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From the archives

Carbon Copy

In equal balance justly weighed

Slouching toward Democracy

Where have all the wise men gone?

By Populist Demand

When urban and rural voters went separate ways

Big Brother No More

Ontario’s and Canada’s interests are no longer identical

Matthew Mendelsohn

In 2006, all governments were staking out their positions on the renegotiation of the equalization formula. Most provinces wanted the program expanded, but Ontario had publicly stated that federal programs, like equalization, that drained money from Ontario to support other provinces were unsustainable for the Ontario economy. In an attempt to come to an agreement among provinces, a series of premiers’ meetings was convened. The general consensus amongst provinces at these meetings was that Ontario should transfer more money to other provinces. Premier Dalton McGuinty refused to acquiesce to this consensus and, for his troubles, was lectured by other premiers for being stingy and un-Canadian.

One premier chastised McGuinty for failing to fulfil his assigned role of Big Brother of Confederation. “You’re letting the family down,” he said, shaking his head. Thankfully, even to a premier with nine siblings—or perhaps because of it—McGuinty saw this as the maudlin claptrap it was, part of a long tradition of the shakedown emanating from some provinces, where political success depended largely on one’s ability to extract more money from Ottawa—which mostly came from Canadians in Ontario.

During those meetings, a senior government official from outside Ontario helpfully explained to me that Ontario could in fact fund more generous transfers to other provinces if Ontario would “just raise your property taxes by a couple of percentage points.” I tried to imagine an Ontario politician making that case to Ontarians on the stump: “We’re raising property taxes, but don’t worry—it will ensure that other provinces can keep their university tuitions way more affordable than we can here! I hope I can count on your support!”

In 2006, political leaders and policy makers did not yet know that they were dealing with a New Ontario, a province less willing than in the past to see the appeasement of other provinces as core to its interests and one where the citizens are more willing to support muscular political leaders who stand up for the province. The New Ontario is less confident in its economic future than the Old Ontario, but it also has global ambitions, believing its prosperity in the present century will be determined far more by its competitiveness on the global stage than by its ability to placate other provinces.

The New Ontario will produce a political shake-up in Canada. A new national politics will emerge, one that either reconstructs our social policy architecture and federal fiscal relations so that they work better for Ontario, or that sees Ontario join with Alberta and Quebec in demanding greater provincial autonomy to run its own social programs with its own fiscal resources.

The assumption that Ontario is prosperous while other provinces are not is embedded in the Canadian DNA and the design of our major policy frameworks. That assumption is no longer true—and has not been since the 1990s—but it takes a while for the political culture to change. Gradually, though, a new understanding is developing.

Symbolically, the fact that Ontario received its first ever equalization cheque in 2009 helped crystallize that change to the country, even though Ontario’s qualification for equalization is largely technical, the result of a flawed formula.

Receiving equalization does not mean that Ontario is now poor, nor does it mean that Ontario now gets more from the federal government than it puts in (Ontario, Alberta and British Columbia remain the only three provinces to be net fiscal contributors to the federation). It does mean that provinces that once needed Ontario’s fiscal help no longer do. It is also hard evidence that Canada’s “business model” of the latter half of the 20th century—that is, the federal government helps Ontario manufacturing prosper and in return Ontario redistributes much of its wealth to poorer regions that then buy back Ontario’s manufactured goods—is defunct. What will replace the old model is unclear, but Canadians’ success in the 21st century is contingent on redefining the Canadian social contract, along with the federal fiscal architecture that helps fund it, in ways that work better for the New Ontario.

For most of the last 60 years, people living in Ontario assumed that the Canadian interest and the Ontario interest were identical. And they were not necessarily wrong. Historically, federal policies have worked well for Ontario.

A simplified history of the political economy of Canadian federalism can start with the National Policy of the late 19th century. The federal government made a choice to build a protected internal market, which allowed Ontario to prosper by producing goods behind high tariff walls and selling them to Canadians in other provinces. Southwestern Ontario benefited from this first national project, attracting people from Atlantic Canada and profiting from the settlement of Western Canada. These regions came to see federal policy, with good reason, as tilted toward Central Canada.

This first national project allowed Ontario to grow more prosperous than other regions and created the foundation for a second national project: the building of the Canadian welfare state in the post-war period. This project was designed to ensure that all Canadians had access to good-­quality social programs such as health care, pensions, unemployment insurance and public education. Prosperous Ontario was more than willing to have some of its wealth used to establish these programs, which strengthened the country and contributed to Canadians’ national identity.

The national project of building the modern welfare state strove to ensure that all Canadians had full access to the benefits of citizenship regardless of where they lived in the country. These programs represented a transfer of wealth from Canadians in Ontario to Canadians in other provinces. Ontarians supported this project not only because they could afford it, but because building a stronger, unified Canada was in the interests of the dominant, most prosperous player in the federation.

The policy architecture of this second national project—equalization, unemployment insurance, federal fiscal transfers, regional economic development—was explicitly designed to correct for the structural inequities of the first, which had concentrated greater economic benefits in Central Canada, particularly in southwestern Ontario, and in the triangle of political power between Montreal, Toronto and Ottawa. The Canadian welfare state mitigated the social impact of these regional inequities. The interplay of these two projects created a variety of regional tensions and resentments, which remain embedded in the Canadian genetic code.

But the free trade agreements of the 1990s, and globalization more generally, changed the ability of this business model to work. The last 20 years have seen the dismantling of the first national project, which favoured Ontario, but no structural change to the policy architecture of the second. Canadians deal now with the realities of globalization, not a protected internal market. Canada’s basic business model is no longer operative. The petro-economy of the last decade buried the model further, putting even more strain on the Ontario economy.

The Canadian economy today looks very different than it did when the programs of our second national project were put in place. Wealth is more evenly distributed across Canada’s regions. Canada’s prosperity is now driven by natural resources and services rather than manufacturing. The country’s economic orientation is now less east-west and more north-south—and more global. Most provinces have joined Ontario in relative prosperity and Ontario itself is dealing with an industrial restructuring faced in many advanced economies. Poverty and social problems continue to exist in the country, but these are as likely to be found in Toronto, Ontario’s manufacturing belt or northern Ontario as in small outposts in Atlantic Canada or the Prairies.

Some of these new realities have had enormous social consequences, with industrial restructuring in Ontario taking a huge toll in many communities. Social assistance rolls are up significantly in Ontario as Canadians who worked their whole adult lives and contributed to employment insurance for decades exhaust their benefits in communities such as Windsor, London and Brockville. In communities like these, Ontarians who lose their jobs are more likely to fall on social assistance than Canadians in other provinces because the federal social safety net of EI is not as strong for people in Ontario as it is elsewhere.

The failure of federal policy to respond to Ontario’s new realities demands that Ontario articulate its interests and identify more clearly how the federal government can support the province in achieving its objectives. This is not new for the province—it did so in the early days of Confederation. But the vocal articulation of its interests is a departure from the norm in the post-war period.

One of the defining features of Canadian politics since the 1950s has been the strength of provincial and regional identities in all provinces except Ontario. Ontarians were more supportive of a strong federal government than Canadians elsewhere and they were more likely to support federal involvement in areas of provincial jurisdiction for the purposes of building strong national social programs. Other provinces, particularly Quebec and Alberta, often resisted, while Ontarians presumed that the federal government would quietly look after its interests, which it largely did.

In the federal Privy Council Office in the 1990s, there were always working groups on Quebec nationalism, western alienation and Atlantic Canadian disaffection. Experts were always being flown in to discuss what we should do about these things. Policy makers consistently asked how we could make Quebec or the West or Atlantic Canada happier. But there were no working groups on Ontario. And there was no need. Ontario was content and Ontarians supported attempts to accommodate other regions.

For most people in Ontario, keeping Quebec happy or Alberta happy meant a strong and united Canada, which was ultimately in Ontario’s long-term interest. This was, in fact, the strategic choice that Ontario made throughout the second half of the 20th century: a strong federal government and a minimization of regional grievances meant a strong Canada. A strong Canada led to optimism about the future of the Ontario economy, and this economic optimism was a defining element of the Ontario psyche. “National unity” was Ontario’s mission statement because if Canada was doing well, Ontario did even better.

Since the early 1990s, successive Ontario premiers who dealt with the nuts and bolts of budget making and intergovernmental relations have questioned this mission statement. They understood that the interests of Ontario and Canada are not always identical. When Bob Rae, as premier of Ontario, raised concerns about structural inequities in federal fiscal transfers in the early 1990s, most Ontarians dismissed these legitimate complaints as a transparent tactical ploy to shift blame toward the federal government for Ontario’s ballooning deficit. When Mike Harris raised concerns about the same issues toward the end of the decade, he was dismissed as a stingy neo-conservative, unwilling to offer up a slice of Ontario’s largesse to his poorer neighbours.

But today Ontarians increasingly understand what Bob Rae knew in the early 1990s: that liberalized trade in North America meant that the Ontario manufacturing sector was forever changed and could not generate the wealth required to fund other regions of the country. Rae was not trying to distract voters from Ontario’s fiscal woes; he was trying to explain these woes in the context of a changed North American and global economy that had altered the terms of the second national project.

Ontarians today have also learned what Mike Harris understood at the turn of the century: that national social programs designed to redistribute wealth from Ontario in an era of protected internal markets are unsustainable in a country where Ontario’s wealth is only average and where it competes globally.

None of this means that Ontario is necessarily in decline. Rather, it means that the rest of Canada has caught up. The growth and diversification of provincial economies outside Ontario is good for Canada, including Ontario. The Canadian and Ontario interests, although not identical, remain deeply entwined. A vibrant Vancouver, a healthy oil patch, a prosperous Saskatchewan and renewed economic activity in communities across Atlantic Canada are all good for Ontario.

For decades, Ontario was the largest, most prosperous player in the Canadian federation. It remains the largest and most dominant, and will for the foreseeable future. Its population and economy will continue to expand, fuelled by immigration and growth in the Greater Golden Horseshoe. Ontario will continue to prosper and continue to exercise power.

But many other provinces are generating more income on a yearly basis than Ontario, mostly due to surging revenues from natural resources. Many other provinces are also experiencing population growth and wealth accumulation and are becoming attractive to immigrants. All of this can be thought of as the “decentring” of wealth and power in Canada. Other provinces are joining rather than replacing Ontario. Canada will be stronger because one player—or two players—will no longer be relied on to carry the fiscal burden for the whole country.

But this decentring of power has consequences for the policy architecture of the second national project and intergovernmental relations. This decentring of power allows Ontarians, for the first time in over a half-century, to ask clearly: what is in Ontario’s interests, beyond national unity? Ontario has been freed of the burden of being the big brother. A new national policy architecture will be necessary that does not presume that Canada is a country of a prosperous centre (i.e., Montreal-Ottawa-Toronto and southwestern Ontario generally) and a needy periphery (i.e., everywhere else). Hamilton, Smiths Falls and Sudbury are not “the centre”; Regina, Calgary, St. John’s and Vancouver are not the “periphery.”

But mindsets change slowly. Until recently Ontario has largely acquiesced in the regional buy-offs and side deals of the last half-century. Ontarians have largely accepted that when the federal government was designing a new program, there would be some skimming from Ontarians to appease some particularly loud regional interest. Ontarians amazingly accepted that some of their tax dollars would go to encourage businesses in their town to pull up shop and set up in another part of the country. They accepted that a social program would pay you more if you lived outside Ontario.

The list of policies that no longer work is long. EI is not designed for the modern Ontario labour market, and many Ontarians have no social safety net other than provincial social assistance. The equalization program treats revenues from natural resources in ways that see Ontario taxpayers on the hook for generous transfers to other provinces that cannot be justified on principle. Many federal programs, including funding for infrastructure and skills training, are more generous if you live outside Ontario than in. Businesses in Ontario pay higher federal corporate taxes than businesses in some other provinces.

Ontario’s elected members of Parliament from all three federal parties have been slow to catch up with the New Ontario. Most MPs from the province have continued to reflect the Old “our job is to support a strong federal government and nation-build” Ontario, rather than the New “we’d like to nation-build but not if we are the only ones paying for it” Ontario.

But year after year, this refusal to defend one’s own province takes its toll. Federal MPs from other provinces are usually loyal Canadians, but they also know that one of their legitimate jobs is to defend their province’s interest from the federal government and within the federal government. Ontarians in Ottawa have not done likewise, believing that the federal government “quietly” looks after Ontario, without Ontario MPs having to make a fuss.

There is precious little evidence over the past two decades that the federal government has been looking after Ontario, quietly or otherwise. Ontario’s per capita GDP is now below the national average, yet it still contributes approximately 3 percent of its GDP to support other regions of the country. These are fiscal resources that Ontario cannot invest in its own human capital to remain globally competitive. Ontario MPs from all parties, along with successive federal governments, have had little to say about this and little to offer in terms of modernizing the Canadian policy and fiscal architecture.

Which federal party will be first to seize on the realities of the New Ontario? The last decade has given few clues. In its early years, the Harper government had little interest in Ontario and identified a path toward a majority through their base in Western Canada and outreach to Quebec nationalists. The federal Liberals have taken Ontario for granted for most of the past decade and have consistently identified rebuilding the Liberals in the West and renewing themselves in Quebec as their strategic priorities. For their efforts, the Liberals—supposedly the “Ontario Party”—now hold fewer seats in Ontario than the Conservatives. As for the NDP, their Ontario MPs ripped their shirts demanding the Harper government honour its commitment to transfer more money from Ontario taxpayers to residents of other provinces through a twisted equalization program, and then headed off to Quebec to pursue their party’s ever-quixotic quest to make a breakthrough in that province. The Ontario voter looking for a party on the federal scene that at least understands that an Ontario interest exists has had nowhere to turn.

Some sigh at this analysis. “Oh great. If Canada wasn’t regionalized enough, now Ontario is joining the party as well.” This profoundly misses the point. The irony of Ontario’s increased sense of regional interest will be that it leads to a decline of regionalized politics. It could also lead to a rediscovery by Canadians of their shared citizenship and sense of common national purpose.

Most Ontarians feel uncomfortable speaking of “an Ontario interest,” which derives from the fact that many were born elsewhere and, unlike in other parts of Canada, so few Ontarians actually define themselves by their province of residence. In 2010, the Mowat Centre for Policy Innovation updated historical polling research and found that despite a significant increase over the past decade in Ontarians’ perception that their province is treated unfairly in the federation, there has been no increase in provincial identity, nor any decline in the Canadian identity.

This creates enormous opportunities for a new national politics in Canada. When Ontarians highlight shortcomings in federal policies, they tend to do so with a broad understanding and a concern for every part of Canada. Ontarians, despite newfound concerns about the equity of federal programs, come at these issues almost exclusively as Canadians first. The opportunity for a new national politics is even greater because of the strengthened sense of Canadian identity outside Ontario and the decline in regional identities that were also turned up in the Mowat Centre public opinion research. Canadians are ready for a new national politics.

Canada is at a crossroads. There will be a reckoning. We do not yet know which of two paths Canada will follow.

Ontarians could gradually come to withdraw their support for the social contract of the second national project. They will not be willing to pay higher taxes to support programs in other parts of the country that they themselves cannot afford. Ontario will join Alberta and Quebec in ­demanding more autonomy to run its own programs and collect its own revenues to allocate for its own spending priorities. If that happens, the idea of a strong federal government is dead. Ottawa will design macroeconomic policy and manage foreign policy—and it will not do much more than that.

Or the federal government can fix Canada’s policy architecture so that national policies, designed to support the Canadian social contract, honour this contract in Ontario as much as they honour it elsewhere. For most Ontarians, given their strong Canadian identity, this is their preferred path: a renewed national policy architecture that no longer assumes Ontario will be happy—and can afford—to be tithed in exchange for national unity.

Under the latter scenario, Canada will see the emergence of a new set of national programs that work for Canada’s new realities. These programs would dispense with the regional politics of the past, treat all Canadians equally and offer Canadians, wherever they live, the same basket of national programs, protections, opportunities, benefits and obligations.

Under the former, Canada will witness greater provincial autonomy, where provinces keep more of their own wealth and are able to build their own diverse and unique social programs that respond to their own local realities. For those who have been paying attention, this debate on Canada’s future has been going on for years.

Canada’s federal parties must, as a first step, acknowledge Canada’s changed realities, and they must do so inside and outside Ontario. What they propose to do about it—modernize Canada’s policy architecture in a more regionally neutral way or withdraw the federal government from social policy and allow provinces to control their own resources and define their own social contracts—will make for an interesting national conversation.

If Ontarians took a clear stance in this debate, the outcome would be decided, given that two in five Canadians live in Ontario. Political power is within their hands, but Ontarians have been reluctant to use it. Given the realities of the New Ontario, that may be about to change.

Matthew Mendelsohn is the founding director of the Mowat Centre in the School of Public Policy and Governance at the University of Toronto. He served as a deputy minister in the government of Ontario from 2004 to 2009.

Related Letters and Responses

Peter H. Russell Toronto, Ontario