In the decade to 2015, Canada's economy was like a soufflé that fell in the middle, as the resource boom led to rising around the edges while a cratering manufacturing sector helped sink the centre. It tasted almost as good to the federal taxman, but it wasn't pretty to look at.
As Statistics Canada reported this week, median household income soared in the northern territories, Prairie provinces and Newfoundland between 2005 and 2015, but was flat in Ontario. Fully 30 per cent of Ontario's manufacturing jobs evaporated, leading to steep income declines in once envied industrial boomtowns such as Windsor, Tillsonburg and Leamington.
Had it not been for the resilience of the Toronto housing market and services sector, on top of rising federal fiscal transfers, incomes across Ontario would likely have declined in real terms. As it was, median household income grew only 3.8 per cent after inflation in Canada's most populous province, compared with 24 per cent in Alberta. In 2015, Calgary had almost as many residents earning more than $100,000 as Montreal – despite being one-third the size.
That, however, is yesterday's news. What Statscan did not provide – since its core business is data collection, not prognostication – was a regional breakdown of future income growth. Indeed, no one can. But with housing headed downward, oil moving sideways and interest rates and the dollar going up, it's a question that seriously needs asking.
The uneven income growth Canada experienced between 2005 and 2015 would have had unsettling consequences for the federation had it continued unabated. Alberta could only carry the rest of the country for so long before a growing discrepancy between have and have-not provinces required an overhaul of fiscal federalism. Federal fiscal transfers to the have-nots would have become increasingly unsustainable, both politically and financially.
While no one is cheering the oil crash that sideswiped Alberta, Saskatchewan and Newfoundland, the country has weathered the resource bust astonishingly well thanks to accommodative monetary policy, a lower dollar and a rebalancing of growth toward the centre. With Alberta now past the worst and Ontario and Quebec taking off, the Canadian economy looks more like a normal cake. It's rising (almost) everywhere, but especially in the centre.
This is a welcome turnaround, given the concentration of Canada's population in Ontario and Quebec. Public finances deteriorated significantly in both provinces, but especially in Ontario, during the decade to 2015. Without redress, rising public-debt ratios in Ontario and Quebec would have had serious consequences for the whole country. We risked becoming Europe.
Quebec has stopped the bleeding and is even poised to reduce its net debt-to-GDP ratio. Ontario's fiscal situation remains dicier, with the Fraser Institute noting in a recent report that Ontario's per capita debt burden (at $22,675) is projected to surpass Quebec's in 2018. Still, this current spurt of economic growth has given both provinces much needed breathing room to improve public finances.
CIBC economists Avery Shenfeld and Andrew Grantham project that every province, except Newfoundland, is likely to beat its 2017 budget forecast for nominal GDP growth this year and perhaps beyond. That means tax revenues are also likely to exceed budget projections.
"For Ontario and Quebec, which carry higher debt burdens than B.C. or Alberta, it would be prudent to use any revenue upgrades beyond 2017 to do even better than the balanced budget Ontario has promised or the debt paydowns that Quebec has built in for its Generations fund," Mr. Shenfeld and Mr. Grantham say. "Good times don't last forever and, while we're running at full employment levels of activity, it's time to make solid headway on debt-to-GDP ratios. Save the deficits, and added borrowing/spending, for leaner years when a fiscal boost would be more urgent."
No one can predict where resource prices will be a few years from now, no matter how clever they think they are. But if Canada is to attain more regional balance in income growth in the next decade than it did in the last one, Ontario and Quebec need to strengthen their public finances now to withstand a higher dollar and interest rates and slower population growth. Unless the two central Canadian provinces climb out from under burdensome debt levels while they can, they risk falling into the vicious circle that has trapped so many European economies.
And that would ruin the great Canadian baking show, for sure.
Konrad Yakabuski