This originally appeared in the Fraser Institute Blog, August 13th.
Ontario continues a decades-long economic malaise. From time-to-time economic analysts arise to point out the decline only for the news to be treated as so much water off a duck’s back. Indeed, the complete picture as measured by real per-capita GDP has evolved to the point where the response should be alarm rather than concern.
Moreover, the solutions now being advanced by the Ford government (and others) to move Ontario’s economy forward are quick big fix projects that do not address economic fundamentals. Despite an economy considered Canada’s powerhouse in terms of size, export intensity, and manufacturing depth, the trends are disconcerting. This is not a short-term aberration attributable to the tariff disputes with the United States but a sustained inability to effectively grow the economy.
The chart below plots Ontario’s real per-capita GDP (in 2020 dollars) along with the average real per-capita GDP of the rest of Canada from 1926 to the present using data from Finances of the Nation. For most of the last 100 years, Ontario has been the wealthiest province in the Canadian federation as measured by real per-capita income. Moreover, the gap has usually been substantial.
For example, in the 1920s, the per-capita income of the rest of Canada was about two-thirds that of Ontario. This proportion persisted well into the early 1970s at which point it began to quietly erode. By the late 1970s, the average real per-capita GDP of the rest of Canada had reached more than 80 per cent of Ontario’s. The economic boom of the 1980s masked Ontario’s decline but the period since the 1990s has seen its relative decline continue and the per-capita GDP of the rest of Canada now is just over 100 per cent that of Ontario.
In 1960, Ontario has the highest real per-capita GDP of all 10 provinces. By 1990, it was in second place just behind Alberta but ahead of British Columbia. In 2005, Saskatchewan surpassed Ontario moving it to third place while by 2022 Ontario’s rank had moved to fifth place. Essentially over the course of just over half a century, Ontario went from the top province in terms of per-capita GDP to mid-ranked. Ontario is exhibiting more characteristics associated with the Atlantic provinces—Ontario received equalization for the first time in 2009—than the more dynamic western parts of the country. A province that once had hopes as high as the tallest tree, now is lucky to aspire to economic heights akin to a lilac bush.
What has happened to Ontario is more than a re-equilibration of the federation as resource rich provinces developed or the effects of adjustment to a more competitive free trade world in the wake of the FTA and NAFTA. Simply put, Ontario has experienced a productivity decline rooted in a failure to boost business investment. While Ontario is a mineral and resource rich province, it has been unable to bring resource projects online—the Ring of Fire a case in point. This has been accompanied by a governmental and business culture focused more on process and regulation than on trying to get things done and a cultural shift to gaining wealth through supply restraint and asset appreciation rather than hard work.
Nowhere is this more evident than in housing investment where population growth has outstripped additions to housing stock. The regulatory framework towards getting projects approved, permitted and built is generally a labyrinth. Large amounts of both suburban and northern land were environmentally sequestered from development without steps to ensure density development creating artificial scarcity particularly in the Greater Toronto Sarea (GTA). The effects on new supply were worsened by the fact that new housing began to be treated as an investment by the public and a revenue source by governments given the plethora of tiny investor driven condo buildings and the development charges accounting for a large proportion of the price of new housing.
While there are signs that the Ontario government is finally trying to overcome these past missteps, it’s an uphill struggle given the continual grasping at quick fixes designed to promote rapid economic growth. The passage of Bill 5 gives the Ontario government the powers to establish special economic zones to speed up mining and other development projects. One suspects the goal is to speed up development in the critical mineral rich Ring of Fire area which has been on the cusp of development for decades but has yet to really go anywhere. Yet it may be too little too late as critical minerals are considered crucial for electric vehicle production but the demand appears to be slowing.
The Ontario government does not have a coherent economic strategy designed to boost long term productivity and investment but rather is hitching its wagon to quick fix large scale investment projects and the attraction of federal investment dollars in the face of President Trump’s economic and commercial assaults on the Canadian economy. Among the nation building projects that the Ford government would like federal support for are a tunnelled expressway under Highway 401, all season road access to the critical minerals of the Ring of Fire, new nuclear generation projects, and a new deep sea port on James Bay.
Ontario is also supporting the idea of an east-west pipeline made with domestically produced steel that would connect to a not-yet-built port of James Bay as well as a new rail line from the mineral rich Ring of Fire to mineral processing facilities in Western Canada. Strangely enough, Ontario has not put forward the enhancement of the vital east-west Canadian highway link passing through its north as a major nation-building project which is a curious oversight, instead leaving it up to municipalities to advocate.
In many respects, this aspirational mega project vision of economic development for Ontario is a serious case of déjà vu as many of these projects resemble a wish list from the 1960s and 1970s. Even developing deep-water ports on James Bay is a concept with a history stretching back to the 19th century. Some of these projects—such as new pipelines—are tied to resource development and are welcome given Canada’s comparative advantage in resources but a return to simple hewers of wood and drawers of water is also not where we should be going.
How does Ontario invest in 21st-century resource extraction in a manner that boosts high technology and create backward linkages into our tech and AI industries? How can Ontario break through the regulatory morass slowing the construction of homes, new resource projects and economic activity in general—regulations that in total have been estimated at 386,000 requirements? What will Ontario do to create tax incentives for business investment and individual labour supply, given that highest marginal personal income tax rates are close to 54 per cent?
Getting on the quick fix mega-project bandwagon is easy. Putting in place the environment that might help some of these projects succeed is not.