CANADA

DEMISE OF A 'FAT CAT'

MARY JANIGAN April 4 1994
CANADA

DEMISE OF A 'FAT CAT'

MARY JANIGAN April 4 1994

DEMISE OF A 'FAT CAT'

CANADA

MARY JANIGAN

It wasn’t supposed to be this way when the New Democrats swept to power in Ontario in September, 1990. They took over the traditional “fat cat” of Confederation, the economic engine of the nation, and they had plans to dole out benefits to the workers of their land. Three and half years later, it was business as usual at the Ontario legislature last week. Outside the Victorian stone facade, 2,000 angry Ontario Hydro workers were battering on the doors to protest possible wage and benefit cuts. Inside the building, the NDP government faced another multibillion-dollar revenue shortfall. After agonizing debates, it shelved proposals for further cuts in social spending, hiked university tuition fees and glumly accepted the prospect of an even higher deficit. In the grim 1990s, Premier Bob Rae has become accustomed to such wrenching decisions. “It’s been tough,” he told Maclean’s as the spring session of the legislature opened. ‘You have to remember that you don’t get to choose the time in which you take office.”

Given a choice, Rae would almost certainly have selected an earlier, more prosperous decade for Ontario’s first NDP government.

Bob Rae blames Ottawa for his province’s fiscal woes

Instead, it has been his ill fortune to preside as the former powerhouse of Confederation dwindled in wealth and power. Hard-pressed folks in other parts of the country may find it difficult to sympathize, but the recession has ravaged Ontario—and strained its generosity towards its neighbors. The province’s welfare rolls have doubled. The unemployment rate is hovering at dismal levels—10.7 per cent in February. “The reality is that the recession has hit Ontario the hardest,” says economist Paul Hobson, a social policy expert at Acadia University in Wolfville, N.S. “And when it needed money from Ottawa, it wasn’t there.”

Ontario’s current plight is reflected in a litany of dismal statistics. For the fourth year in a row, Finance Minister Floyd Laughren is preparing to deliver a budget in late April with a deficit in the range of $10 billion, far higher than the $6.8 billion he forecast last year. The province’s debt now stands at a staggering $78 billion, up from $40 billion in 1990. Most worrisome, there are signs that its economy has permanently changed: the province suffered almost 70 per cent of the nation’s job losses during the recession, but it has generated only 28 per cent of the job gains registered since its recovery began in April, 1992. About 574,000 Ontario workers are unemployed and another 1.3 million residents depend on welfare—at a time when the federal government has dramatically pared back its share of that social assistance tab.

The province that always had enough money to spare for Ottawa and its provincial partners now claims that it is being shortchanged in the Confederation bargain. In particular, Rae has complained loud and wide about federal welfare cutbacks—which began to hit the wealthier provinces of British Columbia, Alberta and Ontario in 1990. The premier maintains that Ontario contributed 43 per cent of federal taxes in 1991—the most recent available figures—but received only 31 per cent of federal spending. And provincial officials have compiled a lengthy list of programs—ranging from immigration to job training—for which they say Ontario receives less support per person than other provinces. No one denies that Ontario is still comparatively wealthy: in 1992, the province’s average family income of $57,071 ¡3 was the nation’s highest. But the govern| ment’s decision last week not to cut transfers to municipalities, schools and hospitals has z pushed the province deeper into debt, g “Ontario has suddenly become poorer than it z was,” notes Desmond Morton, director of - the McGill Institute for the Study of Canada

that modem Ontario premiers traditionally avoided. “This has been the one region of Canada that dared not speak its name,” observes Rae. “That is no longer the case. And if [Ottawa] does not address this problem in some practical way, it will be harder to hold the country together.”

To support those claims, the Ontario government tabled a report last November from the Ottawa-based economic forecasting firm Informetrica Ltd. Along with additional provincial research, it outlined inequities in Ottawa’s treatment of Ontario:

in Montreal. “Hence, not getting a couple of billion dollars from Ottawa that it might otherwise be entitled to makes a difference.” Ontario’s quest for what Rae calls “fair treatment” will probably become a recurring theme in the next provincial election, expected in the spring of 1995. The premier will likely argue that Ottawa is responsible for most of the hikes in provincial fees and taxes, including last week’s decision to increase tuition fees by 20 per cent over the next two years, and for much of the provincial debt. More important, Ontario’s resentment could jeopardize the central bargain of Confederation—in which the richer provinces transfer generous payments to the poorer ones to allow them to provide similar levels of service for similar levels of taxation. Already, Rae is engaged in the kind of regional sabre rattling

• Through the Canada Assistance Plan (CAP), Ottawa paid 50 per cent of the welfare costs in the seven poorer provinces, but picked up only 29 per cent of Ontario’s 1993-1994 tab of $6.3 billion. Quebec got 10 per cent more funds with 43 per cent fewer beneficiaries.

• In 1992, Ontario employers and employees paid $1.67 billion more into the unemployment insurance (UI) fund than they drew in benefits. The province blames UI rules that allow workers in areas of higher unemployment to work shorter periods for longer benefits.

• Ontario receives about 55 per cent of all immigrants to Canada, but only 38 per cent of the federal funds for settlement and training. Ontario got $760 per immigrant in 1993-1994, compared with $1,510 for other provinces.

• Although Ontario has 38 per cent of the country’s workforce and 36 per cent of the

unemployed, it received only 27 per cent of federal job-training funds last year.

These apparent inequities have a tangled history—and both Ottawa and Queen’s Park bear a share of the blame. The federal Conservatives, in power from 1984 until last October, focused their attention on the regions where they drew their greatest support: Quebec and the West. Throughout the boom of the midand late 1980s, while Ontario’s Liberal government spent lavishly, Ottawa struggled to control its costs, often at Ontario’s expense.

In retrospect, the pivotal clash came in 1989 when the provincial Liberals proudly announced sweeping multimillion-dollar reforms to Ontario’s welfare system. To their horror, the federal Tories realized that they were obliged, under CAP, to pick up 50 per cent of those staggering new costs. Nine months later, Ottawa unilaterally announced that CAP payments to the three wealthier provinces would be “capped” at growth rates of five per cent per year. That decision coincided with the start of the economic downturn. Within four years, the number of Ontario residents dependent on welfare more than doubled, while the costs of supporting them almost tripled. Ontario now has the most generous welfare system in the nation. And while Ottawa uses tax revenues from Ontario to fund 50 per cent of the welfare tab in poorer provinces, it contributes only 29 per cent towards Ontario’s tab.

That situation has poisoned relations between Ottawa and Queen’s Park. Senior bureaucrats in both governments distrust each other and rarely co-operate. Relations are so strained that, before his Feb. 22 federal budget, Finance Minister Paul Martin personally assured Rae and Laughren that Ottawa recognized the inequities—and would rectify them during its current overhaul of social policy. But, Martin added carefully, Ottawa did not have the $1.7 billion required to rectify the shortfall in CAP payments to Ontario for 19941995. That decision, in turn, forced Ontario to postpone its plans to overhaul social assistance, including its ambitious scheme to send cheques for each child in all lowincome families, including the working poor.

The continuing strife could not come at a more pivotal time in Canada’s history. Free trade is dismantling the tariff walls that once protected the province’s manufacturing base. Across the nation, provinces are increasingly trading with their American neighbors. Much of the economic rationale for transfers from the richer to the poorer provinces is disappearing as those on the receiving end use the money to buy foreign goods instead

CANADA

of Ontario-made products, as they once did. As Rae observes: “We would send the money out and it would come back. Everybody would read the Eaton’s catalogue and send in their cheques. The economic logic of that has collapsed.”

Ontario’s disaffection could have dire consequences for other provinces. Ontario could demand cuts to the current transfer arrangements. Pushed to the wall, it could even collect its own personal income taxes— and disrupt Canada’s economic union. “This 28-cents-on-the-dollar stuff with CAP is sapping the integrity of the entire transfer system,” warns Queen’s University economist Thomas Courchene. “Ottawa had better do something, because if Ontario feels aggrieved and starts to flex its muscles, it can wreak absolute havoc on the whole transfer system. If this isn’t sorted out, the poorer provinces are going to lose more than Ontario is going to lose.”

In the end, Ottawa and Ontario may compromise, if only because they need each other. Both governments want to overhaul the social security system. But such reform is probably impossible unless federal unemployment insurance and provincial welfare schemes are redesigned in tandem. As well, both levels of government must agree before Ottawa’s controversial Goods and Services Tax and the provincial sales tax can be combined in a new national sales tax to encourage economic efficiency. It is easy to

imagine the eventual trade-offs: Ontario supports social policy reform in return for a fairer deal on CAP funding; Ottawa funds Ontario’s welfare schemes in return for cooperation in the national sales tax.

If Ottawa and Ontario do patch up their differences, it may come too late to assist the embattled Rae, whose NDP commanded only 10 per cent of decided support in the latest

opinion poll, published last week, compared with 62 per cent for the Liberals and 21 per cent for the Tories. Although both opposition parties support his call for a more equitable deal with Ottawa, they also contend that he has badly mismanaged the province’s finances. “We don’t have a revenue problem, we have a spending problem,” Tory leader Michael Harris told Maclean’s last week. Added Liberal finance critic Gerry Phillips; “Bob Rae should stop trying to pass the buck to someone else.”

The premier maintains that Ontario taxpayers instinctively understand and support his campaign for fair treatment. Others are not so sure. Observes pollster Michael Adams, president of Environics Research Group Ltd. in Toronto: “When Canadians see governments fighting each other, they are basically seeing one level of politicians whom they don’t have a high regard for throwing mud at another level of politicians whom they don’t have a high regard for, and they wish a pox on all their houses.” The premier can only hope that the economy recovers, the welfare rolls abate and Ottawa passes the bucks to him soon. □