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Matthew Mendelsohn is director of the Mowat Centre at the School of Public Policy and Governance, University of Toronto.
The Drummond report’s chapter on “Intergovernmental Relations” has received little attention so far. That needs to change. The chapter provides a devastating, evidence-based case that lays a lot of the blame for Ontario’s fiscal woes on the steps of the federal government.
When Premier Dalton McGuinty complained on Monday about federal decisions that are having a disproportionate effect on Ontario, he actually had the evidence on his side.
Chapter 20 of Don Drummond’s report begins by noting that in 2009-10, Ontario, with 39 per cent of the Canadian population, contributed 39 per cent to federal revenues, but benefited from only 34 per cent of federal spending — a gap worth about $12.3 billion or 2.1 per cent of Ontario’s GDP. The report concludes that this — among other factors — demonstrates the “perverse structure of Canadian fiscal federalism.”
Such a drain of fiscal resources from Ontario may have at one time been justified. It was the burden of prosperity that Ontarians gladly paid in the 1970s and ’80s.
Today, as is well known, Ontario’s fiscal capacity is below the national average. However, despite receiving equalization this year, Ontario, along with Alberta and B.C., are the only net fiscal contributors to the federation.
This is no longer sustainable. The operation of fiscal federalism and federal spending decisions that take money out of Ontario at a time when its fiscal capacity is below average is indeed “perverse” and should offend Canadians’ sense of fairness.
Over the past decade, the federal government sucked 2 to 4 per cent per year out of Ontario’s GDP for the purpose of regional redistribution. We are now seeing the long-term impact of federal policy on Ontario’s economy.
Ontario has the largest deficit in the country. This is not because of higher than average spending. In fact, Ontario spends less per capita than any other province. In 2009, Ontario spent just $9,030 per capita, well below 9th placed B.C., which spent $9,689. Newfoundland and Labrador ($13,466) and Saskatchewan ($11,848) were the biggest spenders and, despite surging resource royalties and above average fiscal capacity, both continue to be significant beneficiaries of federal spending. With resource revenues and generous federal spending decisions, it is not surprising that they spend more than other provinces.
This is the backdrop to Ontario’s efforts to bring down its deficit: It already runs the least expensive, most efficient programs in the country. It has to. Because of the operation of federal transfers and spending, Ontario has fewer dollars to spend, in a virtual tie with P.E.I. for lowest fiscal capacity among provinces.
For the rest of this article, please go to the Toronto Star website: http://www.thestar.com/opinion/editorialopinion/article/1142062–ontario-staggers-under-burden-of-fiscal-federalism