Ontario's problem: Ontario's government

Printer-friendly version
Appeared in the Calgary Herald, Belleville Intelligencer, Grande Prairie Daily Herald-Tribune, Pembroke Daily Observer, Sarnia Observer, Stratford Beacon Herald, and Owen Sound Sun Times
In his recent shot at Alberta, Ontario’s premier Dalton McGuinty—who blamed the West’s resource boom for a slowdown in Ontario’s manufacturing sector—invented a fascinating explanation for the relative decline of Ontario.

While McGuinty later backtracked and claimed his original clear point was not his actual opinion, what is yet transparent is how, in McGuinty’s world, Ontario’s problems have nothing to do with his own policy choices, or events outside of Canada—say, worldwide competition in the manufacturing sector.

True, a booming resource economy out West and its effect on the Canadian dollar relative to other currencies can make it more difficult for manufacturers to export.

However, it’s not as if Ontario couldn’t benefit from the worldwide demand for more resources: Ontario has plenty of potential new mines. If the Ontario government wants to cash in on the demand from China and elsewhere, it should make those resources easier to develop.

On manufacturing, Ontario was hit by the same recession that yet plagues the U.S. manufacturing sector. Presumably then, using McGuinty’s thesis, the resource-rich Canadian West is also to blame for the decline in Michigan, Ohio and other northeast U.S. states. To wit, there are some worldwide factors at play in the decline of Ontario, the other critical aspect that Ontario’s premier ignores. Maybe that’s because recognizing that fact would highlight his own government’s poor policies. 

For example, in 2009, the last year alone for which statistics are available, Ontario’s government spent $2.7 billion on corporate welfare. That’s a terrible misuse of tax dollars as it picks winners and losers and hampers, not helps, the overall economy. A better strategy is neutrality in tax and spending policy: use whatever budgetary room a government has to get business and personal taxes down.

To its credit, Ontario did reduce business taxes over the past several years (while it hiked personal taxes). But here’s the problem: The McGuinty government thwarts its own progress there by making power more expensive. It does this through expensive feed-in-tariffs (renewable energy producers are paid much more than the market rate needed in traditional energy production such as hydro). The Ontario government has done this to encourage alternative energy but at an exorbitant cost to consumers.

Thus, as Ontario’s Auditor General pointed out in late 2011, the Ontario government’s multi-year agreement with two Korean companies to build renewable energy was rushed and done without proper due diligence: “No economic analy¬sis or business case was done to determine whether the agreement with the consortium was economically prudent and cost-effective.”

Also, on feed-in-tariffs, the Auditor General noted that had Ontario applied the recommendation of the Ontario Power Authority, $2.6 billion could have been saved over the next 20 years. Both were deliberate policy mess-ups and both will make it more expensive to start a business—and create jobs—in Ontario. In fact, Toronto-based energy consultant Tom Adams calculates Ontario will have the highest power prices in North America by 2013.

Beyond reversing some counter-productive policies and ceasing the attacks on the West, the remedy to weak recoveries and worldwide competition is not to close up Canada’s borders in some vain effort to protect a plant in Ontario, or for that matter, any business anywhere in Canada. Canada is a trade-dependent nation. We (and in return everyone) benefit from selling our goods and services to other countries. Open borders are a necessity because free trade expands economies.

The late Angus Maddison discovered just this in his now-famous survey of the world economy over the last millennium. In it, Maddison pointed out that while the number of people alive at the end of the 20th century was 5.6 times higher than those around in 1820, per capita income was higher by a factor of 8.5. In other words, the economic pie grew in real, per person terms. That increasingly included important “catch-ups” by non-western countries since the 1950s (think of East Asia’s spectacular growth). That happened because some politicians made the right, pro-growth policy choices over the years. That allowed natural entrepreneurial energy and economies to flourish.

Ontario has some severe challenges including massive deficits and poor industrial labour and power policies, much of which are of its own making. Alberta has a few similar challenges; no province is perfect. But Ontario’s premier is way off the sensible policy reservation in blaming the West for Ontario’s anaemic state. Over the years, Ontario Premier McGuinty’s own policies made a weak Ontario economy even worse. The Ontario government should focus on expanding the Ontario economy, rather than engaging in churlish attacks on Canada’s more successful provinces.

Subscribe to the Fraser Institute

Get the latest news from the Fraser Institute on the latest research studies, news and events.