to keep spending growth in check.

Blaming Ottawa for Ontario’s persistent deficits is a convenient but false narrative. To find the real reason for the province’s fiscal woes, Ontario’s political leadership will have to look in the mirror.

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