Ontarians roundly rejected Tim Hudak’s prescription of horse medicine for their province by returning Kathleen Wynne’s Liberals to power with a majority mandate. Despite the Liberals’ spending scandals and failure to put Canada’s biggest province back in the black, voters signalled that they feared Mr. Hudak’s cure would be worse than the disease.
The economic and fiscal challenges facing Ms. Wynne’s majority government, however, will be no less daunting than they were for her minority one. For the better part of a decade, the Liberals have been unable to reverse the province’s fast-declining competitiveness and put its deteriorating public finances on a sustainable track. Fixing those problems has only become tougher as a result.
The province’s competitiveness gap with the United States and Mexico has widened dramatically in the past decade, mainly because productivity has grown much more slowly here. Under-investment in research and development, computer and information technology, machinery and equipment and skills training “explain why Ontario has a productivity gap with its peer jurisdictions,” concludes a February study by the University of Toronto’s Mowat Centre.
The result is that Ontario has failed to move up the food chain into advanced manufacturing and is now stuck trying to compete with Mexican and American factories for the same lower value-added production. It will take more than dangling subsidies to auto makers to turn the tide.
A recent study by Boston Consulting Group showed that productivity-adjusted wages in Canadian manufacturing, which is concentrated in Ontario, now stand at $41.57 (U.S.) per hour, a 92-per-cent increase in the past decade. The comparable rates in the southern U.S. and Mexico are $22.32 (up 27 per cent) and $10.88 (up 19 per cent), respectively. There are only two ways to close the gap – raise productivity or cut wages. It may take a combination of both.
The Mowat report calls for a “relentless focus” on boosting investments in robotics and training. As manufacturing becomes increasingly automated, plant workers must move from the assembly line to computer screens. In this kind of factory, a high-school diploma doesn’t cut it.
Ms. Wynne’s government needs to facilitate this shift, not hinder it. It must resist the political pressure to save existing jobs in traditional manufacturing. But the Liberals’ pre-electoral budget promised to create a $2.5-billion Jobs and Prosperity Fund to be spent over 10 years, suggesting Ms. Wynne is prepared to go head-to-head with the U.S. states and Mexico to prevent more auto-sector jobs from drifting south. This would be money down the drain, however, if the broader competitiveness challenges go unaddressed. Ms. Wynne has yet to show she gets this.
Ms. Wynne desperately needs an economic turnaround if she is to make good on her promise to eliminate the provincial deficit within three years. That promise also hangs on her government’s ability to hold the line on public-sector wage settlements. Just because that will be somewhat easier with a majority government does not mean it will be easy. Public-sector workers, in particular teachers, fought hard to re-elect Ms. Wynne and they will expect payback now.
But for all the Liberal talking points about Ontario spending less per capita on programs than other provinces – economies of scale are one reason why – the scarier fact remains that it is the only major province running an operating deficit. Program spending has exceeded revenue in six of the past seven years. Tack on the $11-billion Ontario will spend on interest this year and the province remains in a hole that will only get harder to climb out of as interest rates climb.
Ms. Wynne has earned another stab at restoring Canada’s once economic engine to prosperity. But unless she wants the perpetuation of Ontario’s have-not status to be her legacy, she needs to get cracking.