Ontario has entered an election campaign, after the government did not gain opposition support for its budget. Quebec just completed an election, and the new government will be presenting a budget to replace that tabled by the former Parti Québécois administration. While both unrealized budgets will turn out to be little more than historical footnotes, it is what they said, rather than what they did, that makes them instructive.
Essentially, the two provincial budgets signalled that economic growth in Central Canada will be slower in the years ahead than it has been in recent decades, which will translate into reduced public services, higher taxes – or both. Taxpayers in Central Canada will be getting less, at more cost.
Still, the short-term outlook for Central Canada is a bit brighter in 2014 than in the previous two years, in which economic growth was very weak. The Conference Board of Canada forecasts growth in both Ontario and Quebec to pick up to about 2 per cent in 2014, driven by the positive spillover effects of the U.S. private sector recovery. Growth is expected to be a bit stronger again in 2015.
However, the uptick likely cannot be sustained. All of Canada is going to be affected by aging demographics, which will likely reduce labour force growth, limiting overall economic potential. Along with Atlantic Canada, Ontario and Quebec are at the forefront of this slow-motion grey tsunami. The Conference Board's long-term economic forecast (to 2035) projects future economic growth (inflation adjusted) in Ontario will decline to around 2.1 per cent annually after 2015, and to an even slower 1.7 per cent in Quebec.
This slower growth will squeeze revenue growth for governments (and businesses), making it hard to maintain the same quality of public services. Provincial governments in particular will be squeezed between slower revenue growth and pressure to provide services like health care that are sensitive to population aging. Many provinces will be pushed to raise taxes to maintain public services, counteracting any tax cuts being pondered at the federal level.
It is worth noting that while Central Canadian potential growth will slow in the coming years, real per capita income is expected to continue increasing, slowly. On average, Canadians will keep getting a bit richer in real terms – but few of us are average. If recent history is any guide, a disproportionate share of the gains in real per capita income will go to Canadians at the top of the income scale. And if tax increases are required (as we expect) to close the fiscal gaps in a number of provinces, any gains in real per capita income may end up being drained away through higher taxes.
Is there any way out of this tightening straitjacket? Yes, if we are prepared to embrace innovation and transformation that would feed productivity. For a mature economy like Canada's, with an aging population and slowing labour force expansion, stronger productivity is the surest way to improve economic potential. Higher sustained economic growth that is underpinned by stronger productivity would help to raise living standards and firm up the revenue base for governments to pay for valued public services.
Trouble is, Canada has a woeful track record over the past three decades when it comes to innovation and productivity growth. Canada has regularly scored in the bottom half of the class on both measures in the Conference Board's regular report card, How Canada Performs, and this result is corroborated by international comparisons like the World Economic Forum's Global Competitiveness Index.
So while it is possible to imagine a world where Canadians and their business and political leaders embrace the need for stronger productivity growth, the odds of it actually happening are not great. Without this commitment to take action on productivity, Central Canada will have to get used to slow growth and a future of getting less for more.
Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.