2014 Ontario Economic Outlook and Fiscal Review
Chapter IV: National Leadership — Strong Ontario, Strong Canada

Overview: Time for Federal–Provincial Partnership

Ontario and the Government of Canada have a long history of creating constructive and forward-looking partnerships. From acting together to support the auto sector to modernizing the sales tax system with the Harmonized Sales Tax (HST) — and more recently, working to establish a Cooperative Capital Markets Regulator together with other provinces — both governments understand that collaboration can yield significant benefits for Ontarians and all Canadians.

Ontario represents nearly 40 per cent of the Canadian economy, and is a leader in many vital sectors, from manufacturing to mining to financial services. Continued collaboration among all orders of government is required to secure long-term productivity and prosperity and build a strong Ontario within a strong Canada.

Ontario is doing its part. The Province is fostering a healthy economy by investing in people’s skills and talents; building modern infrastructure and transportation networks; creating a supportive and dynamic business climate; and strengthening retirement income security for Ontarians. At the same time, the Province is committed to balancing the budget by 2017–18 in a way that is both fiscally responsible and fair. See Chapter I, Section A: Making Every Dollar Count.

While Ontario is delivering on its plan to balance, it is critical that the federal government avoid unilateral actions that hurt Ontarians and put the Province’s fiscal plan at risk. Ontario, like other provinces in the federation, has responsibility for key public services such as health care and education while the federal government collects most of the tax revenue. This situation, called the vertical fiscal imbalance, leaves Ontario’s fiscal sustainability – and that of other provinces — vulnerable to unilateral federal actions.

As the federal government is expected to be in a position to realize significant and growing surpluses beginning in 2015–16, it will have the opportunity to invest in partnerships with the Province on issues that will support job creation and economic growth to improve the lives of Ontarians. Ontario calls on the federal government to join with the provinces to build up the national economy together.

Need for Responsible Federal Actions

Addressing Fiscal Imbalance in the Federation

A recent report by the Conference Board of Canada1 concludes that the federal government can realize significant and growing surpluses in the future, while provinces and territories as a whole will face increasing challenges to achieve fiscal balance at the same time as providing essential programs and services to Canadians.

The federal Parliamentary Budget Officer (PBO) recently confirmed this conclusion in its 2014 “Fiscal Sustainability Report.” This report demonstrates that the federal government has substantial room to invest in programs over the long term and still remain fiscally sustainable, while other orders of government will collectively face longer-term fiscal challenges.

Even with this vertical fiscal imbalance, the PBO report shows that provinces and territories are doing their part and reducing the fiscal gap by managing growth in program spending, in particular by controlling health care costs in the face of growing demographic and other pressures. In fact, Ontario has taken action to manage growth in program spending, holding average annual growth to 1.2 per cent between 2010–11 and 2013–14. This action has contributed to Ontario overachieving on its fiscal targets for five years in a row.

Meanwhile, the unilateral federal decision to limit increases for the Canada Health Transfer to the rate of nominal economic growth starting in 2017–18 will remove $21 billion in funding from Canadians’ health care — and $8 billion from health care in Ontario — by 2023–24.

“By indexing federal funding for health care at the rate of growth of GDP, the federal government has mostly insulated itself from the fiscal impact of an ageing population. But provincial governments, with direct constitutional responsibility for the delivery of health care, are unable to do so.”

Parliamentary Budget Officer, Fiscal Sustainability Report 2014.

Unilateral actions by the federal government put Ontario’s fiscal plan and public services at risk, particularly given the vertical fiscal imbalance within the federation. The federal government must avoid decisions that negatively impact Ontarians and Ontario’s economic growth prospects.

Modernizing the Fiscal Arrangements

Current federal–provincial fiscal arrangements continue to work against, not for, the people of Ontario. Ontarians are significant contributors to the Canadian economy, but as discussed in the 2014 Ontario Budget, the shortfall between what the people of Ontario pay in federal taxes versus what they receive in federal transfers and services was roughly $11 billion in 2009–10. This represents $850 per Ontarian or $3,400 for a family of four.

Equalization is a federal program that provides funding intended to support reasonably comparable provincial services across the country. Even this fundamental federal program works against Ontario. Of those provinces that receive Equalization payments, Ontario is the only one that is a net contributor to the program. In 2014–15, Ontarians will contribute approximately $6.5 billion to the Equalization program while Ontario will only receive approximately $2.0 billion in return — representing a net contribution of $4.5 billion — the highest of all provinces.

As the current fiscal arrangements put Ontario at a disadvantage, there is a need for a longer-term focus on creating a fair and transparent system supported by a collaborative federal–provincial process. This will require a principled approach to major transfers. Specifically, the federal government must avoid the unilateral imposition of arbitrary caps and constraints on major transfers.

For example, when Ontario first received Equalization in 2009–10, the federal government unilaterally tied the overall size of the program to the growth rate of national nominal gross domestic product (GDP). Equalization has been a formula-driven program that aims to address disparities between provinces’ ability to pay for public services. However, the GDP constraint means that Equalization funding can only grow at a set rate, regardless of the scale of the disparities between the provinces.

Between 2009–10 and 2014–15, the cumulative impact of the GDP constraint on Ontario’s Equalization payments is approximately $6.7 billion. In 2014–15 alone, the GDP constraint reduced Ontario’s payment by nearly $670 million — over three times more than in 2013–14.

The major focus of the fiscal arrangements has traditionally been on supporting the high-quality social services delivered by provinces that Canadians across the nation rely on. While there is continued need for this support, the federal government should modernize the fiscal arrangements to support economic development across the country as well.

Rather than limiting transfers through unilateral decisions, now is the time for the federal government to partner with provinces and focus on areas that will build the foundation for job creation and economic growth. Ontario calls on the federal government to partner with the provinces to build up the national economy together.

Investing to Improve the Lives of Ontarians

The Province has increased investment to support economic growth, create good, well-paying jobs, and improve the lives of Ontarians. The federal government is lagging behind.

Ontario calls on the federal government to act now, partner with the Province and commit to investments that will make a difference in the lives of Ontarians.

Infrastructure Investment

High-quality public infrastructure will help Ontarians spend less time in traffic and more time at home with their families. It will also get the economy moving by improving access to important markets and allowing goods to move more efficiently, and build strong communities by supporting critical services. See Chapter I, Section C: Building Modern Infrastructure and Transportation Networks for more details.

Over the past year, Premier Kathleen Wynne has shown national leadership by leading a working group of ministers from all provinces and territories examining the critical role infrastructure plays in the economy. In August 2014, the Premier hosted a summit on the future of infrastructure in Canada called “Building Canada Up,” working with partners from government and the private and non-profit sectors to demonstrate the benefits of public infrastructure to the economy.

Ontario continues to lead on this issue locally as well. The Province is investing more than $130 billion in public infrastructure over the next 10 years. This includes making nearly $29 billion in dedicated funding available for public transit, highways and other priority areas such as the government’s commitment of up to $1 billion towards infrastructure development in the Ring of Fire.

The Province invests three times as much as the federal government in public infrastructure in Ontario. Despite this imbalance, the federal government receives roughly equal revenue from the economic activity enabled by modern infrastructure. In a fair partnership, the shares of costs and benefits should be aligned.

Higher levels of investments by the federal government would generate considerable economic benefits, as well as revenue to both orders of government. Ontario is doing its part by investing more than $130 billion in infrastructure over 10 years. In addition, given the fundamental role infrastructure plays in Canada's economic growth, the Province is calling on the federal government to match Ontario’s investments in the Ring of Fire region and significantly increase its investments in public infrastructure.

Ring of Fire

The province’s Ring of Fire area, located about 540 kilometres northeast of Thunder Bay, holds significant deposits of minerals and has the potential to drive the creation of good, high-paying jobs in northern Ontario. The Ring of Fire includes the largest deposit of chromite ever discovered in North America, as well as nickel and other minerals. Chromite is a key ingredient of stainless steel.

Ontario is Canada’s leading jurisdiction for the exploration and production of minerals and a major player around the world. The Ring of Fire has the potential to have a positive economic impact not only on northern Ontario, but also on Canada as a whole.

Ontario is playing a leadership role in the development of the Ring of Fire. The Province has committed up to $1 billion to develop strategic transportation infrastructure. Ontario is calling on the federal government to be an equal partner and match the Province’s investments to build the infrastructure required for this important project in the north that will create jobs, provide opportunities for First Nation communities, and boost the northern economy. A strong and clear federal commitment to match provincial funding would help boost investor confidence and accelerate development in the Ring of Fire.

Support for the Automotive Sector

Ontario and Canada have successfully worked together to make strategic investments in the province’s auto sector, resulting in economic growth and jobs for thousands of Canadians. Ontario’s automotive sector has shown tremendous resilience, with production, shipments and exports on the rebound. As opportunities arise in the future, Ontario will look to collaborate with the federal government to build on this success and strengthen this vital part of Canada’s economy.

Support for Labour Market Development

The Province continues to invest in the skills and talents of Ontarians to help them compete globally and to meet the demands of a rapidly evolving economy. The new Canada–Ontario Job Fund Agreement is a good step forward in supporting skills and training programming, but the federal government has not come far enough to address the critical need for funding. Ontario remains concerned that this gap in funding will create pressures and potentially direct funding away from existing successful skills and training programs for the most vulnerable unemployed workers.

Alongside adequate and reliable funding, good labour market information is critical to helping Ontarians find high-quality, well-paying jobs. Greater coordination between the federal government and the provinces and territories is needed to ensure that a reliable and up-to-date labour market system is available. By working together, the collection and use of labour market information will allow the Province to allocate funding most effectively and improve decision-making for youth, families, employers and the broader public sector.

Labour Market Development Agreements (LMDAs) support proven and effective training programs that help Canadians find work, as evidenced in ongoing federal and provincial–territorial evaluations. The federal government has indicated that it wants to renegotiate the LMDAs; however, it has not provided any evidence to support the need to do so. Any future decisions around LMDAs must continue to be collaborative and evidence-based.

Attracting Skilled Immigrants

Immigration plays a significant role in supporting economic growth and is central to bringing much-needed skills to Ontario’s labour force. It is expected that immigration will account for all of the increase in Ontario’s working-age population over the next 25 years, meaning that immigrants will be one of the main sources of future labour force growth in the province. However, recent federal changes to immigration policy have resulted in fewer skilled immigrants coming to Ontario.

In the fall of 2012, Ontario introduced its first Immigration Strategy to continue attracting the best and brightest to the province. Ontario will re-introduce the Ontario Immigration Act, 2014, which if passed, would strengthen the integrity and effectiveness of the Provincial Nominee Program. It would also position Ontario as a full partner in immigration with the federal government.

Ontario’s Provincial Nominee Program plays a vital role in supporting employers in their efforts to attract and retain the skilled workers they need to be competitive in today’s knowledge-based economy. In 2014, Ontario’s Provincial Nominee target was increased to 2,500. Although progress has been made, it remains well below the 5,000 requested by the Province. The Province urges the federal government to support a strong and resilient workforce in Ontario and increase the Provincial Nominee target.

Partnership on Poverty Reduction

Ontario’s Poverty Reduction Strategy articulates a comprehensive approach to tackling poverty, but the Province needs the federal government to be a partner in this plan.

The federal government is urged to come back to the table as a long-term housing funding partner in the area of social housing. Federal funding for existing social housing units in Ontario will decline from almost half a billion dollars annually to zero by 2033, jeopardizing the maintenance of existing facilities and putting more families at risk of homelessness.

Ontario also encourages the federal government to make enhancements to the Working Income Tax Benefit (WITB). Increases to the WITB would support the incomes of low-wage workers and make it easier for families to participate in employment and remain in the labour market.

Ensuring Old Age Security

In its 2012 budget, the federal government announced changes to the Old Age Security (OAS) benefit, Guaranteed Income Supplement (GIS) and Allowances (ALW). Over the 2023 to 2029 period, the federal government plans to increase the minimum ages of eligibility for OAS and GIS from 65 to 67 and for ALW from 60 to 62. Those changes will have a wide range of negative impacts on seniors in Ontario, particularly vulnerable seniors with low incomes.

As the Province will cover the increased costs associated with the greater demand for social services resulting from these changes, Ontario calls on the federal government to fulfil its promise to fully compensate provinces.

Ensuring Everyone Pays their Fair Share of Taxes

As part of its commitment to having a fair and efficient tax administration system, Ontario continues to work with the federal government to ensure everyone pays their fair share of taxes.

As it has done for a number of years, Ontario is again calling on the federal government to release its proposed national strategy to address the underground economy. A national strategy would serve as a foundation for sustained action and enable a more coordinated approach with the Province to address behaviours that Ontarians believe are unfair, unsafe and unacceptable.

The Province will also continue to review its tax collection arrangements with the federal government on a regular basis to ensure that quality services are provided to Ontarians and that optimal revenues are realized through tax administration and compliance activities.

[1] Conference Board of Canada, “A Difficult Road Ahead: Canada’s Economic and Fiscal Prospects,” 2014.

Chart 4.1: Fiscal Disparity in the Federation: Projected Budget Balances across Orders of Government

As a percentage of GDP, the Conference Board of Canada projects that the federal government will be able to achieve growing surpluses over the long term, reaching 4.2 per cent by 2034–35. At the same time, provinces and territories as a whole will have a growing deficit in the long term, falling to negative 6.6 per cent of GDP by 2034–35.

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Chart 4.2: Ontario’s Net Contribution to the Federation in 2009–10

In 2009–10 (the latest year in which comparable data are available), the federal government will collect $97.3 billion from businesses and individuals in Ontario. In the same year, the federal government will spend only $86.2 billion in Ontario in the form of direct program spending and transfers to government and individuals. This leaves an $11 billion gap, representing 1.9 per cent of GDP, which is Ontario’s net contribution to the federation.

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Chart 4.3: Net Contribution to Equalization (2014-15)

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.

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Chart 4.4: Declining Federal Investment in Housing in Ontario

Federal funding for existing social and affordable housing units in Ontario, through social housing funding, the homelessness partnering strategy, and other time-limited housing programs will decline from almost half a billion dollars annually to zero dollars by 2033.

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