Last year was the 10th in a row that Ontario’s economy grew more slowly than the national average.
The cumulative effect of this underperformance is a doubling in provincial debt and an intractable deficit that the government will promise unconvincingly to subdue in Thursday’s budget. Long the province that punched above its weight, Ontario is fast becoming a bigger Quebec, faced with managing its relative decline.
You wouldn’t know it by Toronto’s skyline, where new hotel towers bearing the Trump, Shangri-La and Ritz banners signal the city’s membership in an elite network of global cities where big deals and decisions get made. As such, Ontario is also a lot like California, where pockets of extreme wealth and economic dynamism co-exist among low-income immigrant communities and rusted-out manufacturing towns that have made both places studies in contrast.
Maintaining public services (improving them might be asking for too much at this point) will challenge Ontario’s leaders as never before. If the province is serious about taming the deficit, every program, including health care and education, must be subject to spending constraints and/or tax increases for which Ontarians remain unprepared. But with long-term prospects for economic growth of less than 2 per cent a year, what choices does any government have?
In the 11 years since the government-funded Institute for Competitiveness and Prosperity began measuring Ontario’s economic performance, the province has been treading water. Despite a far more devastating recession south of the border, the GDP deficit between Ontario and its peer jurisdictions in North America still stood at $7,500 per capita in 2011. Closing that “prosperity gap” is the key to paying for the level of public services Ontarians expect.
But how? If you believe institute head Roger Martin and creative class guru Richard Florida, Ontario needs to better leverage its “clusters.” The duo’s research is often dismissed by meat-and-potatoes economists as about as fulfilling as air. But drawing on the work of Harvard competitiveness czar Michael Porter, they have persuaded a lot of policymakers to listen.
Clusters built on deep and ongoing collaboration between universities, businesses and venture capitalists in specialized fields have become the major drivers of innovation and productivity. There is only one Silicon Valley, but there are hundreds of places seeking to emulate its success.
Ontario has more clusters than it can handle. Only one (Waterloo’s tech cluster) has distinguished itself. So the province should focus on strengthening the intensity of a few clusters where it has a reasonable chance of making a mark. Ontario produces plenty of university grads; more thought needs to be given to equipping them to thrive in a clustered work force.
A recent C.D. Howe Institute study criticized the cluster strategy as all hype, arguing that boosting exports is a better route to higher productivity and wages. But the report only looked at manufacturing, while the cluster approach is better suited to knowledge-based industries.
Speaking of manufacturing, Ontario soon needs to address its widening competitiveness gap or face more displaced workers without the skills to work in any cluster. Tory Leader Tim Hudak thinks the solution is making Ontario a right-to-work jurisdiction, a proposal driven more by ideology than evidence but one the province has to consider as nearby states make paying union dues voluntary. (Full disclosure: My sibling belongs to Mr. Hudak’s caucus, but we don’t discuss politics.)
Objective research on right to work is hard to find. The southern U.S. states that epitomize the “worker freedom” ethos remain at the bottom of the socio-economic heap. But they’d be even worse off had BMW, Hyundai, Boeing and dozens of others not gone south in recent years, and have generally seen stronger job and economic growth than their rust-belt rivals.
The recent adoption of right-to-work laws in Michigan and Indiana has given manufacturers one less reason to choose Ontario, where labour and electricity costs are among the highest on the continent. Caterpillar’s closing of its London locomotive plant and Ontario’s paltry 5.4-per-cent share of North American auto-sector investment since 2010 do not augur well for the future.
For the Ontario government, it may come down to a choice between some taxpayers earning 10 per cent less (the gap in weekly earnings, excluding benefits, between right-to-work states and ones without such a law) or more labour force dropouts unable to contribute to provincial coffers at all.