Ontario’s economic decline will strain Canadian unity, critics argue

Ontario's decline from its traditional role as Canada's economic engine is setting off alarm bells about the implications for Canadian unity.

Since Confederation, Ontario was Canada's centre of gravity, a thriving manufacturing hub that consumed resources from the rest of the country and for the last few decades was the source of much of the money the federal government paid out in equalization payments.

Equalization is designed to ensure all provinces can offer comparable levels of health, education and social services. it's become part of the federation's bedrock.

But now the economic centre of gravity has shifted to the resource-rich western provinces while Ontario's manufacturing sectors stagnate.

Under the complex equalization formula, Ontario has become one of six have-not provinces and will receive about $3.2 billion in payments for fiscal 2011-12, according to the federal Department of Finance.

That's less than half the $7.4 million Quebec, a long-time equalization recipient, will get. The other provinces on the receiving end are Prince Edward Island, New Brunswick, Nova Scotia and Manitoba.

The provinces contributing money to equalization are British Columbia, Alberta, Saskatchewan and Newfoundland and Labrador - once the poster child for equalization but now benefiting from offshore petroleum development.

National Post columnist John Ivison says the move of Ontario into the have-not neighbourhood will strain the federation.

Ottawa will distribute $15.4 billion in equalization in 2012-13.

"The problem is that even this level of redistribution is unlikely to prove rich enough in the years to come, as Canada's manufacturing heartland continues to decline, at the same time as its resource rich provinces benefit from high commodity prices," Ivison argues.

The decision by multinational Caterpillar to close the Electro-Motive Diesel plant in London, Ont., shifting jobs to a lower-cost U.S. site, is the most recent example of Ontario's relative uncompetitiveness, he says.

He notes former Bank of Canada governor David Dodge predicts Ontario will need larger intergovernmental transfers over the rest of this decade, which he estimates will reached $5.5 billion.

The increased financial obligation of the haves will create strains between the western and eastern provinces, Dodge says.

"But perhaps more concerning for national unity is the anticipated rise in tension between Ontario and Quebec, as they compete for scarce equalization dollars," Ivison observes.

He notes Ontario Finance Minister Dwight Duncan points out Ontario taxpayers, who still contribute more to equalization than they get back, are helping pay for Quebec's $7-a-day childcare program and subsidized electricity.

His fellow Post columnist, Lorne Gunter, argues the equalization formula is overdue for reform.

If the original rules set out in the late 1950s still applied, only P.E.I. would still qualify for equalization, he says.

Geographic and demographic shifts aren't accounted for in the equalization formula, Gunter argues. Nor does it factor in the difference in costs for delivering services.

"Our equalization system is good at calculating how much a province should receive relative to its 'fiscal capacity' — its ability to raise revenues from income, sales and corporate taxes — but fails to take into account at all each province's 'expenditure needs.' No consideration is given to how much it actually costs to provide basic public services."

Under the present system, Ontario loses out, says Gunter.

"In 2010, Ontario received equalization payments of $3.7-billion. Had the higher cost of providing services there been factored in, it would have received $4.5 billion — the same as Quebec would qualify for."

Over at the Globe and Mail, national affairs columnist Jeffrey Simpson dubbed Ontario the Sick Man of Canada, borrowing heavily to maintain the province's existing level of services.

"The rest of Canada should take note," Simpson writes. "Ontario is fiscally crippled and will be for some time. This crippling represents the biggest change within Confederation since the discovery of oil in Alberta."

The equalization Ontario receives is not as large as Quebec's but the fact it gets the money is a symbol of its decline, he says.

Ontario squabbling political parties need a consensus on how to address a growing gap between revenues and expenditures.

"Maybe the three parties in a minority government will stop posturing and come together in a serious effort to restore Ontario's fiscal situation," writes Simpson. "Maybe pigs will sprout wings."

He says the province and its leader, Premier Dalton McGuinty, scheduled to give a speech Thursday, have a choice: "Speak the truth about what is really happening and prepare people for what must be done; or give a Toronto speech, evasive, bland and political."