Chapter III: Federal Underfunding of Ontarians
The Province provides efficient public services resulting in competitive taxes for Ontarians. In fact, Ontario already has the lowest program spending per capita among provinces while, at the same time, it raises the lowest total revenue per capita including federal transfers. However, as the Province continues to carefully manage costs, take action to increase prosperity and implement its fair and responsible plan to return to balance, unilateral actions by the federal government are putting this at risk.
Since 2006, the federal government has taken more than 110 unilateral actions that have hurt people and businesses across Ontario and undermined the Province’s fiscal plan. Each and every year, the share of federal revenue raised in Ontario is higher than the share of federal spending in Ontario. This results in an $11 billion gap according to most recently available figures. In 2014–15, Ontarians will be contributing $4.5 billion more to Equalization than the Province is receiving in payments. While this money could be used in Ontario to fund more hospitals, nurses or public transit, it is redistributed to other regions of Canada to subsidize programs and services that Ontarians themselves may not enjoy.
As the federal government plans to balance its budget beginning in 2015–16, it is in a position to make investments that will help grow Ontario’s economy and protect services. Ontario calls on the federal government to:
In 2014–15, Ontario will experience a year-over-year decline of $641 million in entitlements for major transfers. Over the last four years, the federal government paid a total of $2.2 billion in Total Transfer Protection payments to seven provinces that would otherwise have seen their major transfers reduced. This year, when Ontario would have qualified for a payment for the first time, the federal government decided to end the practice of transfer protection payments. As a result, Ontario is the only province since 2010–11 to face a decline in its overall major transfers.
“Because of the unprincipled nature of Canadian federal fiscal arrangements and funding agreements, Ontarians and Ontario businesses are often short-changed. The federal government needs to reform Equalization and create a national standard for EI access, and fix the funding gaps in infrastructure, training, housing, and regional economic development funds.”
Ontario Chamber of Commerce, “Emerging Stronger,” 2013.
The federal government is making unfair choices that undermine Ontario’s economic growth. By taking unilateral actions, it is balancing its budget on the backs of Ontarians and other Canadians.
|Retirement Income Security||Federal government decided to shut down consideration of a modest enhancement to the Canada Pension Plan, and increased the Old Age Security age of eligibility from 65 to 67.|
|Patient Wait Times Guarantee Trust||Federal government did not renew $205.4 million to Ontario for wait-time reductions.|
|Human Papillomavirus Vaccine Trust||Federal government did not renew $117 million to Ontario for immunizations.|
|Police Officers Recruitment Fund||Federal government did not renew $156 million to support the hiring of 329 front-line police officers in Ontario.|
|Early Learning and Child Care
|Federal government eliminated ELCC Agreement and cut $1.3 billion over three years in support for Ontario.|
|Source: Government of Ontario, “Federal Actions Negatively Impacting Ontarians,” 2014.|
The Province has taken measures to protect Ontarians from some of these actions including:
However, the Province cannot step in every time the federal government abandons its responsibilities.
As discussed in Ontario’s Long-Term Report on the Economy, in 2011, the federal government unilaterally changed the growth rate of the Canada Health Transfer, beginning in 2017–18, which will remove an estimated $21 billion in support for health care nationally — $8 billion of that in Ontario — by 2023–24. This will have a real effect on the quality of health care provided to Ontarians. As confirmed by the federal Parliamentary Budget Officer, this transferring of fiscal burden creates a fiscally sustainable federal government, but fiscally unsustainable provinces and territories. Unless action is taken, the fiscal position of provinces and territories will deteriorate in the long term.
Last year, seven of ten provinces pushed back their expected balanced-budget year from targets outlined in previous budgets. At the same time, the 2014 federal budget announced that the federal debt-to-GDP ratio is expected to fall to 25.5 per cent by 2018–19, putting the federal government well on its way to achieving its target of 25 per cent by 2021.
Not only do imbalances exist between the federal government and provinces, but inequitable federal programs and policies also cause imbalances between Ontarians and Canadians in other provinces. According to the Mowat Centre, the people of Ontario contributed $11 billion more to the federal government than they received in return in 2009–10 (the year with the latest available data). This represents about $850 per Ontarian.
“Ontarians transfer approximately $11B on net to the rest of Canada. This transfer is equivalent to 1.9% of the province’s GDP. This can be referred to as the gap between what Ontarians contribute to the federal government and what is returned to the province in the form of transfers and spending.”
Noah Zon, “Filling the Gap: Measuring Ontario’s Balance with the Federation,” Mowat Centre, (2013).
The current system of federal–provincial fiscal arrangements is working against, not for, the people of Ontario. A good example of an arrangement that works against Ontario and needs to be modernized is the Equalization program. While Ontario is committed to the principles of the Equalization program, the Province does 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.
How the Equalization Program Works
The principle of Equalization is enshrined in the Constitution to “ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation,” Section 36(2), Constitution Act.
The program’s formula estimates how much potential revenue a province could raise based on its economic base, and provides payments to provinces with below-average potential revenue.
In 2009, when Ontario first entered Equalization, the federal government unilaterally imposed a ceiling to limit annual growth on total Equalization payments to the rate of growth of national gross domestic product (GDP). The cumulative impact of the GDP ceiling on Equalization on Ontario’s payments is approximately $6.7 billion between 2009–10 and 2014–15. In 2014–15 alone, the GDP ceiling reduced Ontario’s payment by nearly $670 million — over three times more than in 2013–14.
Ontario’s Equalization payment will be $1.2 billion lower in 2014–15 than the previous year, partly due to factors that have no relation to Ontario’s economic performance. For instance, $300 million of the reduction in Ontario’s entitlement in 2014–15 is due to the closure of Quebec’s Gentilly-2 nuclear power plant — an action that has no bearing on the relative strength of Ontario or Quebec’s economic base. But, due to the Equalization formula, the closure of Gentilly-2 will increase Quebec’s payment between 2014–15 and 2016–17. Under the federally imposed GDP ceiling, one province’s increasing Equalization entitlements are paid for by reductions in payments to others. In this case, larger payments to Quebec reduce payments to Ontario.
While Ontario’s payment is lower in 2014–15, the program is growing by over $560 million nationally. Ontarians are paying more into the program compared to previous years and are receiving less. The difference between what the people of Ontario will pay into the Equalization program through federal taxes and what the Province will receive from the program is $4.5 billion in 2014–15, and has reached $43 billion over the last 10 years.
Building a prosperous province requires partnership among all orders of government. This is demonstrated each time the Province works with other governments to create jobs and make businesses more competitive, such as moving towards a cooperative capital markets regulator with the federal government and British Columbia. By being a fair and collaborative partner and making strategic investments, the federal government could support the Province’s plan to build greater prosperity for the people of Ontario.
|Potential Areas for Enhanced Collaboration||Benefit to Ontarians|
|Retirement Income Security for Ontarians||→||Would ensure that today’s workers are able to enjoy their retirement years.|
|Greater Investments in Public Infrastructure||→||Would better meet the needs of communities and provide economic returns to Canada.|
|Investment in Regional Transportation Priorities||→||Improvement in commuting times, economic competitiveness, and regional productivity.|
|Development of Ring of Fire||→||Ontario Chamber of Commerce estimates that Ring of Fire development would sustain 5,500 jobs.|
Canada’s publicly administered Canada Pension Plan (CPP) is fundamental to the retirement income security of all Canadians, but for several reasons, its benefits are too low to meet the needs of many workers.
Several studies have shown that, unless action is taken, a significant portion of today’s workers will face a decline in their living standard in retirement, and that this problem will likely worsen over time.1 Recent analysis by the Ontario Ministry of Finance draws similar conclusions.
Ontario has long played a leadership role in retirement income security and has been advocating for an enhancement to the CPP since 2010.
In December 2013, the federal government unilaterally shut down discussions on options for an enhancement to the CPP against the agreement of provinces and territories to continue work on this issue. This has not only curtailed work on a potential enhancement, but has also crowded out discussions on other possible reforms to modernize the CPP.
A CPP enhancement is still the preferred option and, if the federal government is prepared to come to the table, Ontario is still a willing partner. However, in the absence of action by the federal government, the Province is moving forward with an alternative to provide Ontarians with the retirement income security they deserve.
See Chapter IV: Strengthening Retirement Security in Ontario for more details.
As part of the Council of the Federation, Premier Kathleen Wynne is leading a working group that includes provincial and territorial ministers responsible for economic development and infrastructure to study the critical role infrastructure investments play in creating good jobs and attracting investments in such areas as manufacturing, transportation, and research and development.
Given the fundamental role infrastructure plays in Canada’s economic growth and the Province’s ongoing commitment to infrastructure funding, it is essential that the federal government be a strong partner and invest more in public infrastructure.
The federal government has committed to provide $70 billion nationally for infrastructure over the next 10 years, including $47 billion through the new Building Canada Plan. This $70 billion investment is equal to roughly $2,000 per capita over 10 years given that Canada has a population of about 35 million. By comparison, Ontario plans to invest over $130 billion in the province over the next 10 years. This investment is equal to almost $10,000 per capita over the next 10 years, given that Ontario has about 13.5 million people. The Province plans to invest nearly five times more per capita than the federal government over the next decade.
Inadequate federal investment means fewer improvements to transit systems, roads, bridges, and water and wastewater systems. To support jobs and economic growth, federal funding for infrastructure should be closer to the level being invested by Ontario.
The Commission on the Reform of Ontario’s Public Services recommended a national transit strategy with the federal government, other provinces and municipalities. A federal commitment to dedicated funding for transit would help support the development of such a strategy.
The Province recognizes that an effective transportation network is supported by many components working together: transit systems and roads that carry commuters and link communities, major highways that allow movement across regions, and heavy rail that moves goods across industries.
The Province has recognized the need for dedicated and stable funding as part of a balanced investment strategy in transportation infrastructure, including public transit, but the federal government needs to recognize that a national strategy is badly needed.
Canada is the only G7 country without a federal policy of long-term, predictable investment dedicated to transit, and the continuing absence of the federal government on ongoing investments in transit networks has an effect on commute times, movement of goods, economic competitiveness and productivity.
Ontario is Canada’s leading jurisdiction for the exploration and production of minerals and a major player around the world. The Province’s Ring of Fire area, located about 535 kilometres northeast of Thunder Bay, holds significant deposits of minerals. Recent estimates suggest that the value of mineral resources in the Ring of Fire area could be up to $60 billion for known chromite (a key material in the production of stainless steel) and nickel deposits.
By 2025, significant output will be produced from the Ring of Fire, making the province one of the major world producers of chromite and strengthening Ontario’s position as a world leader in nickel production. This would have a positive economic impact not only for Northern Ontario, but also for Canada as a whole.
“There is a strong business case for governments to invest in this economic opportunity. We think the federal government has an obligation to be actively involved in this development, as it has for other transformative projects including the oil sands, the St. Lawrence Seaway, and Churchill Falls.”
Ontario Chamber of Commerce, “Beneath the Surface: Uncovering the Economic Potential of Ontario’s Ring of Fire,” (2014).
Ontario is playing a leadership role in the development of the Ring of Fire, and calls on the federal government to advance regional infrastructure development in the Ring of Fire, just as it has supported industry development in other provinces and territories.
|Newfoundland and Labrador and Nova Scotia||To encourage the commercial development of offshore oil and gas, the federal government signed the 2005 Atlantic Accords with Newfoundland and Labrador and Nova Scotia. Newfoundland and Labrador received $2 billion from the federal government through the Accord. Nova Scotia received $1.1 billion between 2004–05 and 2014–15.|
|Newfoundland and Labrador||In 2013, the federal government finalized a loan guarantee with Newfoundland and Labrador to develop the Muskrat Falls Hydroelectric Project. According to Newfoundland and Labrador, the loan guarantee is projected to result in savings of $1 billion in interest costs.|
|Alberta and Saskatchewan||The Commission on the Reform of Ontario’s Public Services reported that federal support for the oil and gas sectors is worth $1.4 billion annually in addition to $2 billion for carbon capture and storage.|
The Province is willing to commit up to $1 billion towards infrastructure development, contingent on matching investment by the federal government. This would ensure that the necessary infrastructure investments, estimated to be over $2 billion, would proceed.
Ontario remains the top destination for immigrants to Canada. Over the last 10 years, Ontario has received close to 1.2 million landed immigrants — 46 per cent of all those who came to Canada. However, in recent years, economic immigration to other provinces has increased at Ontario’s expense. This is due to growth in regional economic selection programs implemented by the federal government (e.g., Provincial Nominee Programs and Quebec Skilled Workers) that place Ontario at a disadvantage.
In 2012, Ontario was limited to less than four per cent of landed economic immigrants through its Provincial Nominee Program, compared to an average of 54 per cent for other provinces (excluding Quebec). The lack of federal support for a more flexible selection process inhibits Ontario’s ability to select the right combination of newcomers and undermines immigrants’ ability to contribute to the economy.
This is why, in the fall of 2012, Ontario released its first Immigration Strategy, responding to the province’s demographic and economic realities. The Immigration Strategy called on the federal government to increase its Provincial Nominee Program levels to 5,000 by 2014. The federal government took a step in the right direction by increasing Ontario’s Provincial Nominee Levels from 1,300 in 2013 to 2,500 in 2014. However, it still falls short of the 5,000 nominations Ontario has been seeking.
A more flexible immigration selection system would allow Ontario to meet changing labour market needs and help the province grow. Ontario calls on the federal government to increase the nomination target and to bring Ontario’s share of economic immigration up to 70 per cent, from the current share of only 50 per cent.
The unilateral federal decision to limit the growth of the Canada Health Transfer (CHT) will have a significant impact on Ontario’s delivery of quality health care. Instead of maintaining the CHT annual growth rate at six per cent, the transfer is now expected to increase at the rate of nominal economic growth nationally, approximately 4.3 per cent, starting in 2017–18.
By 2023–24, this federal action will remove an estimated $8 billion from health care in Ontario and $21 billion nationally. The cumulative impact would be equivalent to reducing federal funding of health care by about $550 for every Ontarian by 2023.
The federal funding that is being reduced could instead be used to help support Ontario’s ongoing efforts to decrease wait times for surgical and diagnostic services, hire more doctors and nurses who provide Ontarians with access to primary care, and improve investments in the province’s home care initiatives that help older Ontarians live healthier, more independent lives.
This chart shows the amount of Total Transfer Protection Payments paid to provinces from 2010–11 to 2013–14. During this time, Quebec received $731 million, followed by Manitoba with $660 million and Nova Scotia with $421 million. These provinces are followed by New Brunswick, Newfoundland and Labrador, Saskatchewan and Prince Edward Island. However, the federal government decided to end the practice of transfer protection payments in
2014–15, when Ontario would have qualified for a payment of $641 million.
This chart shows that, based on the ratio of net debt-to-GDP, the financial position of the federal government is projected to improve over time, whereas the financial positions of provincial, local and Aboriginal governments are projected to deteriorate over the same period. From 1991 to 2014, the federal government is expected to have a net-debt-to-GDP ratio higher than provinces’. This relationship is projected to reverse, starting in 2015, and widen over time. From 2015 to 2087, the difference between net-debt-to-GDP ratios between the federal and provincial governments increases, reflecting a progressively stronger fiscal position for the federal government and a deteriorating fiscal position for provinces and territories.
This chart shows that in 2009–10, Ontarians contributed $97.3 billion to the federal government while receiving $86.2 billion in federal transfers and services. The gap between Ontario’s contribution to the federal government and benefit from federal transfers and services is $11 billion or 1.9 per cent of GDP.
This chart shows that in 2014–15, Ontario is the largest net contributor to the Equalization program. Ontario is followed by Alberta, British Columbia, Saskatchewan, and Newfoundland and Labrador. All other provinces receive more in Equalization payments than their taxpayers contribute through federal taxes.
This bar chart illustrates per capita investment in public infrastructure by order of government over the next decade. The federal investment is roughly $2,000 per capita over 10 years. By comparison, Ontario plans to invest $10,000 per capita over the same period.
Ontario is Canada’s leading destination for mineral exploration investment.
Source: Ministry of Northern Development and Mines.
Federal Government: $1B
Within the first 10 years of its development, the Ring of Fire will produce considerable benefits:
Source: Ontario Chamber of Commerce, “Beneath the Surface: Uncovering the Economic Potential of Ontario’s Ring of Fire,” (2014).