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Other provinces have no cause to gloat over Ontario's economic woes

Anyone who might take satisfaction in watching Ontario, once the richest province in Canada, get its comeuppance as it grapples with low growth and high debt should remember that the province's troubles are everyone's troubles. In this country, when Ontario suffers, everyone else suffers, too.

Many of us remember the waves of public-sector strikes and repeated civil disturbances that accompanied the Mike Harris government's efforts to eliminate a chronic deficit in the 1990s. Economist Don Drummond in his report on Ontario's current situation warns that this time "the government will have to cut program spending more deeply … and over a much longer period of time than the Harris government did."

Things have gotten so bad because over the past decade the province has become two Ontarios.

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The first Ontario is Toronto, a Canadian New York whose economy is powered by financial services, education, biosciences, cultural industries, tourism and more. Living in or near Toronto, it can feel as though things are still going reasonably well.

But outside Greater Toronto is a whole lot of Ohio, as the manufacturing sector follows other Great Lakes economies into rustbelt status. This is why unemployment has been above the national average for five years, and why the last recession was far worse in Ontario than elsewhere. It is why, amazingly, average personal income has dropped below the national average. And it is why real growth of about 2 per cent annually is the most the province can expect for years to come.

Yet Ontario continues to finance the social programs that many provinces depend on. Its taxpayers contribute 39 per cent of federal revenues, but receive only 34 per cent of federal spending. Each year, 2 per cent of the province's GDP, or $12.3-billion, bleeds to the rest of the country, even as Queen's Park records a deficit of $14-billion, which Mr. Drummond calls "a clear demonstration of the perverse structure of Canadian fiscal federalism."

Ontario voters can no longer afford to finance Employment Insurance programs that favour Atlantic fishermen over laid-off auto workers. No Ontario government can tolerate equalization programs that subsidize university tuition outside the province, even as Mr. Drummond calls for annual increases to postsecondary education of no more than 1.5 per cent, less than the rate of inflation.

Voters in the Prairie and Pacific provinces may shrug and say this is an Eastern problem for the Eastern provinces to sort out. This attitude is delusional. Even the most resource-rich provinces and Ottawa, as well, face lean years as they try to balance their books.

"People shouldn't have any illusions," said Craig Alexander, Mr. Drummond's successor as chief economist of the Toronto Dominion Bank. "Keeping program spending to around the pace of inflation or below is extraordinarily difficult.

"If governments actually managed to do what they have committed to do up to this point, it would be one of the longest and most painful periods of fiscal austerity the country has ever had."

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And this time the economic engine in the heartland won't be there to cushion the pain and take up the slack.

The Drummond report won't be fully implemented. At best, the McGuinty government is likely to slow the growth of the debt. It lacks the mandate, and probably the political will, to slash spending as severely as needed to balance the budget.

This will leave the province dangerously vulnerable to another recession, an oil shock or a sharp rise in interest rates, which could swiftly bring on a fiscal emergency.

Alberta defaulted on its debt during the Depression. In more recent times, Saskatchewan and Newfoundland came close. If any province found itself unable to service its debt, "we explicitly assume that there is a high probability that the federal government would help the province," said Jennifer Wong, assistant vice-president at Moody's Investors Service, in an interview.

If things go badly, Ontario's problem could become everyone's problem, with a vengeance.

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About the Author

John Ibbitson started at The Globe in 1999 and has been Queen's Park columnist and Ottawa political affairs correspondent.Most recently, he was a correspondent and columnist in Washington, where he wrote Open and Shut: Why America has Barack Obama and Canada has Stephen Harper. He returned to Ottawa as bureau chief in 2009. More

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