In a trend that’s been on-going for quite a few number of years now, Ontario has been labeled as a “Have Not” province. Rob Ferguson covered this story back in 2008, in which a TD Bank report stated that Ontario was set to receive federal equalization payments for the first time.
Equalization is an important national formula that has historically been used in which tax dollars from wealthier provinces, mainly Ontario and Alberta (in the past), flow to less well-off provinces to ensure all Canadians have comparable levels of public service.
However, with Ontario’s debt woes growing, it was only a matter of time before Ontario was attacked by critics.
Back in 2008, Flaherty expressed worry about the Ontario economy. He said,
If this continues – this is not hyperbole, this is a fact – Ontario will become a ‘have not’ province in confederation. And it will be Premier (Dalton) McGuinty’s legacy that he in two terms took Ontario from being the strongest economic province in the federation to a ‘have not’ province.
He also told a Sun Media editorial board that the federal government would have to “rethink” the federal equalization program should the most populated province become a recipient of it. He said, “If Ontario becomes entitled to those kinds of things, then that will distort the system dramatically and will bring strains into confederation.”
Flaherty added that the architects of the equalization formula never envisioned a scenario in which Ontario and Quebec, home to 21 million of the country’s 34 million residents, would both be recipients.
At the time, TD’s chief economist Don Drummond said, “Ontario is not the mighty king of the economy anymore. It’s one of the weaker partners, but again it’s not so much Ontario’s being weak as the other provinces are really roaring along.“
The financial markets of the past haven’t been good times for Ontario either. Reasons for this have included a higher dollar and a U.S. economic slowdown that has hurt Ontario’s export industries, while soaring oil and commodity revenues have been found in the Western Provinces.
But there is another explanation for the fiscal crunch facing Ontario, and that is rooted back to the policies and decisions of previous governments.
Various terms of Previous Ontario Governments
And as we all know, the importance of Ontario has been significant for Canada’s historical development. For what seems like tradition now, Ontario has long been considered the economic engine of Canada.
Now it’s increasingly referred to as a “have-not province.”
So how did Ontario receive this coveted title? The answer, lies in it’s history.
Below, we present a graph of Ontario’s Debt as a percentage of GDP going all the way back to 1981-2.
And here is another:
As is immediately observable, Ontario’s debt-to-GDP increased substantially beginning in 1990 onwards.
This series intends to look into the causes that snowballed the finances of Ontario from the period of Bob Rae’s NDP government, Mike Harris’ Progressive Conservatives, and finally to Dalton McGuinty’s Liberals.
Rae’s rise to power in the 1990 provincial election came amidst a turbulent time for the Ontario economy.
Going back to 1988 when Brian Mulroney was re-elected, his negotiation of the Canada-US Free Trade Agreement (FTA not NAFTA) between Canada and the U.S. set in motion a plan, that had the Canadian economy more closely interconnected with the value of its currency.
Rae’s term to power couldn’t have occurred at a less opportune moment. The Bank of Canada raised the Canadian prime rate 6 points higher than the US prime, because they wanted to fight inflation, but some critics have charged this was done to simply soften Canada into the Free Trade Agreement policies.
The changes in financial policy were tremendous, and are not well known to those outside of the financial community, this is why many journalist, columnists, had portrayed Rae in the wrong manner and misunderstood the context and the significance of the changes in financial policies.
Indeed, Ryan McGreal was absolutely correct in his assessment of the significance of the prime rate changes.
The Bank of Canada prime rate change led to the following extraordinary effects:
- Companies had to pay more for debts accumulated, thus they stopped investing in new infrastructure – and instead, cut costs
- Consumers had to pay more for debts, so they had less disposable income and this deterred them from making large purchases
- The aforementioned changes above led to a significant barrier in economic activity which translated into lost profits for companies, whom then proceeded in laying off workers
- The layoffs that followed then reduced consumer demand even more
- The higher interest rates in Canada proceeded in attracting US currency speculators, who then proceeded in driving up the Canadian dollar and made exports more expensive, which also hurt revenue further, and threw even more Canadians out of work
- At the same time as the Canadian Federal Government saw its tax revenue go down, its program spending (on welfare, health care, subsidized housing, etc) went up and its debt servicing costs also went up
- This then resulted in the Federal Government cutting transfer payments to the provinces, and this placed another blow to their finances even more
This chaotic economic context set the ground work for Rae’s NDP to sweep into power in Ontario.
Neither the PC’s (progressive conservatives) nor the Liberals had anticipated the NDP winning the leadership and by such a majority.
This fact was clearly evident since the provincial NDP held only 19 seats after the 1987 election and ended up with a 74 seat majority in 1991. One could also contend, that Rae might not have even expected such an huge NDP victory.
In the recession that began in 1990, many companies began massively downsizing and threatened to leave Canada all together. New advancements in manufacturing such as automation and globalization further destabilized the province and led to many years of instability.
In Gerald Kaplan’s piece for the Globe and Mail, he documented the assault against the Rae Government by businesses, bankers, and private media, and after the new finance minister’s very first meeting with the banking community , a bank vice-president told him, in the presence of an aide: “Nice speech, Mr. Minister, but we’re going to kill you.”
He also asserted, that during the Rae government, bond traders had demanded them to slash government programs to reduce the deficit as a prerequisite to Ontario borrowing at competitive rates, even though Ontario’s deficit was equivalent to that of Conservative-run Alberta.
The media had been focused on the government’s threatened credit ratings, despite the fact that Ontario had the only Standard & Poor’s AAA rating in the country. The Social Credit government in British Columbia, the Conservatives in Alberta and Robert Bourassa’s Liberals in Quebec all had lower credit ratings. Yet only in Ontario was the government threatened
This helps explain, that the fiscal decline facing Ontario had already been in motion due to the FTA agreement, Bank of Canada monetary policies, and world capital markets, which helped to create a more globalized capital market whereby economic activity in other countries would impact the Canadian economy in ways even Rae would not have been ready for.
And he certainly wasn’t, at the time.
Knee Deep in Debt
Ontario’s economic forecast was bleak when Rae took office in October 1990. The Liberal government had forecast a small surplus earlier in the year, but a worsening North American economy led to a $700 million deficit before Rae ever took office.
In October 1990, the NDP projected a $2.5 billion deficit for the fiscal year ending on March 31, 1991. (Toronto Star, January 23, 1991).
Rae himself was critical of the Bank of Canada’s high interest rate policy, arguing that it would lead to increased unemployment throughout the country.
Of course, he was absolutely correct on his assertion however Rae was ignored, and that message remained lost in time.
Rae had also criticized the 1991 federal government’s budget, arguing the federal Finance Minister Michael Wilson was shifting the federal debt to the provinces.
All of this meant that the province had just been slammed with the worst recession in Ontario’s history since the Great Depression, and Rae’s NDP had two clear cut choices.
They would have been able to take the path of facing austerity by fighting to reduce the deficit and loose valuable programs, or they would have been able to play the stimulus card, and fight the recession with government stimulus, infrastructure and training programs at the risk of running up the province’s $700 million dollar debt.
The NDP had chosen the latter route and they were criticized brutally for it, leaving a scar that may still affect certain Ontarian voters today.
This was easily observable by Ontario NDP Finance Minister Floyd Laughren, when faced between the deficit and recession he said,
Fighting the deficit or fighting the recession – we’re proud to be fighting the recession.
The government’s first budget in 1991, had increased social spending to mitigate the economic slowdown and projected a record deficit of $9.1 billion. It targeted more money to social assistance, social housing and child benefits, and raised taxes for high-income earners while lowering rates for 700,000 low-income Ontarians
This resulted in the first major mistake for Rae, and the beginning of a negative fiscal balance for Ontario’s books.
Rae’s NDP government followed a Keynesian approach to economy growth.
Their hope was that spending money in the public sector would help stimulate employment and productivity. It did not achieve it’s intended purpose since the recession was still quite severe. The budget was seen as the worst of both worlds since it angered the business community, and it did not do enough to provide public relief for individuals.
By the mid 1990’s, it was clear – the Ontario NDP were embroiled into a fiscal crisis. Over a 5 year period from 1989/90 – 1994/95, the provincial government had accumulated $49 billion in debt. (Statistics Canada, 2010).
And in terms of provincial net debt, it stood at 13.5% in 1989/90 and had more than doubled by 1994/95 to a ballooning 17$ billion in 1994.
As a result of the rapidly escalating debt coupled with high interest rates, the interest on the debt had increased from 9.3% of government revenues in 1989/90 to 17% by 1994/95. (Department of Finance, 2011).
This effectively meant that Ontario had become caught inside of a spending induced fiscal spiral of persistent and substantial deficits, increasing government debt, and growing interest costs.
During these recessionary times, Rae’s “Agenda for People” election platform called for legislation to prevent the use of replacement workers (scabs) during strikes, better social assistance, and tax reforms.
The “Agenda for People” election platform also called for nationalizing auto insurance, although he had backtracked on this policy once in office, which caused a split between him and those of his minister’s that had seen value in it. The NDP had initially increased spending in the public sector, in order to stimulate employment and productivity.
The view was that injecting stimulus into the economy would jump start productivity and help Ontario “grow” it’s way out of the recession. Unfortunately as Rae’s NDP would soon learn, it was wrought with failure.
Rae had initially consulted with the unions, asking for them to renegotiate their contracts to save money. His government had labeled this as the “social contract”.
When the unions had refused to bargain, the Rae government had to unilaterally implement the changes they were hoping to make. This began the creation of “Rae Days” , in which public sector workers were required to take occasional unpaid days off. This is included below.
Due to the excess spending of Rae’s administration and facing a ballooning provincial deficit thanks to monetary policies, the NDP had to introduce:
- Cutbacks to social spending and Social Contract. This was a policy that forced public-sector workers to take unpaid “holidays” – otherwise known as “Rae Days” every year. Of course, this angered most of the labour movement such as the Canadian Auto Workers Union, Ontario Public Service Employees Union, and other public sector unions because it was seen as a violation of collective bargaining and it had also placed budget issues on the back of public sector workers
- Wage freezes
- Elimination of grants
- Unpopular revenue-raising taxes and operations
As a result of these measures, many of the policies employed by Rae’s NDP resulted in thousands of NDP party members resigning from the party, with many ardent supporters of the NDP vowing to vote them out in the next election.
The Rae government also bailed out the Algoma Steel factory in northern Ontario in order to save jobs in addition to bailing out the workers in Kapuskasing.
Rae’s NDP also worked with the TTC Eglinton West subway line in Toronto, and the Jobs Ontario job creation program
The Rae government had also introduced many policies that would be considered positive as well, such as the introduction of anti-strikebreaking legislation, among other pro-labour provisions, that would have substantially improved labour’s bargaining position.
This was among a smorgasbord of important policies such as tenant protection, employment equity, and even trying to introduce same-sex partnership benefits.
Other policies included the Rae government’s support for native Canadians “inherent right to self-government”. They worked to help six aboriginal bands in Northern Ontario gain reserve status. The government also called for self-government on the Akwesasne Indian Reserve, in order to help the leaders of the reserve combat smuggling. Rae also pushed for native rights to be included in future constitutional reforms
The Rae government also announced an indefinite moratorium on the construction of new nuclear plants in Ontario. He opposed all plans to privatize Ontario Hydro.
Rae had also announced his government’s plans to introduce legislation for a ‘common pause day’ across Ontario, “to help strengthen family and community life while protecting small business and the rights of workers”. Many retail owners opposed this initiative for obvious reasons.
The Rae government also established a Royal Commission on Learning which was co-chaired by Gerald Caplan and Monique Begin. The Commission published their report titled: For the Love of Learning with their findings on January 1995.
Amoung the reports’ more prominent recommendations were:
- Creation of a common curriculum for Ontario schools – the equalization of funding per pupil
- Elimination of grade 13
- Implementation of uniform testing of students at various grade levels
The Rae Legacy
History has not been kind to Bob Rae, and neither have Canadians, many of whom hold his government accountable for the recession of Ontario. The unfortunate reality is that many of the larger issues that occurred during his term in power were completely out of his control as they fell into federal jurisdiction.
In the video below, Rae defends his economic record while premier of Ontario and rebukes many of the criticisms that he has received over the years.
Rae begins the echo and reiterate many of the points which have been covered thus far such as the Bank of Canada’s money tightening macroeconomic policy and the rising economic growth by the end of his term.
Although the Rae administration’s Social Contract policy was highly unpopular among the labour unions, it did prevent complete layoffs, – which under the Mike Harris administration did occur.
In the video below, Steve Paikin hosts an interview with Bob Rae recounting his Rae Day policy.
At 3 minutes and 28 seconds in, Steve Paikin asked Rae, “What made you think there was the possibility of negotiating something, rather than just unilaterally bringing down the hammer on this.”
Rae responded that negotiation had to be done via discussion and consultation. This seeming point would highlight a critical difference between the governing style of Mike Harris who would win the next provincial election in 1995.
Although Rae’s NDP had only lasted one term, the government’s decision to follow the Keynesian path of distributing stimulus definitely did result in the snowball that would lead Ontario down the path of fiscal decline that it is in today.
By 1994, near the end of Rae’s term, the recession had cleared up and monetary policy at the Bank of Canada had begun to loosen. This however, ended up being ‘too little, too late’ for Rae’s government as his popularity plunged, resulting in his resignation.
In the provincial elections of that year, the PC’s under Mike Harris swept into power with a majority.
The Harris PC’s would work on reversing many of the policies that were adopted by the Rae government.
Part 2 will look into the Common Sense Revolution manifesto brought into government by the Mike Harris Progressive Conservatives.
Part 2 – Mike Harris: The Common Sense Beginnings
Part 3 – Metropolitan Toronto: An Amalgamated Megacity
Part 4 – Ontario Taxcuts: On Borrowed Time and Money
Part 5 – Dismantling Infrastructure
Part 6 – Firesale: The Highway 407 Hijack
Part 7 – Ontario Hydro Privatization
Part 8 – Value for Money Auditors Reforms
Part 9 – The End of the Common Sense Revolution