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Summary
Ontario’s economic struggles, which are most dramatically illustrated by its transition to a “have-not” province, have implications far beyond the borders of the province. For the better part of a decade, and particularly since the recession of 2008/09, Ontario’s economic performance has dragged down that of the national economy. Due to both the sheer size of Ontario’s economy and its population, as well as the fact that the Canadian economy is highly integrated, what happens in Ontario influences our national economy.
The important influence of Ontario on the national economy is borne out by statistics. For example, if we compare the variation in per-capita GDP growth for Canada (without Ontario) against the variation in Ontario for the period from 1982 to 2012, we find that the variation in Ontario explains roughly three quarters of the variation in the rest of the national economy. Simply put, for the better part of three decades, the success of Canada’s economy was inextricably linked with the success and failure of Ontario’s economy.
Ontario’s influence is also seen in employment statistics. About two thirds of the variation in employment growth in the rest of Canada between 1982 and 2012 is explained by the variation in employment growth in Ontario. In other words, Canada experienced strong employment growth when Ontario experienced strong employment growth, and vice versa.
Unfortunately, Ontario’s under-performance since the early 2000s—and particularly since the recession of 2008/09—has been dragging down our national performance. Across a whole host of economic indicators, Ontario is simply not performing at the national average, let alone filling its traditional role as a foundation for the national economy.
From 1981 to 2004, Ontario’s real per-capita GDP (a broad measure of income) was either above or equal to the rest of Canada. A slow-down in per-capita GDP growth began in Ontario after 2000 and, starting in 2005, Ontario’s real per-capita GDP fell below that of the rest of Canada. In 2004, Ontario’s real per-capita GDP was 0.36% higher than the rest of Canada. By 2012, Ontario’s real per-capita GDP was 5.6% lower than the rest of Canada. Indeed, in 2012, if data for Ontario were excluded, Canada’s per-capita GDP would be 2.2% higher.
Since 2000, Ontario has recorded the third lowest rate of private sector job creation in the country, ahead of only Nova Scotia and New Brunswick. Specifically, Ontario’s private sector employment growth between 2000 and 2013 totaled 14.1% compared to first-placed Alberta’s 42.1% or to Canada as a whole, which recorded 19.0% growth.
Not surprisingly, Ontario’s performance in keeping unemployment rates low is poor, particularly after the 2008/09 recession. Specifically, Ontario ranked fifth among Canadian provinces over the period from 2000 to 2013 for its unemployment rate, which averaged 7.1%. This was generally in line with the Canadian average for the period. However, Ontario falls one position to sixth and maintains a higher-than-average unemployment rate when the post-recession period is examined.
Another way to think about Ontario’s higher than average unemployment rate is to consider what the national rate would be if Ontario were excluded. The national unemployment rate for the period from 2009 to 2013 was 7.6%. It declines to 7.3% if Ontario is excluded.
Another measure indicative of the economic problems in Ontario is business investment or what is technically referred to as gross fixed capital formation, which measures the value of new additions to productive assets such as buildings, machinery, and equipment. It is important because it represents an addition to the economy’s productive capacity as well as the employment of new technology. In 1990, Ontario’s share of Canadian capital formation closely matched its share of the population. Its current share of the national capital formation is 31%, well below its population share. This decline in productive investment suggests that in the future there will be growing economic productivity problems.
Ontario’s poor record on GDP growth, employment gains, and unemployment have meant a poorer national performance than would otherwise be the case. Simply put, an economically stronger Ontario means an economically stronger Canada. Canada outside of Ontario has seen decent rates of economic growth in per-capita GDP and employment but, when Ontario is factored into national statistics, Canada’s economic performance is brought down. As much as Canada boasts of weathering the post-recession period in reasonably good economic shape compared to other G-7 countries, it could have performed even better with a more buoyant and productive Ontario. There is a difference between being mediocre and being excellent.
Ontario’s economic weakness also translates into weak financial performance by the government of Ontario. For instance, in 2012/13, Ontario accounted for 49.6% of all provincial net government debt in Canada, reflecting a debt much larger than its population share. Indeed, in 2012/13, Ontario reported the highest provincial net public debt of all the provinces, and the second highest net debt level as a share of the economy (GDP) of the provinces.
Ontario’s failure to come to grips with its economic productivity and growth issues has serious implications for itself as well as the future growth of the Canadian economy. Even given the impressive performance of regional resource-driven economies outside Ontario and increasing international and North American integration of Canada’s economic regions, there is still a high correlation between Ontario’s economic performance and the rest of Canada. The end result is that Canada’s economic performance remains tied to Ontario’s economic performance. Canada can get by without Ontario doing well but could prosper even more if Ontario overcame its economic disrepair and began firing on all cylinders. Ontario is a vast pool of human, physical and financial capital that is not living up to its potential.
Ontario can do better. Smarter policies focused on competitiveness and encouraging economic growth rather than interventionist industrial policies and expansionary government are the solutions to Ontario’s lagging performance. Specifically, improved tax and regulatory competitiveness coupled with better energy and industrial policies would establish the foundation for improved economic performance in Ontario. It can start by getting its public finances in order, boosting its economic productivity, recognizing that government economic intervention has its limits, and unleash its private sector on its northern resource frontier.