Ontario: from Dera Fe Ti E O Heartland to Have-Not H N
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FISCALAMITY! ONTARIO: FROM DERA FE TI E O HEARTLAND TO HAVE-NOT H N T Thomas J. Courchene L A For the second time in Ontario's history, the province has joined the ranks of the N F O have-not provinces, and the cause both times was soaring energy rents and royalties É TI accruing to the energy-rich provinces. With this as a backdrop, Contributing Writer DÉRA Thomas Courchene focuses on selected details of Ontario’s fiscal position in relation to its sister provinces. He also examines suggestions that the equalization program can be seen as complicating Ontario’s fiscal bottom line. The author concludes by presenting a policy blueprint for the province in an era that will likely be characterized by high energy prices and the continuing volatility of the dollar. Pour la deuxième fois de son histoire, l’Ontario se retrouve parmi les provinces moins nanties. Et cette fois encore, ce recul s’explique par les rentes et redevances tirées des ressources naturelles qu’ont accumulées les provinces riches en énergie. Dans ce contexte, notre collaborateur Thomas Courchene fait le point sur quelques aspects clés de la situation financière de l’Ontario par rapport à celle de ses provinces sœurs. Il examine aussi les hypothèses selon lesquelles le programme de péréquation vient compliquer cette situation. Il propose enfin pour la province un plan d’action adapté à une époque qui sera vraisemblablement caractérisée par des prix de l’énergie élevés et une instabilité permanente. he Ontario of Frost and Robarts and Davis was this great province at a Dominion-Provincial Canada’s economic heartland. The province was so Conference, saying something like this. He said, “You T prosperous, so diversified economically and so pow- have all read that we have three thousand new indus- erful politically that Canadian policy had little choice but to tries come to Ontario since the war.” (This was about be cast in a pro-Ontario light. In effect the old saw “What is ten years after the war. They already had three thou- good for General Motors is good for America” was even sand new industries.) He said, “You think this is won- more relevant for the Ontario-Canada relationship because derful, don’t you?”— looking at the nine of us, the the latter was reciprocal. Since heartland Ontario could gen- other premiers. “You think this is wonderful. You don’t erally count on Ottawa to further the province’s interest, it realize the other side of it, all the new schools we have was in favour of a strong central government. And Ottawa to build and all of the housing and all of the hospitals delivered the Seaway, nuclear power for Ontario Hydro, the and all the new roads and paving and everything Auto-pact, the National Energy Program and so on. As a else.” I said, “Stop, you are breaking my heart.” result, more so than their fellow citizens in other provinces, Ontarians are unhyphenated Canadians, although this may et heartland Ontario did recognize its privileged posi- have less to do with fealty than with the crass reality that Y tion and did attempt to play an integrating role in the Ontarians often elect two governments — their own and federation. For example, Premier John Robarts magnani- Canada’s — so why not like them both. mously orchestrated the aforementioned 1967 Not surprisingly, Ontario’s “king of the hill” status did Confederation of Tomorrow conference in order to (in Jean- not elicit much sympathy for its concerns from its sister Luc Pepin’s words) “give Danny [Quebec Premier Daniel provinces. No one expressed this more creatively, yet Johnson] the biggest soap box in Canada to tell the people tellingly, than Newfoundland Premier Joey Smallwood. of the country what he really wanted for his province.” Speaking at the 1967 Confederation of Tomorrow confer- Moreover, Ontario MPs often tended to view them- ence, Smallwood noted: selves as national rather than Ontario parliamentarians, I notice that Premier Frost is here today and I remem- much to the chagrin of Ontario premiers Rae, Harris, Eves ber his saying when he was in office as the Premier of and McGuinty, as noted below. But even here, one might 46 OPTIONS POLITIQUES JUIN 2008 Fiscalamity! Ontario: from heartland to have-not note that supporting the interests of lation were still in play today, it would ing and tax cuts) and the resulting other parts of the country was not nec- again exclude Ontario from receiving depreciation of the Canadian dollar essarily inconsistent with advancing equalization, because Ontario’s per- (relative to the US dollar), Ontario Ontario’s own interests: a comprehen- sonal income is still above the nation- embarked upon an impressive export- sive system of equalization payments al average since energy royalties accrue led boom and soon forgot about any would eventually benefit Ontario as directly to provincial governments energy/equalization concerns. This the principal east-west supplier/distrib- and, therefore, do not enter personal was obviously influenced by the col- utor of manufactured goods, both income.) lapse in global energy prices and the domestic and imported In return for agreeing to forgo advent of the FTA (which Ontario’s In any event, heartland is no equalization payments, Ontario Peterson government opposed in spite more. Even before the end of the Davis requested a reworking of the equaliza- of the fact that Ontario business was government, Ontario’s fiscal star tion formula and proffered several onside because it wanted, inter alia, to began to shine much less brightly. options, including a proposal that “lock in” the earlier and dramatic export penetration of US Heartland is no more. Even before the end of the Davis markets). The FTA and later government, Ontario’s fiscal star began to shine much less NAFTA provided the back- brightly. Indeed, for each and every year over the 1977-82 drop for Premier Mike Harris’s launching of period, Ontario qualified as a have-not province. The reason Ontario as a “North for this is the very same as the reason why Ontario is again American region state,” becoming a have-not province — massive fossil energy which, I would argue, for- royalties accruing to the energy provinces. mally spelled the end of heartland. Indeed, for each and every year over would have Ottawa equalize only In the interim, and foreshadowing the 1977-82 period, Ontario qualified non-resource revenues and would Dalton McGuinty’s ongoing list of as a have-not province. The reason for have the provinces embark on an grievances against Ottawa, Ontario’s this is the very same as the reason why interprovincial revenue-sharing pool next reality check came first with the Ontario is again becoming a have-not for resource revenues. Bank of Canada’s 1988 policy of price province — massive fossil energy roy- stability as its operating strategy alties accruing to the energy provinces. s I can attest after advancing this (replete with a damaging transition But the Ontario of Davis remained A proposal on several recent occa- period of high interest rates, a soaring too proud (heartland was still alive, sions, this is a tough sell at the best of currency and sharply deteriorating eco- even if not well) to receive equaliza- times, but it was impossible in the nomic and fiscal fortunes) and then tion payments. So Premier Davis, not time frame of the National Energy with the early 1990s global recession. unlike Premier Dalton McGuinty Program, which came into being with This was the context for the call by today, took the position that if Ontario the blessing of the Davis government. Premier Bob Rae (1990-95) for “fair- qualified for equalization this must Ottawa’s initial proposal for reworking shares federalism,” based on a series of mean that there was something seri- equalization was an “Ontario stan- position papers prepared by ously awry with the equalization for- dard” — this would bring all have-not Informetrica. What is rather surprising mula. Accordingly Davis supported the provinces up to Ontario’s level but is that these fairness issues, which passage in the House of Commons in would not break the federal bank became the rallying cry of successive 1981 of what was referred to as the because Ontario had no energy rev- Ontario premiers through to McGuinty, “personal income override.” The enues to equalize. The compromise were met with stonewalling by succes- express purpose of this legislation was was the “five-province” standard, sive prime ministers (Mulroney, to strip Ontario, retroactively, of its which essentially accomplished the Chrétien, Martin and even Harper). In equalization entitlements. The essence same thing, namely that Alberta and terms of the impact on Ontario’s fiscal of the personal income override was the Atlantic provinces were excluded position, the most serious of Rae’s con- that no province would be eligible for so that Ottawa’s twin goals were still cerns was the 5 percent growth cap on equalization payments if its per capita satisfied — the fossil energy influence the Canada Assistance Plan for Ontario, personal income exceeded the nation- on equalization would be substantially Alberta and BC. This “cap on CAP” cost al average per capita personal income muted and Ontario would again Ontario nearly $10 billion before CAP in the current year and the previous become a have province. was folded into the CHST in the 1995 two years. While this is written in gen- budget and then promptly reduced by eral terms, its specific and only target ith President Reagan’s “military one-third. Paul Martin’s generous was Ontario. (Intriguingly, if this legis- W Keynesianism” (military spend- health care and equalization decade- POLICY OPTIONS 47 JUNE 2008 Thomas J.