Ontario’s economic fundamentals need fixing – by Kevin G. Lynch (Toronto Star – June 17, 2014)

The Toronto Star has the largest circulation in Canada. The paper has an enormous impact on federal and Ontario politics as well as shaping public opinion.

Now that Ontario’s government is decided, it’s time to address a series of economic challenges that we ignore at our peril.

With Ontario’s government now decided, the governing begins. And it will be a challenging task. Ontario faces economic challenges that we ignore at our peril. The pace of growth has declined, and it is permanent, not temporary. The government debt of Ontario is high, and still rising. The productivity of Ontario business is low, and barely increasing, while its innovation performance is poor and shows only isolated pockets of improvement. The Ontario cost base, from electricity to regulations to congestion is relatively high, and shows few signs of becoming more competitive. As the Jobs and Prosperity Council bluntly observed, the status quo is not an option for Ontario.

Growth in Ontario, long the stalwart of the Canadian economy, averaged roughly three per cent annually from 1980 to just before the global recession, but is now heading downwards to a long term growth path of only 2.1 per cent per year according to the government’s Long-Term Report on the Economy, or even lower by other estimates.

This massive decline in Ontario’s potential growth is the result of a variety of interconnected factors: aging demographics, weak productivity growth, structural shifts in manufacturing competitiveness and sustained weakness in our traditional trading partners. What is clear is that a failure to rebuild Ontario’s growth capacity will affect everything from the affordability of public services to the number and quality of jobs to living standards.

While long-term growth in Ontario is poised to decline by more than 30 per cent, net government debt has been on a serious upswing, ballooning 85 per cent between 2007 and 2014. Net government debt today stands at about 40 per cent of GDP, atypically above all other provinces except Quebec and considerably higher than the federal government.

The saving grace so far has been extraordinarily low interest rates, which have reined in the costs of servicing all this new debt. But, as rates eventually begin to return towards more normal levels, the proportion of each revenue dollar that goes to service the debt will rise, putting more pressure on the fiscal framework. And these pressures will only be exacerbated by declining long-term growth in Ontario. Without the implementation of viable fiscal and growth strategies, Ontario runs the risk of a ratings downgrade.

Restoring growth will require structural changes in both government policies and corporate behaviours. A key element will be reinvigorating productivity performance in Ontario. The facts are dismal: between 1985 and 2000, business productivity growth in Ontario averaged 1.3 per cent annually compared to 2.1 per cent per year in the United States. Since 2000, the gaps have actually widened, not narrowed, with productivity growth slipping to 0.4 per cent annually in Ontario, while the pace in the U.S. picked up. The consequences are real for all Ontarians: less competitive firms, lower growth in sales and employment, and downward pressure on wages and profits.

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