Ontario Is Not a "Have-Not" Province

Ontario Defined as Have-Not by the Equalization Formula

Ontario's definition as a have-not province is based on the federal minister of finance's recent report, which says that next year, for purposes of equalization payments, Ontario will fall into the have-not category, and therefore, qualify to receive equalization payments. Canada's very complex method of measuring which provinces qualify for equalization is based on measures of "fiscal capacity," relative to a national standard. About 33 individual economic criteria are taken into account to measure fiscal capacity of a provincial government, averaged over several years. Indeed, Finance Minister Jim Flaherty announced that in 2009/10, Ontario can expect to receive C$347 million in equalization payments. To put that into some perspective, C$347 million is an almost imperceptible C$27 per capita for the year. Never (or almost never) has so much ink been spilled about so little, especially when the conclusions many people have drawn from this announcement are misleading.

The current equalization formula may or may not be a reasonable measure of "fiscal capacity." Fiscal capacity, however measured, may or may not be a reasonable criteria for determining equalization payments. The equalization program, as currently defined and administered, may or may not be an effective instrument to achieve its professed objectives. Each one of these points can be seriously debated, but that is beyond the scope of this brief note. Its purpose is to put these high-profile claims of Ontario's fall into have-not status into perspective. Furthermore, the definition of provinces as have and have-not creates some very surprising, misleading, and probably unfair results.

Ontario Is Still, and Will Remain, a Have Province

For years, economists have considered the best single measure of economic well-being to be real GDP per capita. For international comparisons, to allow for differences in price levels, real GDP is measured at Purchasing Power Parity (PPP). This measure is often referred to as the standard of living. Economists serious about measuring economic well-being are quick to emphasize that real GDP per capita, although the most accepted single measure, must be supplemented by considering other supplementary measures before conclusions with respect to standard of living are drawn. So, by the measure that has long been regarded as the best single measure of economic well-being, is Ontario destined to become a have-not province next year?

The answer will shock those who have been following the media recently. Ontario is not a have-not province this year, it will not be next year, and it may never become a have-not province. In 2007, Ontario's real GDP per capita was 5% above the Canadian average. As the chart below reveals, Ontario is expected to be 3% above the Canadian average next year, when it is scheduled to begin to collect equalization payments. The Global Insight forecast does see tougher times for Ontario than for the rest of Canada for the next several years. As a result, we expect Ontario's real GDP per capita to fall to just above the Canadian average by 2013. After that, though, we expect Ontario's economy to have restructured and to again best the Canadian average.

Why the Difference in Measures of Have-Not?

As noted above, the equalization formula uses measures of fiscal capacity to define have-not provinces for purposes of determining the level of equalization payments that should be sent to a provincial government. That is a different purpose than focusing on measuring the economic well-being of the people of the province. While the equalization measure does take into account income per capita, it emphasizes the ability of the provincial government to raise tax revenues, including from natural resource royalties. As such, when resource prices move up sharply, provinces relatively rich in natural resources are more likely to be defined as have provinces than those relatively weak in resource revenue-raising potential—and vice versa. The equalization formula is based on the average measures of fiscal capacity over several years, so the fact that resource prices have softened in late 2008 is unlikely to significantly change the measures in effect for 2009.

British Columbia Is a Lower-Income Province Than Ontario, But Is Expected to Subsidize Ontario's Equalization Payments

Turning back to real GDP per capita as the most accepted measure of economic well-being, we cannot help but note that in 2009, while Ontario is expected to receive equalization payments, British Columbia (B.C.) is not. In 2009, while Ontario's real GDP per capita will be about 3% above the Canadian average, B.C.'s will be about 95% of the Canadian average. That is, per capita income will be about 9.0% lower in B.C. than in Ontario. To further rub salt into the wounds of the (somewhat complacent) folks of B.C., if we were to take account of differences in price levels as is done for international comparisons, the measured gap in economic well-being would probably widen. Many prices are similar across Canada, but one important price that is not is the price of housing. While accurate measures of the level of house prices are not available provincially, house prices in Vancouver and Victoria are high by Ontario standards.

Conclusion

We conclude that the equalization formula provides a definition that contradicts the most accepted measure of have and have-not. As such, the equalization formula defines Ontario as a have-not province. By the most accepted measure of economic well-being, Ontario will certainly remain a have province while collecting equalization next year. In an unfortunate twist of fate, Ontario's equalization payments will partly be financed by B.C., whose per capita income remains well below that of Ontario.