2012 Ontario Budget: Chapter III: Federal–Provincial Relations

Highlights

  • The federal government should disentangle and devolve programs where policy areas are shared with Ontario to remove duplication, which will reduce costs and provide better services to citizens.
  • Federal initiatives should not undermine Ontario's plan to balance its budget and protect health care and education.
  • The federal government should enhance its support for Ontario's clean energy sector, the Ring of Fire and an east-west electricity transmission grid.
  • The federal government must do more to improve the fairness and transparency of the Employment Insurance system.
  • Ontario is prepared to work together with First Nations communities and the federal government to share the Province's expertise in delivering education, provided the federal government supplies the necessary funding for on-reserve First Nations education.
  • Ontario is again asking the federal government to support the province's farmers by funding its 60 per cent share of the agricultural Risk Management Program.
  • Ontario insists the federal government work with the provinces and territories to improve and modernize federal–provincial fiscal arrangements to support the sustainable delivery of public services.

Introduction

During the recent global recession, the governments of Ontario and Canada worked together to protect Ontario families and their jobs. A joint infrastructure program stimulated growth of both economies. The Province and federal government provided support to the auto industry to protect the hundreds of thousands of jobs supported by the automotive sector. Ontario and the federal government also worked together on sales tax harmonization to help provide savings to business that will create economic growth and jobs. However, as noted by the Commission on the Reform of Ontario's Public Services, despite its 39 per cent population share and contribution to federal revenues, only 34 per cent of federal spending, in the form of services and transfers, was returned to Ontario in 2009–10. According to the Commission, the net result of this revenue and spending pattern on a per capita basis is worth about $12.3 billion, or 2.1 per cent of Ontario's gross domestic product — indicating Ontarians are receiving less than their per capita share of federal spending on programs and services. As a result, it is clear that both levels of government should continue to work together on existing and new initiatives to strengthen the economy and benefit the people of Ontario and Canada.

Working Together to Save Taxpayers' Money

Between 2005–06 and 2010–11, the federal and Ontario governments both had program expense grow at an average annual rate of 6.5 per cent. Both governments have recently begun reducing rates of growth in program expense to support their plans to return to balanced budgets. Taxpayers would benefit from their governments working together to ensure achievement of those plans.

Opportunities to Disentangle Public Services

The Ontario government is reforming the way public services are delivered to ensure the best value for Ontario taxpayers. Services that multiple levels of government currently provide could be delivered more efficiently by one level of government. Ontario wants to work with the federal government to disentangle programs where policy areas are shared to remove duplication, saving taxpayers' money and providing better services to citizens.

"While independent, Canada's two orders of government work collaboratively to serve their citizens. But collaboration should not mean delivering the same services. Both federal and provincial governments deliver services for labour-market training, immigration settlement and corrections. This duplication creates an environment that is both inefficient and confusing for citizens."

Commission on the Reform of Ontario's Public Services, Public Services for Ontarians: A Path to Sustainability and Excellence, 2012.

Labour-Market Training

The current system of federal support for training inhibits the efficient and effective delivery of labour-market services in Ontario. Existing agreements such as the Labour Market Development Agreement and Labour Market Agreement contain differing program and client eligibility requirements. Some of these requirements limit Ontario's ability to maximize the benefits of an integrated delivery approach. Therefore, it is important that the federal government provide Ontario with the flexibility to design and deliver programs and services that better meet the evolving needs of workers, communities and businesses.

It is also important that the federal government honour its 2007 budget commitment to explore transferring the delivery of federal labour-market programs for youth, older workers and persons with disabilities, along with annual funding of over $500 million, to the provinces and territories. Giving Ontario responsibility for all labour-market training programs would reduce duplication and save taxpayers' money.

Immigration Settlement Services

Both the federal and provincial governments provide immigration settlement services in Ontario. Although helping new Canadians contribute to the Ontario economy is a responsibility that both levels of government share, immigrant settlement services would be improved if they were solely provided by the Ontario government.

The federal government failed to fully meet its commitment under the 2005 Canada–Ontario Immigration Agreement (COIA), by underspending over $200 million allocated to Ontario settlement agencies. In addition, over the past two years, the federal government has permanently reduced funding for settlement programs for immigrants and their families by approximately $75 million.

The Province's key priority is to ensure immigrants to Ontario have access to the support they need to succeed and participate fully in the economy. With a transfer of responsibility and adequate support from the federal government, Ontario could integrate federal settlement services into its existing suite of settlement programs and provide seamless and integrated services for new Canadians.

While Ontario remains the top destination for immigrants to Canada, it has seen a decade-long decline in its share of economic immigrants who are selected on the basis of their potential economic contribution. Greater say over immigrant selection is critical to ensuring Ontario's future prosperity.

In response to these challenges, including a federally imposed cap of 1,000 provincial nominee program (PNP) applicants per year, Ontario has announced a process for creating its first-ever immigration strategy through the Ministry of Citizenship and Immigration. A new expert roundtable, led by Julia Deans (former CEO of Greater Toronto CivicAction Alliance), will help to develop this strategy and examine ways that immigration can best support Ontario's economic development and help new Ontarians find jobs. The roundtable consists of business people, employers, academics and other experts within the fields of immigration and labour-market needs.

"The federal government should provide the province with the tools it needs to effectively integrate newcomers by devolving settlement services to Ontario, with funding. Devolution would produce savings through rationalization and generate better outcomes for newcomers."

Commission on the Reform of Ontario's Public Services, Public Services for Ontarians: A Path to Sustainability and Excellence, 2012.

Correctional Services

Both Ontario and the federal government provide correctional services. Inmates serving sentences of less than two years serve them in provincial correctional facilities. If responsibility for inmates serving sentences of more than six months were transferred to the federal government, these inmates would have access to federal rehabilitation services — services important for keeping communities safe and controlling costs of correctional services. This realignment would mitigate against one level of government having to pay for decisions made by another level of government, as will occur as a result of the federal government's criminal justice agenda.

Working Together for a Fair Taxation System

Ontario is collaborating with the federal government on ways to further strengthen tax integrity such as corporate tax compliance, targeting the underground economy and tobacco enforcement. Like other governments, Ontario is concerned about tax losses from businesses that engage in underground economy activities. These activities could be curtailed through improved enforcement measures, enhanced information sharing and increased disclosure by Ontario businesses. By working together, both levels of government could improve tax compliance and reduce the size of the underground economy. (See Chapter IV: Tax and Pension Systems for more details.)

Potential Federal Impacts on Ontario's Fiscal Position

As Ontario moves forward with transforming the way public services are delivered, the Province looks to the federal government to support its efforts. Federal initiatives should not undermine Ontario's plan to balance its budget and protect health care and education.

Changes to the Criminal Code

Certain federal actions — such as those included in the recently enacted Safe Streets and Communities Act — will increase costs for the Province and limit Ontario's ability to provide the public services on which its residents rely. This legislation could add as many as 1,500 more inmates to provincial correctional facilities by 2016, and may require a new 1,000-bed prison, costing an estimated $900 million, with ongoing operating costs of $60 million per year. Ontario calls on the federal government to provide additional funding to fully address any provincial costs that may result from changes to the criminal justice system.

Declining Federal Funding Support

When federal support for provincial programs is time-limited, declines over time or ends, it can leave provinces with significant ongoing financial pressures and negatively affect citizens who rely on these key services. Federal government support for policing through the Police Officers Recruitment Fund is set to expire on March 31, 2013. Support provided by the federal government for the reduction of health care wait times is set to expire on March 31, 2014.

The Province cannot step in every time the federal government decides to cut funding. To continue to deliver quality services on which Ontarians rely, the Province calls on the federal government to renew and provide adequate funding supports.

Building the Economy — Supporting Jobs for Ontario Families

Support for Clean Energy and the Ring of Fire

Ontario is very proud of the work being done by Canadians in every province and territory across the country to strengthen the national economy.

Continued economic growth is important to all Canadians. In other provinces, the federal government supports the oil and gas industries and energy sector with investments in technological developments such as carbon capture and storage and through loan guarantees. Energy and growth opportunities exist in Ontario as well and also merit federal investment. Ontario has become a North American leader in clean energy — with 50,000 jobs being created province-wide. Ontario also has an unparalleled opportunity to develop and mine the Ring of Fire, bringing jobs and economic development to the north. (See Chapter I: Transforming Public Services for more details.)

Ontario is also encouraging the federal government to provide enhanced financial support and the appropriate regulatory environment for an east-west transmission grid, including increasing Ontario's interconnections, to allow for transmission of clean, emissions-free electricity across provincial jurisdictions. Greater regional integration of electricity grids would provide greater incentives for the development of new, larger-scale renewable projects.

Employment Insurance

The Employment Insurance (EI) program is still failing to meet the needs of the modern labour market and Ontario's unemployed workers.

"A well-designed [Employment Insurance] system should enhance rather than undermine a country's productivity and promote an efficient use of human capital. But it must do so equitably. The distribution of benefits must be transparent and understandable to the average person."

Mowat Centre for Policy Innovation, "Making It Work: Final Recommendations of the Mowat Centre Employment Insurance Task Force," 2011.

Temporary federal EI measures, such as extending duration and work-sharing arrangements, were helpful during the recent recession. However, these time-limited measures have not reversed the long-term decline in the share of unemployed persons receiving EI regular benefits, also called the coverage rate. The share of unemployed workers receiving EI regular benefits has fallen significantly in both Ontario and the rest of Canada since 1990.

In 2011, Ontario's coverage rate was 30.6 per cent. By contrast, the average coverage rate in the other nine provinces was 49.2 per cent.

Chart 3.1: Ontario's EI Coverage Rate Lower than Average of the Other Nine Provinces for 35 Years

Given that EI eligibility is a requirement for many EI-funded training services, low EI coverage also translates into lack of access to training for many of Ontario's unemployed.

Fairness in the allocation of funding for training programs among provinces also remains an issue. For example, the funding per unemployed in 2011–12 is $970 in Ontario compared with $4,040 in Newfoundland and Labrador, $2,940 in Prince Edward Island, $1,770 in Quebec and $1,520 in British Columbia. Overall, Ontario received only 28 per cent of the EI Part II Training allocation in 2011–12.

Chart 3.2: EI Training Allocation per Unemployed by Province in 2011-12

Ontario workers and employers continued their long-standing overcontribution to the EI program in 2011 by paying an estimated 40 per cent of premiums but receiving only 33 per cent of total income benefits. In 2011, Ontarians contributed about $7.3 billion in EI premiums while receiving about $6.0 billion in EI income benefits.

Chart 3.3: Ontarians' Net Contribution to the EI Program

The federal government must do more to improve the fairness and transparency of the EI system. The current complex rules governing EI eligibility and benefit duration create unfair differences in benefits received by workers who have the same work history but live in different locations. These rules also discourage labour mobility and reduce many employers' ability to address labour shortages.

Geographic Differences in EI Benefits

To illustrate geographic differences in EI benefits, consider an example where three workers are employed full-time by the same firm in Niagara Falls, Ontario, for 650 hours at a wage of $20 per hour, earning a total of $13,000 prior to layoff.

Worker 1:

  • Lives in the Hamilton EI Region (5.9 per cent unemployment rate)
  • Not eligible for EI benefits.

Worker 2:

  • Lives in the Niagara EI Region (10.2 per cent unemployment rate)
  • Receives about $413 per week of EI benefits.
  • Eligible for 23 weeks of EI benefits for a total of $9,488.

Worker 3:

  • Lives in the St. Catharines EI Region (7.7 per cent unemployment rate)
  • Receives about $358 per week of EI benefits.
  • Eligible for 17 weeks of EI benefits for a total of $6,078.

On-Reserve Education

The federal government has chronically underfunded First Nations on-reserve education. In February 2012, members of the House of Commons unanimously supported the Education for First Nation Children motion to provide the necessary financial and policy supports for First Nations education systems and to provide funding that will put reserve schools on par with non-reserve provincial schools.

Investment in on-reserve education has the potential to improve social and economic outcomes for First Nations peoples living on-reserve. The federal government should provide adequate funding for First Nations on-reserve education that at least reaches parity with per-student provincial funding for elementary and secondary education. Ontario is prepared to work together with First Nations and the federal government to share the Province's proven expertise in delivering world-leading elementary and secondary education, provided the federal government supplies the necessary funding.

"The Commission believes that there is an urgent need to significantly improve the provision of on-reserve First Nations education in the province. There is a substantial and growing gap in educational attainment between First Nations peoples living on-reserve and the rest of the Canadian population."

Commission on the Reform of Ontario's Public Services, Public Services for Ontarians: A Path to Sustainability and Excellence, 2012.

Agricultural Support

Agriculture is a shared federal–provincial responsibility in Canada supported by key cooperative initiatives such as the Growing Forward Framework Agreement, which is cost-shared between the federal and provincial governments: the federal government funds 60 per cent and the provincial government funds 40 per cent. The Ontario Risk Management Program (RMP) is not part of the Growing Forward Framework Agreement, and to date the federal government does not contribute towards RMP. As a new national agreement is negotiated, Ontario asks the federal government to come to the table with its fair share of funding to support agri-food in Ontario. Ontario is again asking the federal government to support the province's farmers by funding its 60 per cent share of the agricultural RMP.

The demand-driven farm income support programs are a source of financial risk to the Province as payments can be unpredictable. The Ministry of Agriculture, Food and Rural Affairs will work with farmers to reshape these programs, including the RMP, through a capped program structure to limit financial exposure and leverage federal dollars.

Trade Missions

The federal government can play an important role in helping provinces, including Ontario, increase trade with developed and emerging economies. To support increased trade, Ontario will work with the federal government to help coordinate and streamline trade missions and strategies and also negotiate new trade agreements, such as the Canada-European Union Comprehensive Economic and Trade Agreement. (See Chapter I: Transforming Public Services for more details.)

Fiscal Arrangements

Current federal–provincial fiscal arrangements put Ontario at a disadvantage. Federal Equalization payments are determined by a province's ability to raise revenue yet do not take into account the relative cost of providing public services. In addition to private-sector wages, the prices of property, goods and services are higher in Ontario than in many other regions of Canada. A series of recent studies — including one completed for the Mowat Centre by Peter Gusen 1, a former director at the Department of Finance Canada — have demonstrated that Ontario is shortchanged by the current Equalization program.

"Canada's Equalization system currently acknowledges that provinces differ in their capacity to raise revenues. This paper has maintained that there is a good case for also reflecting how provinces vary with respect to how they need to spend. If Equalization continues to ignore differences in expenditure need it will not be treating provinces fairly and it will not be fulfilling its constitutional mandate."

Peter Gusen, "Expenditure Need: Equalization's Other Half," Mowat Centre for Policy Innovation, 2012.

"The [Equalization] program does not account for differences in price levels across the country, which affect the cost of public services. Ontario faces higher cost pressures than other provinces. Even with its Equalization payment, Ontario may not be able to deliver 'comparable levels of public services' because of these additional cost pressures."

Commission on the Reform of Ontario's Public Services, Public Services for Ontarians: A Path to Sustainability and Excellence, 2012.

Even though Ontario currently receives Equalization payments, it remains a net contributor to the program. In 2012–13, Ontarians will contribute approximately $6 billion to the Equalization program while Ontario will receive approximately $3.3 billion in return. Ontarians' net contribution to the program —funding that could support vital public services here in Ontario — is redistributed to other parts of the country. That means Ontario families are subsidizing programs and services in other regions of Canada that they themselves may not enjoy. The current redistribution of Ontarians' money to other provinces is harmful to Ontario and underserves its public services, placing an unfair burden on Canada's largest economy.

These fiscal arrangements between the federal government and the provinces need to be modernized to reflect current economic circumstances. Canada's Equalization formula is outdated and must be changed to ensure that all Canadians receive similar levels of public services regardless of where they live.

"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."

Matthew Mendelsohn, Mowat Centre for Policy Innovation, 2012.

Chart 3.4: Net Contribution to Equalization in 2012–13

The difference between what Ontarians pay into the Equalization program through their federal taxes and what the Province receives back from the program will be $2.7 billion — or just over $200 per person in 2012–13. Over the past 10 years, Ontarians have contributed approximately $50 billion to the Equalization program. Ontario remains the largest net contributor to the Equalization program despite fast-growing resource-based economies in Western Canada.

Ontario is committed to the principles of the Equalization program. However, it will not support a system of transfers that puts Ontario's public services at risk and provides inequitable levels of support to different parts of Canada. Ontario is fifth among provinces in ability to raise revenues in 2012–13 but falls to ninth after federal transfers are included.

Chart 3.5: Ontario's Fiscal Capacity is Fifth in 2012–13 But Federal Transfers Drop Ontario to Ninth

Recently, the federal government acted unilaterally on the renewal of major transfers. The federal government's actions fell well short of Canadians' expectations. Limiting increases for the Canada Health Transfer to the rate of nominal economic growth starting in 2017–18 instead of six per cent would remove $21 billion in funding for Canadians' health care — and $8.2 billion for health care in Ontario by 2023–24.

Fiscal arrangements between the federal government and the provinces and territories provide important support for public services such as health care, postsecondary education and social services for people across Canada. The federal government should consult when such important matters are being decided.

Ontario insists the federal government work with the provinces and territories to improve and modernize federal–provincial fiscal arrangements to support the sustainable delivery of public services.

1Peter Gusen, "Expenditure Need: Equalization's Other Half," Mowat Centre for Policy Innovation, 2012.