Ontario in decline: From Canada's economic engine to clunker

[ErickMontreal]

Ontario in decline: From Canada's economic engine to clunker

Can Dalton McGuinty see the light and reverse the decay with his forthcoming budget?

 

 

By Paul Vieira, Financial Post

March 23, 2009

 

A month before Dalton McGuinty, the Liberal Ontario Premier, hit the election trail in the fall of 2007 to seek a second mandate, an ominous warning sign of the province's crumbling economic stature emerged that should have provided fodder for the campaign.

 

An analysis from leading Bay Street economist Dale Orr said Ontarians' standard of living had plummeted -- from a peak of 15% above the Canadian average in the mid-1980s to just more than 5%. Accompanying the analysis was a warning of further erosion by 2010.

 

Alas, the eye-opening report hardly generated buzz during the election campaign. Instead, most of the talk was about a Conservative proposal to provide government funding for faith-based schooling. Ontarians didn't warm to the idea and re-elected Mr. McGuinty's Liberals with another majority.

 

Reflecting today on that report, Mr. Orr said his nightmare scenario for Ontario has unfolded as envisaged. If anything, the situation in the province may be worse.

 

As the McGuinty government prepares to table its sixth provincial budget on Thursday, it does so knowing the province that was once the country's economic engine is now the clunker of the confederation. While former have-nots such as Saskatchewan post surpluses this fiscal year, Ontario is bleeding red ink--a cumulative two-year deficit of $18-billion.

 

Ontario's dramatic decline comes as no accident. It was decades in the making, based on a combination of mismanaged public finances and the ascent of emerging economies at the expense of high-cost manufacturing. Upon taking office in 2003, Mr. McGuinty moved to pour tens of billions of dollars into improving government services -- health care, education and social programs targeting the downtrodden -- while neglecting the changing economic landscape. To help finance this agenda, he raised corporate taxes and slapped a health-care levy on households. These moves, analysts say, helped cement Ontario as one of the least attractive places for companies to invest.

 

Analysts wonder whether the economic crisis is finally going to force Mr. McGuinty and Dwight Duncan, his Minister of Finance, to make tough choices on spending and undertake the kind of tax reform -- as displayed this week by New Brunswick-- that will help the province attract investment to offset heavy job losses in Ontario.

 

Derek Burleton, senior economist at Toronto-Dominion Bank, said Thursday's budget presents a possible turning point for the province. "There is no doubt we are undergoing a period of transformation as some of the industries that have driven healthy gains in living standards are on the decline," said Mr. Burleton, who co-authored a report with TD chief economist Don Drummond last fall that called on the province to embrace a "sweeping" new economic vision.

 

"Given the sizeable deficit the province faces, that will put increasing pressure on the government to prioritize."

 

One of those priorities is for Mr. McGuinty to cease his preferred manner of dealing with difficulties in the industrial heartland -- funneling tens of millions of dollars to the manufacturing sector, particularly automotive, through targeted tax relief or direct subsidies.

 

"What the province should have been doing over the years was to make the province more flexible in attracting new businesses and not diverting resources into declining sectors," said Finn Poschmann, vice-president of research at the C. D. Howe Institute, a Toronto-based think-tank that has been critical of Ontario's tax breaks for struggling sectors such as autos and forest products.

 

"Do you want to steer resources to the sectors where the outlook is positive and growing? Or do you want to divert resources from these stars, which are more likely to generate the long-term employment and wage growth that Ontario is accustomed to?"

 

The manufacturing sector, and its high-paying jobs, used to be the province's crown jewel. But as a component of Ontario's GDP, it has dropped from a peak of 23% in 2000 to roughly 18% on factors such as a richer Canadian dollar, higher energy costs and offshore competition. It is expected to fall further once the dust settles from this crisis.

 

The province was largely able to mask the decline in manufacturing through a combination of a booming housing market, a surge in public sector hiring and a robust financial services sector. The financial crisis, however, has exposed those flaws.

 

For the period starting in 2003, only Quebec and Nova Scotia have produced weaker growth than Ontario. Forecasts suggest Ontario was the only province whose economy shrank last year, and economists say it will record either the worst, or second-worst performance, among provinces this year. Scotia Capital, for instance, has Ontario's economy contracting 2.9% in 2009, and posting meagre growth of 1.4% in 2010, below the expected national average.

 

Of the roughly 295,000 jobs lost in Canada since October, nearly half have come from the province. The result? Unemployment in Ontario, at 8.7%, is now higher than it is the United States (8.1%) and above Quebec's 7.9% jobless rate-- the first time that has happened in three decades.

 

The news is not expected to get any better any time soon. "We believe that the unemployment rate in Canada's largest province should hit 10% by 2010, even if the automobile sector's restructuring plan works," said Sebastian Lavoie, an economist at Laurentian Bank Securities.

 

Further, Mr. Lavoie said wage growth in the province is destined to take a hit. In the past, companies were forced to offer comparable wages and benefits based on what the Canadian Auto Workers would negotiate with the Detroit car makers. But Mr. Lavoie said that will no longer be the case, with CAW accepting salary freezes and making concessions on perks such as cost-of-living-allowance.

 

The financial crisis has just exacerbated a growing trend, said Mary Webb, senior economist at Scotia Capital. Ontario's receipts from foreign-bound exports last year represent an 11.7% drop from a peak of $185.1-billion recorded in 2000. For the same time period, Quebec's receipts fell by just 2.9%. For the rest of Canada, excluding Ontario and Quebec, receipts have surged a whopping 72%.

 

Compounding Ontario's problem is the emergence of big deficit, fuelled in part by shrinking tax revenue and years of escalated program spending. Under Mr. McGuinty, program spending now stands at $23-billion per year more than when he took office in October, 2003, an increase of 36%. In fiscal year, 2007-08, program spending climbed more than 10% to $87.6-billion, compared with a 5.4% increase in tax revenue.

 

 

Observers note Mr. McGuinty's ascent to power in 2003 can be attributed to a desire for change among Ontarians after years of the hard-nosed, right-leaning Conservative regime that earned scorned for cutting government services.

 

Mr. McGuinty's two terms have been dominated by a push to restore spending on public goods such as education, health care, infrastructure and social services. Analysts say Mr. McGuinty was on the right track to bolster some key building blocks, such as post-secondary education.

 

To help pay for this, Mr. McGuinty raised the corporate tax -- to 14% from 12% --in his first budget.

 

"The balance of [McGuinty's] approach was not quite right," said Jack Mintz, public policy professor at the University of Calgary and renowned tax expert. "The problem was trying to [reinvest in public services] while at the same time trying to maintain a vibrant industrial sector."

 

Mr. Mintz and other analysts say Ontario's tax regime, as currently structured, is suffocating the province's ability to attract investment and rebuild the economy. Last year, Jim Flaherty, the federal Finance Minister, suggested the tax system was making Ontario the "last place" businesses wanted to invest.

 

Mr. Flaherty took lots of heat for that remark, but he was on to something. Mr. Mintz's research indicates the province's marginal effective tax rate on capital, which encompasses all levies slapped on investment in the province, stands at 35%, six points higher than the Canadian average, 29%.

 

Further, the Ontario rate ranks as the ninth-highest in the world, tied with Japan. Despite moves to eliminate capital tax in 2010, and other business tax reductions from the federal government, Ontario's marginal rate is expected to drop only three points to 32% by 2012 -- still higher than all provinces and exceeding the national average.

 

"Ontario will not be successful in retaining existing businesses and attracting new ones if its taxation system is not on sound competitive footing with other provinces and countries," said the TD report by Messrs. Burleton and Drummond.

 

There are signs that Mr. McGuinty is acknowledging the need to change. Despite previous opposition, he said in January the province would take a "long, hard look" at harmonizing its provincial sales tax with the GST.

 

As currently structured, Ontario's sales tax derives almost half of its revenue from taxing business inputs such as productivity-enhancingequipment. Harmonizing with the GST would shift the tax burden to households, but economists argue it would boost business investment and make Ontario more attractive. In a C. D. Howe research paper he released yesterday, Mr. Poschmann said putting an end to the "archaic" sales tax and harmonizing with the GST would move Ontario from a high-tax jurisdiction to a medium-tax jurisdiction by 2012, with the marginal rate on investment falling just over 10 percentage points.

 

A signal toward sales tax harmonization could be contained in Thursday's budget, although observers are hedging their bets given the potential voter backlash. Any further moves on taxation, whether business or personal, may have to wait given the province's monster deficit and an unwillingness to give up further revenue to fund public service initiatives.

 

"Ontario is going to be deeply challenged," Mr. Mintz said, "because it is going to be very hard for the government to do anything when you are so fiscally restrained-- unless it wants to make the deficit even bigger now."

 

Glen Hodgson, senior vice-president and chief economist at the Conference Board of Canada, said the needed tax reductions would not see the light of day until Ontario decides what to do about health-care spending, which is growing at an annual clip of 8% to 10% and is the single biggest expense item in the budget.

 

"This is a catalytic moment for the province," Mr. Hodgson said. "The light bulb has gone on, but it is not burning brightly yet. A lot of people would like to return to the Old World. But I think the Old World is gone -and that's the dilemma Ontario faces."

 

 

---------

MANITOBA, N.B. SET EXAMPLE:

 

 

As Ontario attempts to pull itself out of its economic quagmire, it can look to the provinces of Manitoba and New Brunswick for leadership.

 

 

While the recession is expected to hit every province, Manitoba comes out near the top in most forecasts as one of the country's better performers in 2009. In its outlook, the Conference Board of Canada projects slight growth in the province of 1%, powered by infrastructure projects and tax cuts.

 

 

Jack Mintz, public policy professor at the University of Calgary, said Manitoba was, along with Ontario, considered a high-tax jurisdiction for business investment. But the government has moved and Manitoba's marginal effective tax rate on investment dropped from 37% in 2007 to 33.8% last year. It is now scheduled to fall to 26.7% by 2012.

 

 

"It is on the high side, but it will be closer to the national average" in 2012,Mr. Mintz said. "From the point of view of people who need to make investment decisions now, they know these changes are in place over the next several years. So Manitoba looks more appealing."

 

 

Manitoba also benefits from having one of the most diversified economies in Canada. Roughly 30% of its economy is agriculture, which is more resilient to economic downturns. Further, Manitoba has a diversified manufacturing base with aerospace and buses playing key roles - and, unlike autos, demand for those products continues to be fairly solid.

 

 

It also has abundant, cheap hydroelectricity. In contrast, questions abound over the reliability of Ontario's power grid, especially in light of the 2003 blackout that blanketed the province and much of the U.S. northeast.

 

 

Meanwhile, analysts have applauded New Brunswick for taking aggressive steps on taxation this week in an effort to make the province more attractive for both investors and workers.

 

 

The main change is the replacement of the existing four-bracket personal income tax structure to a simpler two-bracket structure by 2012. The lowest rate will be 9% for workers earning less than $37,893. Beyond that threshold, a flat tax of 12% will be applied.

 

 

Perhaps more stunning, however, is that New Brunswick plans to lower its general corporate tax rate from 13% to 12%, effective this year, and all the way down to 8% by 2012 - the lowest in the country.

 

 

"The New Brunswick government appears to be relatively more proactive compared to other jurisdictions, taking bolder steps to improve its economic and fiscal roadmap," said Carlos Leitao, chief economist at Laurentian Bank Securities, in his analysis of the province's budget.

 

 

Source: Paul Vieira, Financial Post

 

 

pvieira@nationalpost.com

 

 

ONE-TIME POWERHOUSE CAN'T KEEP UP WITH REST OF THE COUNTRY:

 

 

Ont. Export Receipt Drop

 

 

11.7%

 

 

Que. Export Receipt Drop

 

 

2.9%

 

 

Receipt Rise Rest Of Canada

 

 

72%

 

 

Ontario GDP Decline, 2009

 

 

2.9%

 

 

RANKS OF WORKERS IN CANADA'S LARGEST PROVINCE TAKE IT ON THE CHIN:

 

Ontario Unemployment

 

 

8.7%

 

 

U.S. Unemployment

 

 

8.1%

 

 

Quebec Unemployment

 

 

7.8%

 

 

Ontario Unemployment, 2010

 

 

10%

 

 

© Copyright © National Post

[ericairlines]

Et oui Calgary et Toronto ...les temps changent...un peu de modestie à présent ...

[Ornello Mastrocola]

Finally!! Some good news!

[iamthewalrus]

is it really good news ?.

we shouldnt be happy that other provinces are strugling, if big provinces like ontario and alberta have some hard times it will hit us at one time or another

[Malek]

These provinces are our clients one way or the other...

[ouaouaron]

I don't think we should be happy about the ROC going bust.

 

Equalization payments for one.

 

But more importantly, I think this type of opinion typically illustrates a Quebecois mindset: Instead of comparing ourselves to the best, we rather just look at poor performers as a way to make us feel not so bad.

 

Quebec is way more in debt and in trouble than any other province.

 

Just look at the EI numbers: QC has about the same EI claims as Ontario, a province almost twice it's size:

 

http://www.statcan.gc.ca/daily-quotidien/090324/t090324a1-eng.htm

 

I'll take Ontario's temporary uncertainty over Quebec's chronic under performance any day.

[FFJ-MTL]

Finally!! Some good news!

 

J'espère que ton commentaire est sarcastique...

[francely57]

Et oui Calgary et Toronto ...les temps changent...un peu de modestie à présent ...

 

Ce sont les provinces qui retombent sur terre...

Toronto reste une des métropoles les plus prospères du continent (si c'est pas LA plus prospère?)

 

 

...et si l'Ontario va mal, c'est grave pour tout le monde parce qu'on peut pas se permettre de la voir tomber dans les "have-not provinces".

Avoir les 2 grosses provinces parmi les have-not ferait imploser le pays ou quelque chose du genre?

[Ornello Mastrocola]

Yes my comentary is stated with sarcasm!! 75% of my family live in the greater Toronto region and I do not wish it upon anyone.

[Habsfan]

I don't think we should be happy about the ROC going bust.

 

Equalization payments for one.

 

But more importantly, I think this type of opinion typically illustrates a Quebecois mindset: Instead of comparing ourselves to the best, we rather just look at poor performers as a way to make us feel not so bad.

 

Quebec is way more in debt and in trouble than any other province.

 

Just look at the EI numbers: QC has about the same EI claims as Ontario, a province almost twice it's size:

 

http://www.statcan.gc.ca/daily-quotidien/090324/t090324a1-eng.htm

 

I'll take Ontario's temporary uncertainty over Quebec's chronic under performance any day.

 

Tu apportes de bons points. Peut être qu'avec cette crise, le Québec recevra moins de péréquation(surttout à cause du faits que l'Ontario est rendue une "have not" province) Peut être que cette réduction de la prérquation va nous permettre de se sevrer de cette maladie que nous avons de se fier sur les paiements de péréquation. Peut-être que ça va nous forcer à changer notre maudite mentalité de colon ou l'on s'attends à être compenser par ole Fédéral car nous sommes plus pauvres...peut-être que je rêve en couleur, mais j'aimerais voir le jour ou le Québec serait une province "riche".

 

J'aime aussi ton deuxième point où tu dis que nous aimons se comparer à ceux qui ne performent pas bien. Il ne faudrait surtout pas se comparer ``a ceux qui sont à la tête du classement! C'est ce que je dis depuis des années...on aime niveler par le bas, au lieu de viser pour le TOP!!!

 

As far as the EI claims, I had no idea our situation was that bad! Thanks for posting this! Instead of the 175,000 people who benefit from EI, Québec should have a figure that is closer to 110,000-120,000. Our performance is sad!