Tue 25 Mar 2008
Ontario Risks Losing ‘Fat Cat’ Status
OTTAWA — Ontario’s budget mirrors a grim economic outlook for 2008, but though the province is by far the biggest economy in Canada, its pain will largely remain contained within its borders, economists say.
Yesterday’s budget shows an economy at a standstill, driven to a halt by a stagnant export sector, a contraction in home building, deteriorating corporate profits and a lethargic labour market. Government spending will barely grow this year, and there will be no surplus to speak of.
While many economists believe the Ontario economy is hovering on the brink of recession, the provincial government projected real growth of 1.1 per cent this year, followed by a recovery to 2.1 per cent in 2009 and 2.7 per cent in 2010.
“The biggest risk [that the government’s numbers are too optimistic] is in 2009,” said Derek Burleton, director of economic studies at Toronto-Dominion Bank.
The province uses an average of private sector forecasts as a basis for its own forecast, but the private sector is quickly revising its expectations downward as trade with the United States falters.
Traditionally, a province with Ontario’s economic heft could drag down much of the country with it, by spreading its troubles in two key ways: through economic channels, and by cutting into the equalization payments.
This time around, the economic problems hampering Ontario’s growth are so tied to trade with the United States that the spillover beyond the trade sector will be limited, economists say, unless the U.S. downturn deepens significantly.
And changes to the equalization formula over the past few years mean that Ontario’s economic weight is no longer the key determinant for how much other provinces receive.
“Ontario is no longer king of the castle,” said equalization expert Tom Courchene, director of the Institute for Intergovernmental Relations at Queen’s University in Kingston. “It used to be that people would watch the Ontario budgets more than their own budgets, in terms of equalization. And now they’re probably watching Alberta’s oil revenues, instead of Ontario’s income level.”
The old equalization formula excluded the richest and poorest provinces from its calculations, and then dished out federal funds to bring the poorest up to same level of fiscal capacity as the average determined by five median provinces. In reality, Ontario, by its sheer size, usually determined the average. But now, Ottawa uses a 10-province formula to determine the average, diluting the sway of Ontario. The new formula also increases the importance of resource revenues to provincial economies.
As well, with the lags needed to calculate the complex equalization payments, Ontario’s weakness won’t affect the size of the pool of money until about three years from now, when the slowdown will likely be over, Mr. Courchene added.
At that time, it’s quite possible that the formula will put Ontario on the receiving end of equalization, and turn Newfoundland and Labrador into a contributor, he said.
“This Ontario hit won’t show up until three years from now … Ontario will likely be a have-not when the lag catches up,” he said. “Everyone still believes that Ontario is the fat cat of Confederation. That’s not the case any more.”
While the equalization formula has subdued fiscal contagion, economic contagion is also contained because of the nature of Ontario’s slowdown, economists said. The province’s problems are concentrated mainly in the trade sector, while the consumer side of the economy continues to fare well, said Pedro Atunes, director of forecasting for the Conference Board of Canada.
Triggered by a rising currency and compounded by a U.S. slump, output in Ontario’s wood, construction and manufacturing sectors is declining, as are jobs in those sectors, he said. The auto sector is heading into tougher times, too, as U.S. consumers hunker down.
But Canadian consumers are in good shape, and should be able to bolster Ontario’s services sector as long as the U.S. downturn doesn’t deepen significantly, he added.
Data released yesterday about consumers on both sides of the border are a case in point, he said. Consumer confidence in the U.S. plunged to its lowest level since 1973. In Canada, retail sales grew strongly in January, even in Ontario and Eastern Canada.
HEATHER SCOFFIELD
From Wednesday’s Globe and Mail
March 25, 2008 at 9:13 PM EDT
With files from reporter Kevin Carmichael in Ottawa
Related Alberta Jobs:
- Fed finance minister says Ontario may become have-not province - we could foot the bill
- Canada high-paying and high-quality full-time jobs
- Canadian jobless rate falls to 33-year low of 5.8 per cent in January
- Labour Force Survey
- Manufacturing Job Losses Frustrate Ontario
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