Ontario's financial woes a problem for all of Canada
Lost in the current flurry of Ontarios election campaign is the one key issue facing the province, and indeed all of Canada: Ontarios laggard economic performance is dragging down the national economy.
Due to the sheer size of Ontarios economy and population as well as the fact that its output and employment are integrated with the Canadian economy, what happens in Ontario affects all of Canada.
Ontarios economic malaise is the outcome of its poor economic productivity and a more competitive world. Its problems are aggravated by higher costs for electricity and energy resulting partly from a government green energy industrial policy, a reliance on manufacturing exports tied to a U.S. market that experienced a major downturn, and a political culture focused on government intervention as a solution to the economys perceived problems.
Across a host of economic indicators, Ontario is simply not performing at the national average, let alone filling its traditional role as a foundation for the national economy.
From 1981 to 2004, Ontarios real per-capita GDPa broad measure of incomewas either above or equal to the rest of Canada. A slow-down in the growth of per-capita GDP began in Ontario after 2000 and in 2005, Ontarios real per-capita GDP fell below that of the rest of Canada where it has remained.
Specifically, in 2004, Ontarios real per-capita GDP was 0.4 per cent higher than the rest of Canada. By 2012, Ontarios real per-capita GDP was 5.6 per cent lower than the rest of Canada. Put differently, if data for Ontario were excluded, Canadas per-capita GDP would be 2.2 per cent higher.
A key measure of competitiveness now and expectations for the future is the growth in fixed investment (referred to as capital formation). Between 2003 and 2012 (the most recent data available), Ontarios growth in fixed capital averaged 3.0 per cent compared to the rest of Canadas 5.3 per cent. Ontario was failing to attract capital investment at a rate comparable to the rest of the country.
Perhaps most illustrative of Ontarios under-performance is its private sector job creation and unemployment records. Between 2003 and 2012, Ontarios total growth in private sector employment was 4.1 per cent. Canada, excluding Ontario, experienced 12.7 per cent growth, or more than three times the rate of private sector job creation in Ontario. Indeed, since 2000, Ontario has had the third lowest rate of private sector job creation in the country, ahead of only Nova Scotia and New Brunswick.
Ontario compensated for this poor performance in private sector job creation by having its public sector grow at about twice the average rate of private sector employment. In fact, the only reason Ontarios total employment growth is not weaker is that the provinces public sector has grown markedly.
This poor record of creating private sector jobs affects the provinces unemployment rate. Over the last decade Ontarios average unemployment rate was 7.3 per cent while the rest of the country, excluding Ontario, maintained an average unemployment rate of 7.0 per cent.
Perhaps more telling, from 2009 to 2013, Ontarios unemployment rate was higher than all the western provinces and Quebec. Only Atlantic Canada had higher rates of provincial unemployment.
Ontarios poor record on GDP growth, productive capital investment, and employment has meant a poorer national performance than would otherwise be the case. When Ontario is factored into national statistics, Canadas economic performance is brought down. As much as Canada boasts of weathering the post-recession period in reasonably good economic shape compared to other G-7 countries, it could have performed even better with a more buoyant and productive Ontario. An economically stronger Ontario means an economically stronger Canada.
Ontarios economic weakness also translates into weak financial performance by the government of Ontario not least of which has been its descent into equalization recipient status. Indeed, the province has resorted to supporting its accustomed level of public spending by demanding more federal transfers and accumulating more debt. For instance, in 2012/13, Ontario accounted for almost half (49.6 per cent) of all provincial net government debt in Canada, reflecting a debt much larger than its population share. Indeed, in 2012/13, Ontario reported the highest provincial net public debt of all the provinces, and the second highest net debt level as a share of the economy (GDP) of the provinces.
Ontario can do better. Smarter policies focused on competitiveness and encouraging economic growth rather than interventionist industrial policies and expansionary government will resolve Ontarios lagging performance.
Specifically, improved tax and regulatory competitiveness coupled with better energy and industrial policies would establish the foundation for improved economic performance. It can start by getting its public finances in order, boosting its economic productivity by encouraging more capital investment in the province, recognizing that government intervention has its limits, and unleashing its private sector on its northern mining and forestry resource frontiers. The economic results will be good for Ontario and for Canada.
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