The Mowat Centre has issued a new report on Ontario’s fiscal balance within the Federation called "Filling the Gap: Measuring Ontario's Balance within the Federation." The report finds that: “based on the latest available figures, Ontarians transfer approximately $11B on net to the rest of Canada. This transfer is equivalent to 1.9% of the province’s GDP. This can be referred to as the gap between what Ontarians contribute to the federal government and what is returned to the province in the form of transfers and spending. This gap exists despite the fact that Ontario’s fiscal capacity is below the Canadian average.” This report is the latest installment in an effort by Ontario to redress the fiscal balance. That the size of the fiscal gap is almost identical to the current size of Ontario’s deficit is a convenient juxtaposition.
Three things caught my eye in this report. First, the calculations were based on Statistics Data federal revenue and expenditure data by province for the year 2010 (the Provincial Economic Accounts fiscal year 2009-10)-the last available data point. The report notes: “In the absence of new information, all of our calculations are based on that year’s numbers. Going forward, we would strongly encourage Statistics Canada to publish annual figures on federal revenue and expenditure by province.” My experience is that these figures usually lagged several years at the best of times. However, if they are not being published they do reduce the information available for sound public policy when it comes to fiscal federalism.
Second, this report notes an 11 billion dollar fiscal gap but it would have been useful given that there is data before 2010 to compare this gap to previous gaps. After all, this new Ontario approach to federal-provincial fiscal relations began in 2006 under Premier McGuinty and my recollection is at the time the figure being bandied about with respect to Ontario’s fiscal gap was 23 billion dollars. How does the construction of the current figure compare to the previous figure? If they were constructed the same way, it means that over a four-year period there was a major reduction in the size of the fiscal gap. A longer-term comparison as well as new data since 2010 would help address whether the fiscal gap has indeed been improving.
Third, much of the gap is the result of EI policies in that the case is made that Ontarians paid 40 percent of the EI premiums but received only 33 percent of income benefits and 28 percent of the labour market training funds tied to EI. Okay. What if this was fixed? How much further would the gap be reduced? Indeed, what is the long-term solution? Should all federal revenues and spending in Canada be conducted on a per capita basis? Suppose we got rid of equalization and all federal spending was conducted on a per capita basis but the current federal revenue system remained in place. After all, as the report states: “federal government’s tax collection system has few overt regional biases, but federal spending decisions are significantly skewed against the people of Ontario.” Would there not still be a sizeable fiscal gap given the large number of high-income earners clustered in Ontario in the Golden-Horseshoe and Ottawa regions and the current structure of the federal income tax system? Ontario is still a very wealthy province with alot of high income earners. In such a fiscal world, would not an economic boom in Ontario then increase the size of the gap? That is a question I would like to see answered.
Ultimately, I suppose its not so much the fiscal gap that rankles Ontario but the fact that over the last twenty years the environment has shifted away from a federation that Ontario was able to dominate economically. Paying more into the federation was a good investment when the federation’s policies favoured Ontario but it is not the case now. The report actually writes: “These kinds of imbalances were understandable as part of a trade-off when Ontario’s growth and prosperity were facilitated by federal policies that favoured the growth of Ontario’s manufacturing sector, but as circumstances change, our programs, policies, spending decisions and fiscal architecture should keep up.” Minding the gap indeed.