No quick fix for Ontario’s economic decline

 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.

 

 

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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.

 

Long-Term Municipal Debt in the Northern Ontario Big Five

 

Well, I have been reacquainting myself with municipal debt in Ontario over the last little while culminating in this short piece for the Fraser Institute and a discussion with Jonathan Pinto’s Up North focusing on northern Ontario and Sudbury in particular. There is also this interesting item regarding Farquier-Strickland which suggests that some smaller and more rural Ontario municipal governments are under quite a bit of stress and that large debt loads can have an impact on the long term financial sustainability of municipal finances.  In any event, municipalities going bankrupt in Ontario is something out of the 1930s and most of the current regulations governing municipal finances were a response to the financial turmoil of the Great Depression. 

It turns out that during the Great Depression: “By 1935, 20 percent of Ontario municipal debt was in default (Hillhouse 1936). During the early 1930s, more than 40 Ontario municipalities and school boards defaulted on their obligations.” [Cote and Fenn, 2014]. It is this historical context that haunts some of us as municipalities take on debt even though current debt burdens are well within the debt service requirements of provincial regulation in Ontario and for the most part (Farquier-Strickland excepted I suppose) Ontario municipalities have built up substantial reserves. 

Nevertheless, it is worth monitoring municipal debt levels and the accompanying figure presents the total long-term debt of the big five northern Ontario municipalities from 2000 to 2023 with data obtained from the multi-year reports of the Ontario government’s municipal Financial Information Review.  In 2000, the total debt burden of these five municipalities was relatively closely clustered with Greater Sudbury at $13.3 million, Thunder Bay at $45 million. The Sault and North Bay at $26 million respectively and Timmins close to zero. Things have progressed since then, though for the longest time it was Thunder Bay that was the long-term municipal debt outlier zooming ahead of the others such that by 2008 it peaked at $230 million before coming down somewhat.  Nevertheless, until 2019 it still had the largest total debt of any of the northern Ontario big five.

 

 

Starting in 2019, Greater Sudbury began to ramp up its municipal debt– after a more modest ramping up from 2014 to 2019 – and from 2019 to 2020 went from $70 million to $262 million.  By 2023 it had reached $325 million and is apparently poised by 2027 to reach $600 million. As of 2023, the northern Ontario big five collectively had nearly $700 million in Ontario debt.  With Sudbury’s ramping up to $600 million along with other anticipated expenditures in these other major northern Ontario cities, the total should surpass $1 billion by 2027.  Debt service costs on this debt in the case of Sudbury will likely double from the current 3-4 percent of total own source revenue but remain well within the provincial guideline of no more than 25 percent. Still, all other things given, more money for debt service means less money for current programs.  It is a trade-off that needs to be considered.

Employment Growth in Provincial Norths: Comparing BC and Ontario

 

Economic development in the northern regions of Canada’s provinces is not only an Ontario issue.  Except for perhaps some of the Atlantic provinces (am thinking PEI here), Canada’s provinces all have northern regions which are more rural and remote, and which have often lagged southern regions and metropolises in economic growth and development.  Ontario and British Columbia are the focus of this comparison. 

Ontario’s north divided into the Northeast and Northwest portions of the province total approximately 800,000 people in population or about 5 percent of the provincial population spread over about 90 percent of the province’s landmass.  British Columbia’s north consists of three regions (with their associated major centres in brackets): the North Coast (Prince Rupert), Nechako (Burn’s Lake) and the Northeast (Fort St. John) (though some might consider part of the Cariboo region centred on Prince George as also part of the north). These three regions total about 170,000 in population accounting for about 3 percent of British Columbia’s population spread over about half of its land mass.

Northern BC and Northern Ontario have a lot in common economically given that they have major port cities (Prince Rupert and Thunder Bay), are natural resource intensive with a focus on mining  and forestry, are remote from the rest of the province in terms of transport links and accessibility and have in general lagged in economic development from the more developed southern regions. A unique  difference on the resource side is the presence of aluminum smelting and liquified natural gas exporting in BC’s north which do not have equivalents in Ontario's north.

A key indicator of economic activity is of course employment growth, and the accompanying figure looks at the growth in total employment in these northern regions for the period 2011 to 2024 using data from Statistics Canada. To start, British Columbia’s employment growth has been more robust than Ontario over this period growing at nearly 31 percent versus Ontario’s 23 percent.  When it comes to northern regions, however, Ontario’s north has outperformed BC’s north in employment growth. Total employment in the North Coast and Nechako regions has grown by 4 percent while the BC northeast has declined by 5 percent.  Meanwhile, Ontario’s Northeast and Northwest have seen their total employment grow by 6 and 5 percent respectively.

 

 

While several reasons could be advanced as to why Ontario’s north has done somewhat better in terms of recent employment growth, a key factor is likely location.  Northern Ontario is positioned as a transport corridor for Canada and is a conduit for a lot more trade and commerce going from east to west.  Cargo and traffic bound for BC’s north is more targeted and generally going there for either a specific regional need or to exit via Prince Rupert.  There is a key difference across the two norths in terms of energy.  Northern BC has infrastructure projects underway related to natural gas production and liquified natural exporting underway and these will hopefully generate an uptick in employment growth in the years to come.

However, for the time being, Ontario’s north has the larger critical mass in terms of both total employment and population with larger urban areas than northern British Columbia and has seen the more robust employment growth. Ontario’s north is quite unique when examined nationally as its population tends to dwarf the total populations of most the other provincial norths.    Northern Quebec, for example, is an area about the size of Alberta but with barely 50,000 people.  Northern Alberta (north of Edmonton) has about 375,000 people, northern Manitoba about 100,000 people and northern Saskatchewan about 40,000 people.  Ontario’s north contains a total population pretty much equivalent to all the other provincial norths plus the three territories. It is a more significant region than most of us give it credit.

Province Building, Ontario's North, James Bay and the Ring of Fire

 

Several interesting threads have come together over the past week that warrant a short historical overview of economic development in Ontario’s north.  First, there was the passage of Bill 5 which gives the Ontario government the powers to establish special economic zones to speed up mining and other development projects and which has been denounced by environmental and Indigenous groups in the province.  While this bill could be applied to a variety of sectors including housing 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.

Second, there was this week’s First Minister’s Meeting in Saskatoon which saw a rather amicable gathering in which the premiers presented wish lists of nation building infrastructure projects. Here, Premier Ford stated that his priority was mining in the Ring of Fire and along with infrastructure to access and develop the project. Premier Ford’s full list was of course rather ambitious and included “Ring of Fire critical mineral deposits in northern Ontario, both large-scale nuclear energy generation and small modular reactors, GO passenger train service and a new James Bay deep-sea port.”

The emphasis on the Ring of Fire and a port on James Bay is probably the most ambitious northern Ontario oriented development strategy of recent years.  In the 19^th century there was a northern Ontario policy of land settlement, railroad building and a manufacturing condition (domestic processing of resources) which guided Ontario’s northern economic development until the 1930s (Di Matteo, 2022; Zaslow 1971).  As well, Bill 5 in many respects represents a repudiation of the Far North Act (2011) which set aside from development about 20 percent of Ontario’s landmass in its north.  However, the emphasis on special economic zones, mineral development and rail access with a port on James Bay are old themes in Ontario’s northern development strategies.

The provincial government has generally resisted the creation of special economic zones especially in northern Ontario.  In the wake of the forest sector crisis nearly two decades ago, the Common Voice Initiative published a report titled “Enhancing the Economy of Northwestern Ontario” which among other things advocated Investment Incentive Zones which in many respects was more transformational than what the province is currently proposing.  As the report stated (p.17): “The Province should designate Northwestern Ontario as a Special Economic Development Zone.  The rates for Provincial sales, personal income and corporate taxes for the Northwest should be set 20 percent lower than those for the province to reflect income differences Northwestern Ontario and Southern Ontario…”  Bill 5 is more about suspending various government acts and regulations at ministerial discretion to fast-track development rather than a coherent approach to economic incentives within special economic zones.

As for mineral development, Ontario has long recognized the vast richness and wealth of the Canadian shield underlying Ontario’s north and particularly the James Bay region. In the 19^th century, Benidickson (1980: 62) notes that “descriptions of Ontario's northland including the James Bay region contributed to the gradual emergence of an increasingly favourable impression of the area's resource which was in marked contrast to previous assessments. For example, in commenting on a railway intended to reach James Bay, the Dominion Illustrated regarded the construction proposal as "the latest instance of the changed valuation which recent developments have put upon a region once deemed practically worthless.'”  The result was several initiatives to build a railway to James Bay and a deep-water port on James Bay as a conduit not only for agricultural products (which was a bit optimistic given the land and climate of northern Ontario) but also minerals and forest products. The Toronto business community in the late 19^th and early 20^th centuries even saw a James Bay port as a third outlet to Europe that would expand the city’s agricultural hinterland (Nelles, 1975, p/.19).

Again, quoting Benidickson (1980: 63) “For nearly three decades, beginning with the Lake Superior and James Bay Railway proposal of 1882, private railway promoters planned and advocated a series of northern rail lines to reach Ontario tidewater at James Bay. Although these proposals differed with regard to the location of the southern terminus, overland routing, and port selection, they were generally similar in intent. An Ontario railway to James Bay would contribute to the development of the territory through which it passed, and, having reached northern waters, would confirm the province’s still theoretical status as a maritime power.”  A number of private railway projects followed but they were unsuccessful and it was not until the Ontario government itself took the bull by the horns and built  the Temiskaming and Northern Ontario Railway starting in 1902 that an effort was made to access this region and also assert provincial sovereignty over the region.   Ontario had an ownership dispute with the Manitoba and federal governments over its north that was not fully resolved until 1912.  However, plans for a deep-water port on James Bay never came to fruition though they periodically surfaced with the concept emerging and retreating in the 1940s, late 1950s and 1970s.

Once again, the Ontario government is embarking on a northern Ontario development strategy that has been nearly 150 years in making.  Projects such as deep-water seaport on James Bay have been proposed and resurfaced a number of times with their success limited by first the scale and cost as well as conceptually what the shipping purpose of the port would be.  This time, the impetus is coming from the Trumpian challenge to both Canada’s economy and its sovereignty. In the 19^th century, Ontario was competing against the federal government with respect to a northern development strategy that mimicked the national policies of western development.  This time may perhaps be different if the federal government is brought onside to assist with infrastructure development in the region given the new push for Arctic sovereignty.  However, the key difference this time is that despite Bill 5, the Indigenous peoples in the region will be more aware of their interests and more assertive and any development will need to ensure that there are direct, tangible and substantial benefits to the Indigenous peoples in the region. As well, the ultimate determinant of any successful project to build a new port on James Bay will be economic viability - what is the demand for shipping from James Bay and what is going to be supplied?

 

References

Benidickson, J. (1980) “Ontario’s James Bay Vision,” Journal of Canadian Studies/Revue d'études canadiennes, Volume 15, Number 3, Fall 1980, pp. 60-73.

Di Matteo, L. (2022) Arrested Development: A Brief Economic History of Northern Ontario, 1870 to 2020, American Review of Canadian Studies, 52:2, 163-192.

Enhancing the Economy of Northwestern Ontario, December 5^th,2006.

Nelles, H.V. (1975) The Politics of Development. Forests, Mines and Hydro-electric Power in Ontario, 1849-1941.Toronto: MacMillan.

Zaslow, M. (1971) The opening of the Canadian North, 1870-1914. Toronto: McClelland and Stewart.