Minding the Gap

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.

 

 

Comments

[Frances Woolley]

Livio - "much of the gap is the result of EI policies"

And this EI gap in turn reflects other factors: Ontario's industrial mix (EI disproportionately goes to a fairly limited number of industries e.g. resource extraction) together with the lack of any kind of experience rating in EI; the fact that people in high unemployment areas have to contribute to fewer weeks/can claim for more weeks, and Ontario's unemployment rates are still lower than that of some other provinces; prevalence of part-time and self-employment, and the difficulty part-time workers have accessing EI benefits. Which of these would you fix?

"My experience is that these figures usually lagged several years at the best of times."

If you take a look here http://www5.statcan.gc.ca/cansim/a33?RT=TABLE&themeID=3059&spMode=tables&lang=eng you'll see that most of the StatsCan CANSIM series on government revenue and expenditure have been terminated. The fiscal reference tables on the Department of Finance web site are still available and being updated, but as you say, those tables don't have a lot of the necessary information.

[Vladimir]

Some part of the gap may also be explained by OAS. Presumably the "have provinces" would have seniors with higher earnings thus subject to the clawback and less likely to be eligible for OAS supplements.

[Livio Di Matteo]

Frances:
Actually, I'm not sure I would fix EI at all precisely because unemployment in Ontario is still quite low relative to a number of other provinces. Yet, these fiscal gap arguments keep pointing to EI which has seemed odd to me.

[Noah Zon]

Thanks for writing about this Livio - some good questions to ask.

Can quickly answer a couple of your questions. The $11B is not comparable to the previous $23B dollar gap figure. The criticism offered at the time of the $23B gap figure is that it was inflated by the surplus. At a certain level of surplus all provinces would be paying in more than they receive (and of course the reverse happens with large deficits). We used a "balanced budget approach" to correct for that - an illustration of what the size would be if total expenditures=revenues. More detail in the appendix of the report. Would love to be able compare year-over-year going forward, haven't had time to do so going backwards.

"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?"

Short answer: What we found was that the revenues collected from Ontario for 2009-10 were fairly close to per capita (slightly higher). So the gap is almost entirely spending side. If the spending was entirely per capita as a blanket rule (not something I'm advocating) then the gap would essentially be gone.

That being said, to the next question you pose...

"Ontario is still a very wealthy province with a lot of high income earners. In such a fiscal world, would not an economic boom in Ontario then increase the size of the gap?"

If Ontario was paying in a disproportionate share because of relative wealth, but getting less, then a gap would open or grow. But that would be a very different policy concern.

[Livio Di Matteo]

Thanks very much for this Noah. My regards to Mr. Mendelsohn.

[EtTuSheds]

Noah Zon attempts to convince us that Ontario is somehow owed an extra $11 billion per year from the federal government. That is disingenuous, in my opinion.

As noted in his Mowat Centre report, for the year Mr. Zon examined, Ontario received $9.1 billion more than its taxpayers remitted to the federal government. This fact means that, accepting the premise that a province and its taxpayers are the same (which I do not), Ontario owes, instead of being owed.

Mr. Zon points to the superiority of recasting the numbers using his "balanced budget"; yet all he has discovered is that Ontario's provincial government isn't quite as clever as the others in terms of causing the feds to run a deficit and extracting a proportionate cut.

Sadly, his approach simply provides cover for the Ontario government to whine about getting more from the Canadian government, instead of putting their own financial house in order.

It's like Ontario and the other provinces all skipped out on their tabs at the federal restaurant. On comparing notes, Ontario finds the others ran up bigger bills before bolting. Mr. Zon's solution is for Ontario to order more food before they all do the same thing the next time.

"I only stiffed you for $10, the two others stiffed you for $50. That's $60 among three people, so you owe me another $10."

Hopefully the federal Finance Minister will tell them all to "get stuffed" at some other establishment.

[Jacques René Giguère]

The amounts don't tell much. EI gives the Maritimes a lot of money for the grocery business. A good chunk of what the feds send to the central provinces ids what we call in french "dépenses structurantes." It may or may not have been wise for the feds to develop nuclear industry in ON. It beat paying the grocery bill in PEI.
Getting rid of equalization? Given that it is a second (or third...) order solution to living in a non-optimal currency area, what would be the effects? A mass exodus of the Maritimes into favelas around TO?

[Determinant]

It may or may not have been wise for the feds to develop nuclear industry in ON. It beat paying the grocery bill in PEI.

You'll have to do better than CANDU as an example, because it's not a big industry anymore. Much of the actual manufacturing is located in Peterborough. GE-Hitachi makes CANDU parts and the fuel. There is one nuclear service company there I tried to get summer job with (they never replied to my calls) and a third firm with one or two people devoted to making nuclear refuelling robots.

There are many more people in Peterborough at Quaker Oats, Siemens and other places than there are in CANDU-related businesses. Nobody's building many reactors anymore.

Seasonal EI transfers are much larger than CANDU-related employment gains at present.

[Jacques René Giguère]

Determinant: since we can't list everything, CANDU was an example. Central Canada still receeive large amount for sciences lab, grants for reserarch in private business. It pays for nice jobs and then the grocery. And remember we're talking at the margins.
Life as an optronic specialist in the Quebec City Technological Park is way nicer than being a ticket-taker hoping the Japanese tourists will come back to Green Gables next summer so I won't have to move 100 kms to an even more miserable job.

[Determinant]

Life as an optronic specialist in the Quebec City Technological Park is way nicer than being a ticket-taker hoping the Japanese tourists will come back to Green Gables next summer so I won't have to move 100 kms to an even more miserable job.

At the margin, that optronic specialist is precariously employed on a one-year contract with no benefits and no pension. And a strong possibility that the contract won't be renewed. It makes for a very stressful life.

sciences lab, grants for reserarch in private business

Try again. The unemployment rate in Peterborough is 11%. There's small two research labs in Hamilton, nothing else that I know of in the GTA. Federal grants for private business are negligible and almost unheard of in Ontario.

Certainly nothing like the 500 people employed by the CANMET lab at Varennes or the large federal presence in Montreal.

Prove your claim with figures, Jacques.

[Bob Smith]

Livio: "Actually, I'm not sure I would fix EI at all precisely because unemployment in Ontario is still quite low relative to a number of other provinces".

I think the problem with EI is that it focusses on the province and not on individuals. The fact that the unemployment rate in Ontario may be lower than in Nova Scotia doesn't help the Ontarian who is one of the people who can't find a job in Ontario. In that sense, the disparate treatment Ontarians vs. Nova Scotians (for example) is morally unjustified (unless one thinks that unemployed Ontarians are just a bunch of lazy scroungers, but unemployed Nova Scotians aren't).

But I agree that that has nothing to do with the "fiscal gap", it has to do with an EI system that has been rigged to support Canadians in poorer provinces, but which would collapse financially if extended to all Canadians. If a fair EI system results in transfers to people in provinces with higher unemployment, well, that's the way its supposed to work.

Also, to what extent is the higher unemployment rate in poor provinces a function of a more generous EI system? Who would think that unemployment would be higher if you make it easier to collect unemployment insurance.