Corporate Information

September 28, 2007

Don Drummond, Senior Vice-President and Chief Economist, TD Bank Financial Group
"Mind the productivity gap; Ontarians must not be complacent about their standard of living -- we are losing ground against our competitors"
Article as published in The Ottawa Citizen.

Premier Mitch Hepburn once wondered aloud: If it were not for the riches of Ontario, I don't know what would happen to the rest of the Dominion.

Seventy years later, it still remains to be seen. Few other jurisdictions enjoy such prosperity. Indeed, the province has the sixth-highest real GDP per capita among OECD countries, a key indicator of how well we live.

However, one can't deny Ontario's diminishing stature against other provinces. Much has been made of the slippage in its real GDP per capita relative to the Canadian average. In 20 years, the difference has been cut by more than half, from 13 to seven per cent, though in fairness, this has more to do with Alberta's strength than Ontario's weakness.

Still, we are losing ground against competing jurisdictions throughout North America. Until the early 1990s, Ontario's real GDP per capita was close to the median of competing U.S. jurisdictions, but by 2005 it was $6,100 below. This gap is largely due to weaker productivity, which means increases in capital, labour and raw materials produce barely more output.

Why should Ontarians mind the so-called productivity gap? It comes down to our standard of living. Languishing productivity levels mean we have less money to fund things like our health-care system. It limits other investments in infrastructure, and impedes economic opportunities that lead to new, high-paying jobs. Productivity is ultimately a pocketbook issue.

A number of important initiatives are underway to improve productivity levels. Through innovative public-private partnerships, progress has been made to improve aging infrastructure. New programs to encourage research and development clusters to develop and grow have also been launched.

Yet one only has to look at our manufacturing sector to know more work needs to be done. It accounts for one-fifth of the province's economy but it has encountered the perfect storm: a soaring dollar, weakening U.S. markets, higher commodity prices and stiff competition from emerging economies.

In the last two years alone, over eight per cent of the sector's jobs have disappeared in Ontario. It will be no easy feat for government to bolster the sector's competitiveness without placing a burden on other parts of the economy. It will also be critical to facilitate the transition of displaced manufacturing workers into other jobs.

A number of TD reports have identified policies necessary to address this gap. Here are four specific to Ontario:

1. Policy makers must reduce congestion to and across the main Ontario-U.S. border crossings. Delays are costing the Canadian and U.S. economies more than $13.6 billion annually, with Ontario absorbing $5.25 billion of that, or $843 for every Ontario taxpayer.
   
   Yet these figures understate the potential cost. The promise of free flows across the border lies at the heart of the North American Free Trade Agreement. The pact's appeal is that we can say to corporations around the world -- locate here and you will have unfettered access to the North American market. That promise rings hollow if the border does not function properly for security, infrastructure or simply personnel reasons.
   
   Unless resolved, our border arrangements amount to tariff-like barriers on both exports and imports and will impinge upon Ontario's ability to attract and maintain investments in the province. Complex and lengthy arrangements for labour to flow across the border also undermine the potential benefits from free trade.
   
2. The province must urgently expand electricity generation capacity both within Ontario and in partnership with our neighbours through an east-west corridor grid. A potential shortfall on the transmission grid would limit the capacity to service both residential and industrial users. Concerns about future supply are an impediment to foreign companies locating plants here.
   
   With about one-quarter of transmission stations reaching or exceeding capacity by 2013, massive investments will be needed on that front sooner than later.
   
3. Ontario must strike a balance in the precarious area of intergovernmental fiscal arrangements. Ontarians are proud of supporting much of the federal redistribution in Canada. Yet it is increasingly difficult for the province to compete against other countries that do not face such a handicap.
   
   The net federal fiscal drag on the Ontario economy amounted to 4.1 per cent of Ontario's GDP in 2004, the latest year of actual data. Moreover Ontario taxpayers contribute about 41 per cent of federal government collections while only receiving its population share, or 39 per cent of the benefits at best. It amounts to getting 95 cents back on the dollar.
   
   There is no single answer to how much redistribution the Ontario economy and its taxpayers can afford to finance. All one can say is that in the current economic environment of great competitiveness both within Canada and especially against the United States and emerging countries there is a limit and that limit must be considerably lower than in the past.
   
4. Ontario must reduce its extremely high rate of taxation on capital, which ranks third highest on a list of 35 countries recently examined. This stems from high commercial and industrial property taxes, a high corporate income tax rate, a high capital tax rate (which is legislated to be phased out) and application of the provincial sales tax rate to capital.

The biggest bang would be for Ontario to replace its antiquated and economically inefficient Retail Sales Tax by a value-added tax such as the GST. Experience in other jurisdictions shows this can be done without increasing the tax burden on consumers or causing a net revenue loss. The move would be especially beneficial to manufacturers.

It is up to our political leaders to develop policies that enhance productivity levels. But it is ultimately up to Ontarians to make this issue a part of any public agenda. To this end, we need to call on leaders in our words, and in our own way. Sustaining the province's standard of living relies on it.

Don Drummond is chief economist at TD Bank Financial Group.

© The Ottawa Citizen 2007