TORONTO – With soaring energy prices changing the landscape of the Canadian economy, economists warned Tuesday that Ontario could soon qualify for equalization payments while Newfoundland and Labrador is poised to shed its have-not status.
The latest report from TD Bank Financial Group said Ontario is set to become a have-not province that would qualify for equalization payments by 2010 – and perhaps even as early as next year.
That dire prediction came on the same day the Newfoundland and Labrador budget forecast a $544-million surplus, marking a symbolic turning point as the province prepares to get off equalization next year for the first time since joining Confederation, thanks mainly to record oil prices.
It’s no coincidence that Ontario’s recent slippage in terms of a relative standard of living “occurred in lockstep” with the high dollar, soaring energy rates, and high commodity prices, the TD report said.
The fall, so far, is more a story of booming economic strength in the energy-rich western provinces than it is about a poor performance in Ontario, said TD chief economist Don Drummond.
“That was a fairly minor factor, in fact, when you go through the calculations,” Drummond said. “It was basically the western provinces, in particular Alberta, have been earning so much resource royalties, and that interacted with the change in the formula that was made last year.”
Falling to have-not status is an important psychological barrier for Canada’s largest province, Drummond added.
“It gives the signal that Ontario is not the mighty king of the economy anymore,” he said. “It’s one of the weaker partners, but again it’s not so much Ontario’s being weak as the other provinces are really roaring along.”
The equalization formula, which aims to smooth out regional disparities, sees provinces deemed to have a less-than-average ability to generate tax revenue get cash transfers from the federal government. Ottawa has a constitutional responsibility to help provinces deliver similar social services at comparable tax rates.
The formula was changed recently from a five-province standard to a 10-province standard, which brought oil-rich Alberta into the calculations and automatically raised the economic performance bar for all provincial economies, Drummond said.
“High oil prices, of course, hurt Ontario because it’s an oil importer, and the high oil prices have pulled up the Canadian dollar, which has been the weakness for Ontario manufacturers,” he said.
“If we look for a common culprit, certainly the oil prices stand out.”
Federal Finance Minister Jim Flaherty raised the ire of many provincial politicians when he said recently that Ontario was on its way to have-not status. On Tuesday, he rejected Ontario’s claims that it’s the equalization funding formula that’s flawed and not the province’s corporate tax policies.
“What we have to do as governments is to stop blaming, you know, people that do economic calculations and instead say what can we do as a government to encourage economic growth in our jurisdiction,” Flaherty said in Ottawa.
“I’ve been urging Premier McGuinty and his government to reduce the tax burden on businesses in Ontario because they’re shouldering the heaviest tax burden in Canada.”
Liberal critics said Tuesday that Flaherty was turning into “an economic hazard” for Canadian workers with his repeated attacks on the Ontario government.
Ontario’s Progressive Conservatives blamed the Liberal government’s high corporate taxes for driving the province towards have-not status.
“Premier, you’ve taken Ontario from a province that gives a hand up to one that will soon be taking handouts from the rest of Canada,” said Opposition Leader Bob Runciman.
But Premier Dalton McGuinty wasn’t prepared to accept blame for Ontario’s woes, telling the legislature the TD report also noted the province sends $20 billion more to the federal government every year than it receives in transfers and services.
“How is it that we can be a have-not province if we’re sending $20 billion annually to the rest of the country?” McGuinty asked the legislature. “I think that tells us something about the (equalization) formula.”
The TD report said Ontario’s gross domestic product per capita fell steadily for five years, from seven per cent above the national average in 2002 to two per cent below the average in 2007, and warned the situation isn’t expected to improve in the short term.
Ontario’s own performance is likely to become a more significant driver of the decline, the report said. Next year, Ontario’s GDP per capita is projected to sit four per cent below the national average, while the west’s advantage is set to climb to about 20 per cent.
