John Ivison: Ontario finds itself in danger of shedding ‘have-not’ status and losing $3B

Nationalpost.com
Dec. 21, 2015
By John Ivison

When Ontario had its equalization payments cut two years ago, the finance minister of Canada’s largest province, Charles Sousa, called it “an attack.”

Admittedly, the hit to the province’s bottom line was $1.2 billion, but as the late federal finance minister Jim Flaherty pointed out, the cut was the result of an independent formula, not politically motivated spite.

The same formula was at play when federal transfers were announced at the weekend.

Again, it resulted in Ontario losing out, but this time, the response was more muted.

Ontario will get $60 million less in 2016-17 than it did this year, “But that’s okay,” said Sousa Monday. “We want to support all provinces to be at their best.”

What might possibly explain this festive largesse?

Sunny daze?

Surely not the prospect of squeezing fellow Liberal finance minister Bill Morneau, until the pips squeak?

Federal, provincial and territorial finance ministers met in Ottawa Sunday and Monday to discuss an economy that seems to be sputtering like a second-hand clunker. There are worries that GDP numbers for October, to be released Wednesday, will show another slowdown. There are further concerns over stagnating retail sales, job losses in the West, high personal debt levels and a potential housing meltdown.

The finance minsters’ immediate concern is getting the federal government to commit to spending billions of dollars in infrastructure money before the end of the 2016 construction season.

But there are also some longer-term considerations, not least for Ontario.

All provinces are concerned about the end of the 6 per cent health spending escalator. In 2017-18, health transfers from Ottawa will be linked to a rolling three-year average of nominal GDP growth (after 12 years of 6 per cent increases). Unless, that is, the Trudeau government strikes a new, more generous agreement.

In the absence of that deal - and based on current projections of 3.1 per cent nominal growth by BMO Nesbitt Burns - the change will cost Ontario $402 million.

More worrisome still for Sousa is the prospect that Ontario will become a “have” province in the 2017-18 fiscal year and no longer qualify for equalization payments, which will deliver $2.3 billion to the province this year.

The Ontario government has forecast the provincial budget will be back in the black that year. But if it stands to lose nearly $3 billion in federal transfers, those plans may have to be postponed.

It goes without saying that the return of Ontario to “have” status has got absolutely nothing to do with the Kathleen Wynne government - rather it reflects the dismal performance of the rest of the Canadian economy. Equalization is dished out based on the relative strength of each province’s revenues. There is a two-year time lag to the rolling three-year period on which the formula is based, which means the numbers released Sunday were based on the fiscal years 2012-13, 2013-14 and 2014-15.

Since the collapse in the price of oil started in June 2014, the full brunt of the impact is not reflected. But it will show up in the fiscal capacity of the resource-dependent provinces next year, and the equalization-receiving provinces will suffer the consequences.

Two years ago Sousa complained about a “fiscal bombshell,” but the real explosion will come if, after eight years, Ontario stops receiving transfer payments through none of its own doing.

No wonder that he emphasized his new “collaborative approach to federalism.”

He’ll need Morneau’s goodwill on infrastructure and healthcare spending to make up for his province’s lost equalization dollars.