How one Stephen Harper decision cost Ontario $8.1 billion

OPINION: A new report finds that a decade-old decision by a long-gone prime minister cost Ontario big in terms of federal transfer payments
By John Michael McGrath - Published on Sep 04, 2020
Then-prime minister Stephen Harper speaks during question period on December 9, 2009. (Adrian Wyld/CP)

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Ontario could afford to build almost the entire Ontario Line — the marquee subway that’s a core part of Premier Doug Ford’s transit vision for the GTA — with the money that Stephen Harper has cost Ontario since 2010. In 2009, the former prime minister changed the rules governing equalization funding; over a decade, that has added up to billions in lost money for Queen’s Park.

According to a new report this week from the Parliamentary Budget Officer, Ontario has lost out on $8.1 billion overall; the capital costs for the Ontario Line could be anywhere from $8.7 to $11.4 billion, according to Metrolinx.

In 2009, as the global financial crisis and the ensuing recession began to ravage Ontario’s economy and its public finances, the Conservative government in Ottawa faced the prospect of Canada’s largest province being entitled to equalization payments under the existing rules of the program. So the Harper government changed the rules such that equalization no longer relied on a simple measure of “fiscal capacity” and was instead pegged to the country’s overall economic growth. As the (conservative-friendly) Fraser Institute explains: “High energy prices and economic weakness in Ontario would have driven program costs up markedly faster than the rate of national economic growth during the early years of this decade.”

This goes back to the specific economic conditions of the late 2000s and early 2010s, when a combination of paltry economic growth in Ontario and high oil and gas prices in the west widened the gap between the amount of money a province like Alberta could raise — its fiscal capacity, in the language of equalization — and the amount of money Ontario had at hand. As the Parliamentary Budget Officer has reported before, those conditions were somewhat unusual and may not recur in coming decades.

The results of the changes in the equalization formula, however, have been clear: Ontario went without $8.1 billion in money to which it would have been entitled under the pre-2009 rules. That’s more than half of the $14.5 billion the PBO estimates Canada saved by short-changing the provinces (the bulk of the remaining savings came at Quebec’s expense).

The PBO results aren’t surprising. The Mowat Centre, a think-tank funded by the Ontario government until 2019, issued a series of reports over the decade about the changes to equalization specifically — and about the lack of federal support for Ontario generally during the Harper years.

The Mowat Centre’s work made its way into government: the alleged lack of a “federal partner” became a regular part of Ontario’s budget documents starting in 2012 (when the Mowat Centre was cited directly), and it played no small part in the decision by then-premier Kathleen Wynne to wade into the federal election in 2015, when she vocally supported Liberal Justin Trudeau over Harper.

A funny thing started happening in recent years, however: the 2009 rule change implemented by Harper is now paying out more in equalization funding than the old rules would have. The PBO estimates that, in 2018 and 2019, the feds paid out $2.1 billion more than they would have under the pre-2009 rules. Ontario’s most recent equalization payment, in 2018, was $963 million, and not all of that would have been an “overpayment”; the province received zero equalization dollars in 2019.

Equalization is not the only kind of federal support that provinces receive, of course. In terms of federal dollars spent, the Canada Health Transfer has usually been about twice as large as equalization throughout the last decade, and the Canada Social Transfer is not much smaller than equalization payments — $15 billion versus $20.5 billion in 2020-21. The Harper government also imposed changes that curtailed the growth of the CHT, angering more provinces than just Ontario.

But there are nuances here, too: while the Liberal government was trying to eliminate the budget deficit through much of the last decade, it constrained the growth of health spending in some areas even as the federal health transfer grew (“some areas,” because federal health-care money is more narrowly targeted than provincial health spending overall). As a result, the PBO notes, “growth in federal CHT payments averaged 5.2 per cent while growth in provincial CHT-targeted spending averaged 2.9 per cent annually.” By 2018, federal funding made up more than 35 per cent of Ontario health spending in targeted areas.

The Trudeau government has not announced major revisions either to equalization or to the CHT, and, in 2018, it signalled that it intended to keep the Harper-era equalization changes into the next decade. That, however, was pre-pandemic — and before Trudeau had set his sights on an ambitious new federal-spending agenda for economic recovery. Canadian will presumably get to see whether the current prime minister’s new agenda involves any changes to the one he inherited from his predecessor five years ago.

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