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Globe essay

Ontario's back is to the wall

From Saturday's Globe and Mail

There is something of Ontario's recent history in the story of Raul Arancibia's life.

The 53-year-old forklift operator was laid off last May when his employer of 18 years, Canac Kitchens, took a look at the flat-lining U.S. housing market and opted to consolidate its production at a plant in North Carolina.

It took months for him to negotiate the complex rules of employment insurance and to begin to collect payments and, even then, they won't last as long as they would if he lived in another province. His union helped him to upgrade his skills, but every time he applies for a job, he finds he's in the company of several dozen others.

"I can't find anything," Mr. Arancibia said. "There's too many people."

There are tens of thousands of similar stories in Canada's most populous province, which is dealing not only with the economic crisis that has raged since last autumn but also with a profound structural change in the key manufacturing sector. Ontario remains the country's 800-pound gorilla by virtue of its size, but most economic indicators show that it is in distress. The question posed last summer by the TD Bank — "Are the wheels falling off the Ontario economy?" — has been answered in the affirmative.

And, on the eve of Finance Minister Jim Flaherty's pivotal budget presentation on Tuesday, there are loud calls from economists, government officials and business leaders for the federal government to recognize Ontario's plight — if only out of its own self-interest.

"Given the fact that Ontario is still 40 per cent of the economy, as Ontario goes, so goes Canada," said provincial Finance Minister Dwight Duncan, whose job may be even more difficult than Mr. Flaherty's. His own budget later this winter is expected to post a multibillion-dollar deficit that reflects plummeting revenues and the political reality that he has to pay for increasingly expensive health and education services.

Ontario's situation is different from provinces whose fortunes are suffering because of a global slump in commodity prices, such as Alberta. The arc of Ontario's decline can be traced to the crumbling in the past decade of the pillars of its industrial base. The U.S.-Canada Auto Pact, which spurred the growth of the auto industry in Ontario after 1965, was overruled in 1999 by the World Trade Organization. (At that point, Canada had a $22-billion auto trade surplus in vehicles and parts, but it's now in a global deficit by nearly $15-billion.) Two years later, in the wake of 9/11, the relatively free access to the U.S. market that had begun with the 1988 bilateral trade pact and had accelerated with NAFTA in 1994, began to erode, as Washington chose security concerns over commercial interests at every opportunity.

These developments, combined with surging energy prices and a strong Canadian dollar, shook Ontario's economic foundations. In the past five years, more than 200,000 manufacturing jobs have disappeared and 10,000 more in the forestry sector. And, as Bruce Springsteen lamented 25 years ago about the U.S. Rust Belt, the "foreman says these jobs are going, boys, and they ain't coming back."

In recent months, oil prices have fallen and the dollar has weakened, but slumping demand in the United States for almost everything has dealt a new blow to Ontario. The long-term trend toward globalization — seeking out lower-cost jurisdictions — has been interrupted as multinational companies seek to cut their manufacturing capacity. Many are opting to consolidate production in high-wage areas simply because they don't have the time to develop a greenfield operation in a developing nation. Volvo Construction Equipment, for example, is moving its operations from Goderich, Ont., to the United States at a cost of about 500 jobs.

David Pecaut, senior partner at Boston Consulting Group and chair of the Toronto City Summit Alliance, estimates that more than a thousand location decisions are up for grabs, with no certainty how many of them Ontario will win. "The next 18 months will be one of the most profound chapters in the history of manufacturing in Canada," he said.

Ontario's economic statistics are not encouraging. Its GDP grew by an estimated 0.1 per cent in 2008 and private-sector economists forecast pretty much the same this year. The unemployment rate, 7.2 per cent, is above the national average of 6.6 per cent and is only that low because of what Statistics Canada calls "involuntary part-time workers" — those who would prefer full-time work but can't find it.

The province's average wage, $22.40, is the second-highest in the country (after Alberta) but it is falling back to the pack in other ways. Dale Orr, an economist at Global Insight, notes, for example, that Ontario's GDP-per-capita ratio was 5 per cent above the Canadian average in 2007 but is expected to be 3 per cent this year and will be even closer to the average in 2013.

All is not lost, however. As Premier Dalton McGuinty observes (most often in scoffing at Ontario's designation as a have-not province), there are only three net contributors to the federation and Ontario's contribution is 40 per cent more than those of Alberta and British Columbia combined. Indeed, there is a guarded optimism that happy times will return if Ontario can get past its former reliance on a low dollar and low energy costs and latch on to a green economy using its abundant pool of skilled labour.

But there is an irritation — inside and outside government — that the federal government isn't onside. For four years, Mr. McGuinty has been waging a "fairness" campaign to remove some of the structural inequities in the federation and to reduce what he argues is the gap between the money sent to Ottawa by Ontario taxpayers and the value of the services they receive in return.

DISTINCT' REGION?

Other Ontario premiers made a similar case but faced "a wall of opposition," according to Matthew Mendelsohn, a former provincial deputy minister of intergovernmental affairs who has also worked on Parliament Hill. "The political culture in official Ottawa — across the parties and across the bureaucracy — doesn't see Ontario as having distinct and unique needs," said Mr. Mendelsohn, now with the school of public policy and governance at the University of Toronto.

Mr. McGuinty says he was in the dark until he got his first briefing about the "inequity" file from Ministry of Finance officials after he took office in 2003. He recalls being shocked by the ways in which other regions were favoured at Ontario's expense.

"How could this be?" he said to the officials. "Are you sure this is right?" Why haven't I heard about this before? Why aren't we up in arms here in Ontario?"

He has scored some victories — funding for immigrant services was improved — but plenty of concerns remain.

Federal transfers for health care, for example, are less in Ontario than in other provinces. The McGuinty government estimates it is losing $773-million on this score alone this year. Ottawa has agreed to provide equal per-capita funding but Ontario will have to wait until 2014 for this to happen.

The chief irritant these days is EI, which favours workers in regions of traditional high unemployment. The unemployed in Ontario have to work more weeks to qualify and receive fewer weeks of benefits. The McGuinty government says only 30 per cent of jobless Ontarians receive regular benefits, compared to 58 per cent in other provinces. This costs a jobless worker about $4,630 a year.

And because it's tougher to get EI, fewer workers are eligible for the scheme's training programs, which are essential for the post-manufacturing era that looms. Ontario estimates it loses $478-million because of this.

The Premier wants Mr. Flaherty to rectify the regional bias in EI. "A Canadian is a Canadian is a Canadian, when you lose your job," he said.

He also wants the Finance Minister to establish a regional-development program for Southern Ontario similar to the schemes in place for the Atlantic provinces, Quebec, Western Canada and Northern Ontario. "This is Canada's manufacturing heartland and it's being hit hard," he said.

Private-sector economists applaud those ideas and offer other prescriptions to give Ontario a boost.

Finn Poschmann of the C.D. Howe Institute wants Ottawa to broaden a 10-per-cent investment tax credit that is now available only in the Atlantic region and in Gaspé. Mr. Pecaut would like to see an enhanced tax allowance for incremental research and development spending that would be targeted at the hundred companies (many of them based in Ontario) that account for 90 per cent of all R&D.

Don Drummond of TD Economics recommends that Mr. Flaherty facilitate the proposed new border crossing at Windsor and take the measures to aid the auto industry a step further with a scheme to scrap old cars in favour of new, greener vehicles.

There's one thing that Mr. McGuinty could do for himself. The Ontario Chamber of Commerce, among others, is urging the government to harmonize its sales tax with the federal GST, saying it could save businesses $100-million a year. The Premier has been lukewarm to the idea, because he fears it would hurt ordinary consumers by putting a tax on home heating oil, children's clothing and books.

But yesterday, he said he would take a serious look at the proposal in light of Ontario's ailing economy. We will find out Tuesday whether Mr. Flaherty will show similar flexibility in helping his home province.

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