Fraser Forum

Ontario’s election—the real economic issues

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Ontario’s June 7 election may be a watershed moment as the new government will deal with an economy that, despite the recent improvement, still faces major challenges with employment and investment, given a housing boom is not a sustainable long-term driver.

The recent improvements in Ontario’s GDP growth fuelled spending plans for all three major party leaders as none of them appear overly concerned with the province’s government finances as they announce new spending initiatives, infrastructure plans and changes to the tax system that do not fully appreciate the need for the province to be competitive.

They appear content to merely reap the bounty of an improved economy and are not interested in putting forth policies that foster long-term productivity and economic growth.

Ontario’s real per capita GDP has shown signs of life over the last three years after a decade of abysmal performance. From 2003 to 2013, real per capita GDP growth averaged at less than one-half of one per cent. However, from 2014 to 2017, the range has been from 1.1 per cent to 2.1 per cent (with an average of 1.5 per cent).

Yet, if one looks at the growth rates of real domestic product by industry since 2013, one sees some of the highest growth rates concentrated in sectors such as finance and insurance, real estate and leasing, arts, entertainment and recreation, and accommodation and food rather than more broadly-based growth across all sectors.

The goods-producing sector has expanded at an average of 1.5 per cent annually while services in general have grown at 2.6 per cent. Moreover, within the goods-producing sector, construction has been the leader, with growth fuelled by a frothy residential market particularly in the Toronto area, and government infrastructure spending. Indeed, one can argue that most of this activity is a function of historically low interest rates and continued borrowing at both the public and private level.

Investment spending in Ontario is weak. The growth rates of residential construction since 2013 have averaged 3.5 per cent with non-residential construction at 1.1 per cent and machinery and equipment, the catalyst of productivity and wage gains, also at a mere 1.1 per cent. Since 2003, investment in machinery and equipment in particular as a share of GDP has fallen from 4.2 per cent to 3.1 per cent by 2016.

Investment in new plant and equipment drives productivity in Ontario, and while real GDP per employee has grown since 2013 at an average of 1.3 per cent annually, the previous decade saw only an average of 0.5 per cent growth, meaning there’s still a lot of lost ground to make up.

As for employment, it’s growing with private-sector jobs expanding faster than public-sector jobs since 2013. Prior to 2013, the story was different as growth in government employment was the main driver of jobs. Ontario’s Fall 2017 Economic Statement reveals that since 2013, total employment has grown by more than 2.6 per cent with private-sector employment growing 3.4 per-cent and employment in the public sector actually shrinking by -0.6 per-cent.

However, this employment growth has been lopsided with the GTA and adjacent areas reaping most of the benefits, with outlying regions benefitting little. Employment in the GTA grew 4.1 per cent, with Kitchener-Waterloo-Barrie growing by 1.7 per cent and Hamilton-Niagara by 3.4 per cent. However, Kingston-Pembroke shrank by -0.9 per cent, Stratford Bruce by -4.0 per cent and northern Ontario by -2.2 per cent. As a share of total employment, the GTA’s share was 47.5 per cent in 2013 and reached 48.2 per cent in 2016.

The economic challenge for Ontario remains one of sustained and continued growth in income and employment that benefits all Ontarians. The recent improvements since 2013 are good news, but the improved economic conditions come after a decade of sluggish performance in employment, investment and income accompanied by a massive string of deficits and debt accumulation. Moreover, much of Ontario has been left behind when it comes to employment-creation, especially the further one moves out from the GTA and Ottawa.

The recent economic improvements also run the risk of being short-lived as the economy is probably at the tail end of the economic cycle and there’s considerable uncertainty over the future given the slowing housing market, the upward creep in interest rates, and the prolonged NAFTA negotiations. Add to this mix declining competitiveness relative to the United States (as the Americans lower tax rates) and Ontario’s higher electricity prices and rising minimum wages.

The major candidates in Ontario’s election appear oblivious to these economic realities given the billions of dollars in additional government spending being proposed, an acceptance of large deficits and high debt for the foreseeable future, and a failure to recognize that economic incentives matter with proposed tax changes that fail to account for the fact that Ontario has among the highest marginal personal income tax rates in the country, a situation made worse by recent tax changes south of the border, which saw the top personal federal rate drop.