Ontario used to be known as the economic engine of Canada, but soon it will join five other provinces in receiving equalization payments.
For the first time in history, Ontario will officially become a “have-not” province in 2009, according to the federal government of Canada. Although it is no longer the mighty economic power it once was, Ontario is still an important part of the Canadian economy, contributing about 40 per cent of Canada’s total employment.
The province will be receiving $347 million, about 2.4 per cent of the total program budget of $14.2 billion. This suggests that Ontario’s economy is slipping and the province no longer holds the status that it held in the Canadian economy. This seems to be the case when looking at the sudden drop in the Toronto stock markets, the layoff at General Motors in Oshawa of 1,500 employees in April, or Ford recently cutting jobs across the country. But, with 12 million people, Ontario still has the largest work force in Canada and remains a major contributor to Canada’s GDP.
The equalization program is the federal government’s way of addressing fiscal disparities among provinces. According to Canada’s finance ministry, it enables less prosperous provincial governments to provide their residents with public services that are reasonably comparable to those in other provinces, at somewhat comparable levels of taxation. The payments are unconditional and the receiving provinces are free to spend the funds according to their own priorities. But, Financial minister Dwight Duncan argues that since Ontarians are by far the largest contributor of tax revenue to Ottawa, they will, in fact, be paying themselves in the equalization program.
The payment will provide funding for public services such as health care and education. However, receiving the equalization payment doesn’t mean that Ontario has grown poor. Other provinces just seem to be prospering as a result of the reforms made to calculating equalization payments. The reforms, made as a result of volatility in resource prices and an economic crisis south of the border, pushed Ontario into the have-nots sooner than later. Last year, the government adopted a new formula, which calculated equalization based on the revenue-generating capacity of the 10 provinces. Also, for the first time since 1982, revenues from industries such as oil became a factor in the calculation and 50 per cent of other natural resource revenues are excluded in determining each province’s fiscal capacity and the standard.
Because of the oil factor, Newfoundland and Labrador became a “have” province for the first time since it joined the confederation nearly 50 years ago. Similar to Alberta, the main source of the province’s wealth is based on offshore oil revenues. According to Statistics Canada, in 2007 GDP in Newfoundland and Labrador surged nearly six per cent because of increased oil and mineral extraction. The growth of GDP in Ontario only reached 2.4 per cent due to a slowdown in the U.S. economy and a previously high Canadian dollar early in the year.
Unlike Alberta and Newfoundland, Ontario doesn’t have a large oil industry. The province’s industries are diversified. Northern Ontario is highly dependent on natural resources while southern Ontario depends heavily on the U.S. market and is heavily employed in service industries such as tourism and culture. Almost three quarters of Ontario’s GDP came from the service industries in 2007, according to a study by the Ontario Ministry of Finance. A third of that came from real estates, finance, and insurance. Since the Canadian economy is closely tied with the American market, the service industry also took a hit with the drops in the U.S. stock market.
Ontario has moved its economy beyond resources, developing a skilled work force that has built a strong economy based on manufacturing, technology and knowledge.
The diversity in Ontario’s work force will provide a security net for the economy when resources such as oil have depleted.
With the recent financial turmoil in North America and other parts of the world, Ontario’s manufacture industries are taking a hard hit. The auto industry, representing 20 per cent of the province’s output, is closing factories and laying off workers by the thousands. Many critics have said that a recession seems inevitable in the province’s future.
At a meeting with other premiers on Monday, Dalton McGuinty said it’s vital to put together a federal-provincial aid package for the auto industry but he also said defining Ontario as a "have-not" province doesn’t represent reality. Ontario taxpayers are still net contributors to Confederation of $23 billion and McGuinty said half the new jobs created in the country during the first half of this year were in the province.
Even though federal Finance Minister Jim Flaherty has expressed his concern that Ontario may be getting equalization payment for “some time," Ontario’s minister of finance has insisted that the payment will be a short-term thing.
McGuinty has also made efforts to look for new markets to expand Ontario’s economy by going on a trade mission to China last month.
Collecting $337 million from the federal government is not a sign of failure. The stock markets will eventually recover along with the economy.
Resources such as oil and cods do not last forever. Sooner or later, oil will run out in those provinces whose profit relies heavily on it.
In the long run, Ontario will benefit from its diverse industries and become a “have” province again.