Ontario and Equalization Payments: ‘have-not’ actually means ‘has-no-oil’

Shuttered factory in Hamilton, ON

In the two years since Ontario officially joined the ranks of the ‘have-not’ provinces, the volume of equalization payments received has jumped 534%. That’s right – 534%. From the first payment of $347M to this years whopping $2.2B – Ontario is officially suffering through a massive downturn brought on by the loss of almost 300,000 manufacturing jobs over the past few years.

And before anyone thinks of blaming Dalton McGuinty as Premier in this time period, according to Tom Courchene, an economist at Queen’s University, and Matthew Mendelsohn, director of the Mowat Centre for Policy Innovation, some of the blame may lie with the continued expansion of oil and natural gas in the West and Newfoundland. The are quoted at length in a good article in the National Post.

In a nutshell, it is called “Dutch disease,” and here is how it works in Canada: as the oil and natural gas sectors have expanded in the West and Newfoundland since 2004, the value of the Canadian dollar has gone up by about 40% since that time. Great for the resource sector, awful for manufacturing. And Ontario, with the largest manufacturing base in the country, has taken a massive hit, losing 290,000 manufacturing jobs in this time period. In essence, it is exceedingly difficult for a country with an independent currency (although one that is heavily tied to another, stronger currency) to maintain a strong natural resource sector while keeping their manufacturing industry afloat. The same thing happened to manufacturing in the Netherlands with the discovery of natural gas in the late 1970’s, which is where the name “Dutch disease” comes from.

“We’re just too small an economy to try to have one of the largest resource operations in the world at the same time as trying to have a world class manufacturing sector,” says Courchene. To be successful without becoming part of a larger, collective currency like the Euro, something has to give. And in Canada, Ontario’s manufacturing sector has been sacrificed to appease oil and natural gas interests in the West. Let the Eastern bastards freeze, indeed.

This is leading to a redefintion of what it means to be a ‘have’ province or a ‘have-not’ province, as the issue is less about rich and poor, according to Mendelsohn. “(Equalization) really isn’t a reflection of a province’s underlying economic strength,” he says. “It’s a reflection of whether they are dominantly a natural resource, carbon petro-economy or not . . . .That’s what’s driving the equalization program right now. It makes sense now to think of oil provinces and non-oil and gas provinces rather than poor provinces and rich provinces.”

So what does this mean for Confederation? A lot, actually. Ontario is not the only province that depends heavily on equalization payments from Ottawa: and although Ontario is not the largest recipient (Quebec has that distinction, receiving roughly $7.8B annually), we are the largest recipient by population, which indicates that our percentage of the static equalization pie will be larger than other ‘have-not’ provinces.’ This will be especially hard to hear for Atlantic Canada and Manitoba, who have the strong need for equalization payments, but lack the large populations and/or the ability to punch above their weight to get the share they have grown accustomed to.

“The poorer Ontario is, the less other provinces are going to get,” Courchene says. “It’s a big issue and it’s going to get bigger.”

And all this at a time when the Premiers are meeting in Vancouver with the federal government to discuss the possibility of re-jigging the current system of equalization payments. Currently, it is tied to Canada’s GDP, and cannot easily be expanded. But many want the amount paid out in equalization to be lowered, which would create an even more crowded field for a smaller amount of money. And it wont just be Atlantic Canada and Manitoba that lose out. There seems to be a sense that Canada can retain its overall economic stability when six out of ten provinces are dependent upon the state because the other four provinces have struck gold – or oil, as the case may be – and ruined it for the rest of us.

Which is why articles such as this in the Calgary Herald are so galling when the federal Minister of Natural Resources, Joe Oliver, claims that “we need to correct a popular misconception that the oilsands are just about Alberta. They’re about Canada’s economic future.” Well of course the oilsands are now about Canada’s economic future – we made it this way by destroying Ontario’s manufacturing sector, once the economic engine of the entire country! Oliver simply cannot tell Canadians to stop complaining about the oilsands because there is no economic alternative for the country when the oilsands killed their largest competitor, and the historic economic alternative.

Ontario can now be added to the list of oilsands casualties: 290,000 manufacturing jobs and counting. $2.2B in equalization payments paid out in 2011-2012. Smaller equalization cuts for Atlantic Canada and Manitoba. Threats to lower the total paid out.

And all to support one of the most violently polluting natural resources in the world.