Ontario vs. the US “Rust Belt”: Coping with a Changing Economic World
Since the recession, Ontario has recorded large and consistent budget deficits that have increased the province’s already enormous debt load. According to a prominent narrative at Queen’s Park, policymakers are not to blame for this fiscal trend because the province has been struck by economic forces beyond its control including a higher dollar and global restructuring in manufacturing.
This study subjects this narrative to empirical scrutiny by comparing the economic and financial performance of Ontario with other industrial jurisdictions such as Quebec and the US “Rust Belt” states from 1999 to 2013. The Rust Belt states include Indiana, Michigan, Ohio, Pennsylvania, and Illinois. The selection of this peer group controls for the regional reliance on manufacturing; a number of the Rust Belt states had higher concentrations of manufacturing than did Ontario.
The main finding is that Ontario had a markedly worse financial performance than the Rust Belt states even though they enjoyed much stronger economies. Despite Ontario’s comparative economic strength, it accumulated far more government debt than the Rust Belt states. Even more disturbingly, by 2012/13 the US Rust Belt states had all restored healthy budget surpluses, while Ontario continued to run large deficits. Despite enjoying higher population and aggregate economic growth, Ontario is in a much deeper debt hole.
Queen’s Park claims that the poor economic performance is due to the appreciation of the Canadian dollar vis-à-vis the US dollar since the early 2000s. However, the exchange rate is currently very near its historical average. Simply put, bad policies in Ontario have led to poor financial performance compared to other industrial jurisdictions, which, like Ontario, have weathered a global restructuring in manufacturing. The implication is that better policies can improve the province’s finances and overall economic performance. Further, the responses both of both Indiana and Michigan to the global recession and the restructuring in manufacturing offer lessons for Ontario.