Economy woes plague Ontario as it heads into key election
Province running ‘close to its capacities,’ experts warn amid swelling spending
OTTAWA Doug Ford’s Ontario Progressive Conservatives will take on Premier Kathleen Wynne’s Liberal party in a crucial election in June, with experts warning that the province’s $800-billion economy is running “close to its capacities.”
Royal Bank of Canada is projecting Ontario’s economy to grow two per cent in 2018, then slow to 1.6 per cent in 2019 — slightly above the Canadian average. However, increased capital spending, improving wage growth and higher in-migration numbers suggest the province is already running near its full potential.
“The Ontario economy is running pretty close to its capacities,” said Gerard Walsh, an economist at RBC. “In that context, the government fiscally leaning into it is going to have a diminished effect.”
However, Wynne’s Ontario Liberal Party has rolled out several sizable spending programs, aimed both at infrastructure development and social support ahead of the provincial election scheduled no later than June 7.
Concerns over Ontario’s broader debt burden have reignited debate over whether the province should keep its powder dry amid rising interest rates and slower economic growth. Ontario’s debt in the 2017 budget is projected to reach $312 billion, swelling to $336 billion by fiscal year 2019-20.
Ontario Minister of Finance Charles Sousa announced recently the province would table its budget March 28. Despite claims that he would balance the budget over the next three years, the province will instead run an annual deficit up to one per cent of GDP to funnel more spending into social programs.
“You cannot create jobs by beggaring your future prospects,” Sousa told a Toronto business audience in a March 7 speech. “As I have said many times — balancing the budget is not an end in itself. It is a means to an end. And that end is a stronger Ontario.”
The comments come after the minister outlined a plan last year to spend $190 billion over 13 years on infrastructure development.
“The economy is strong, but just not strong enough,” said Jessica Martin, a spokeswoman for Sousa.
But Ontario’s swelling fiscal stimulus plans could have a muted impact on the overall economy in the next few years, threatening to over-expose the province once it settles into lower growth levels in coming years, says RBC.
“They should prepare and build up their fiscal reserves,” said Walsh.
Newly minted PC Leader Ford has said Ontario’s debt troubles present a major challenge to the province. During his campaign he talked about cutting spending by four per cent of the provincial budget, or roughly $5.6 billion, by finding “efficiencies” in the system.
“Our finances are in a terrible mess in this province,” Ford said in a March 13 interview with CBC News. “We’re paying $12 billion a year in servicing that debt.”
Ford, similar to other Conservative leadership candidates, has also threatened to scrap a carbon tax that was proposed under former leader Patrick Brown.
But a Forum Research poll in February shows that 46 per cent of Ontarians supported a carbon pricing even if it made some things more expensive.
Scrapping the carbon tax would also deprive the province of at least $4 billion in tax revenues, but Ford has said he would like to save at least four cents of every government dollar spent to make up the shortfall. Ford’s campaign did not respond to a request for comment about its fiscal plans for the province.
Ontario’s ballooning debt comes after a decade of sluggish economic performance.
“When you take a step back and look at the medium term, you realize that it’s been a very weak performance for Ontario as a whole,” said Ben Eisen, a researcher at Fraser Institute.
The think-tank released a report on Thursday that found the province trailing its peers in private sector job creation, GDP growth per person and median household income growth. The report said the tepid performance over the past 10 years could weigh on the province as it looks to balance its budget. “Ontario really has had a lost decade,” Eisen said.
Concerns over Ontario’s debt profile come amid intensified worries around the North American Free Trade Agreement, which has already crimped Canadian business investment levels. Ontario automotive, metal and plastic manufacturers, among other sectors with highly integrated supply chains with the U.S., have shrunk their spending plans as they wait for NAFTA negotiations to close.
“If we get a U.S. withdrawal or something worse we may get a long-term drag on investment,” Walsh said.
However, warnings that Ontario’s economy is poised for a downward spiral are blown out of proportion, said Stephen Gordon, an economics professor at Laval University. The perception is partly due to the province’s higher-than-expected growth in recent quarters, which have dwarfed future projections well below the two-per-cent rate.
“The Ontario economy is nowhere near recession,” Gordon said.