How Kathleen Wynne has Ontario going backwards

Ontario’s premier insists she has the fix for Canada’s largest economy—more government

Ontario Premier Kathleen Wynne listens to remarks from Manitoba Premier Greg Selinger (not shown) at the opening of the Building Canada Up Summit in Toronto on Wednesday August 6, 2014. (Chris Young/CP)

Ontario Premier Kathleen Wynne listens to remarks from Manitoba Premier Greg Selinger (not shown) at the opening of the Building Canada Up Summit in Toronto on Wednesday August 6, 2014. (Chris Young/CP)

The morning after winning her majority, well-pressed and alert despite the previous night’s merriment, Kathleen Wynne stood before her caucus and spoke glowingly of the path ahead. Her speech was standard post-victory fare—the honour of election, the burden of responsibility. But at its fulcrum lay a phrase of the sort seldom heard in two decades of Ontario politics: this Liberal government, the premier said, would govern from the “activist centre”—a place on the political spectrum which, though undefined, she declared to be the locus of her new mandate.

In the ensuing months, Ontarians would get a sense of what she was talking about. As promised, the province’s $11 minimum wage began rising in pace with inflation, first to $11.25, then to $11.40, giving Ontario the highest pay floor in the country. The Liberals then showed they were determined to push through their own parallel pension plan for Ontario until federal and provincial finance ministers agreed this week to expand the Canada Pension Plan. On the social front, revisions to the school curriculum carried the province deep into what many consider the private sphere of parents, starting sexual education in Grade 1.

Wynne seemed undaunted by accusations of nanny-statism that for decades Ontario’s mainstream political leaders have strived to avoid. “Government exists to be a force for good,” she told Maclean’s recently, repeating a mantra she’s used frequently since the election. Just how activist the government planned to be, though, became clear in mid-May, when details from a leaked draft of the government’s climate change action plan found their way into the Globe and Mail. A preamble signed by the premier hailed it as a “once-in-a-lifetime transformation” that will “forever change how we live, work, play and move.” The plan as written represented the closest thing Ontario has seen to command-and-control economics since the colonial era, forcing builders of new homes to abandon fossil-fuel heating; requiring anyone selling a home to first conduct an energy-efficiency audit; setting auto-industry sales targets to have an electric car in the driveway of every multi-vehicle household by 2025. The cost—nearly $8 billion over four years—would be covered by proceeds from the province’s cap-and-trade scheme on carbon emissions.

Reaction on the right was swift and extreme. “Ideological fervour, divorced from economic or practical reality,” is how Joe Oliver, the former Conservative federal finance minister, summed it up in a newspaper op-ed, adding: “This sounds like the boldest attempt to re-engineer society since Mao’s Cultural Revolution.” By mid-June, the Liberals were backtracking. A final version announced June 7 scrapped the natural-gas heating requirement for new homes as long as builders find equivalent reductions in carbon emissions. The word “transformation” was dropped from Wynne’s introduction.

Still, more than any single initiative, the plan has pressed home the changes shaking Ontario, remaking Canada’s former epicentre of rugged free enterprise into something akin to a debt-encumbered Euro-state. The recovery in high-paying manufacturing jobs that many hoped the devalued loonie would bring has failed to materialize, leaving Ontario dependent on public service jobs created largely by debt-fuelled public spending. According to Statistics Canada, the province’s manufacturing sector has shed some 347,000 workers since 2003, when the Liberals took office under Dalton McGuinty. During the same period, the number employed in government-driven sectors like health care, social assistance and educational services has risen by 368,000, while provincial debt has soared to $307 billion.

The result is an economy defined as much by state activity as by big-shouldered industry. Over the 2003-2015 period, public sector employment rose 23 per cent while private sector managed just seven per cent, and many of the non-government jobs that were created were self-employed positions, which economists view as lower-quality. With 380,000 regulations (its own count), Ontario is the most administered province in the country, and the clumping footsteps of government are felt throughout the economy. Wynne has clung, for instance, to McGuinty’s vision of making Ontario a leader in green-power technology by paying above-market rates for energy generated from renewable sources. The effect, say critics, has been to drive the cost of electricity sky high for all but the largest industrial employers, scaring off future investment.

The impact of these wrenching changes has been softened by Toronto’s thriving financial and housing sectors, allowing the Liberals to promise the province’s first balanced budget in a decade by 2017-18. Wynne is quick to point out that manufacturing sales and exports bounced back last year, suggesting the government’s involvement in the economy is paying off. “We are recovering and we are selling,” she says, “because of government’s role in partnership with business.”

But that recovery looks fragile. Manufacturing sales in Ontario have dropped 5.3 per cent since January, with implications that reach far beyond the province’s borders. “You cannot have strong economic growth in this country without Ontario being part of it,” says Philip Cross, a former chief economic analyst with Statistics Canada, now a senior fellow at the Macdonald-Laurier Institute, and an outspoken critic of the Wynne government. “It’s just such a large part of the economy—33 to 40 per cent.” What’s more, says Cross, manufacturing belts like Ontario’s serve as the country’s “window to the world,” exposing it to ideas and technology that usher in the industries of the future.

Ontario Liberal Premier Kathleen Wynne reads a story to kindergarten students during a campaign stop at a school in Cambridge, Ont., on Monday, June 9, 2014. (Colin Perkel/CP)

Ontario Liberal Premier Kathleen Wynne reads a story to kindergarten students during a campaign stop at a school in Cambridge, Ont., on Monday, June 9, 2014. (Colin Perkel/CP)

To let it go, warn critics, is to condemn Canada to the slow-growth lane, while casting its most populous province into an identity crisis. With the dollar creeping back up, talk of Ontario regaining its status as Canada’s economic engine have given way to fear that its glory days have gone, leaving behind little more than dreams of wind turbines and electric cars. “I’m 46 years old, from Quebec, and growing up I always looked at Ontario with envy,” says Pierre Desrochers, an economic geographer at the University of Toronto who has charted the province’s economic travails. “To see what this province has become since then—well, it’s kind of sad.”

The province Desrochers remembers traces its values to the turn of the 19th century, when rapid expansion in railways and banking spun off business across southern Ontario, hastening the development of urban centres in Toronto and Hamilton. Harold Innis, the influential political economist, credited this growth to an entrepreneurial “aggressiveness” he believed was linked to the imperialist ambition of their British forebears.

Then, as now, government played a part as the economy grew throughout 20th century, nursed by public projects like canals and railroads, along with subsidies, loans, protective tariffs and special deals between Canada and its closest trading partners. In the early 1900s, Commonwealth protections gave Canadian products preferred access to the United Kingdom, prompting U.S. automotive companies like Ford and GM to set up assembly plants in Ontario. Thus was born the Canadian auto sector, which in the mid-1960s took on a north-south orientation, as the Canada-U.S. Auto Pact removed tariffs on vehicles and parts between the two countries, in exchange for guaranteed production levels in Canada.

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The political value of this history is not lost on Wynne. “When I think about this country, if government had not been involved, we wouldn’t have had the railway. We wouldn’t have the infrastructure that has defined this country,” she says. “The private sector and government have to work together if we’re going to be successful.”

Maybe, but the modern understanding of Ontario as Canada’s heartland of cross-border trade was cemented after big government fell out of vogue. The 1988 Canada-U.S. Free Trade Agreement effectively killed the Auto Pact, and led some to wonder whether Ontario’s manufacturing sector would survive without the governments of two countries watching over it (the deal was ratified against the wishes of David Peterson, Ontario’s Liberal premier). Instead, the sector thrived, increasing exports through the 1990s, while Japanese auto giants Toyota and Honda boosted production in their Canadian assembly plants. In 2004, for the first time ever, the province’s auto industry produced more vehicles than the car mecca of Michigan, cranking out nearly 2.67 million vehicles.

The party ended, alas, with breathtaking abruptness. By mid-2007, spiking oil prices had driven up the value of the loonie, removing a cost advantage Ontario factories had long enjoyed over their U.S. competitors. With the 2008 financial crisis, U.S. demand for Canadian non-energy products cratered—a decline that deepened over the next few years as oil soared again to US$100 per barrel.

The question now is why Ontario’s economic recovery has been so anaemic, because the wind is inarguably at its back. The dollar has been trading below US$0.90 since September 2014, falling as low as 68.2 cents in January. Ontario saw a bump in manufacturing business during that period, with monthly sales climbing 9.6 per cent, to $26.3 billion, as the loonie bottomed out. But manufacturing GDP is nowhere close to where it stood a decade ago, and it certainly shows no sign of producing the employment it once did. The sector’s recovery, such as it is, has been a jobless one.

How to respond is not the political Rorschach test you might think. Conservative economists urge a hands-off approach, but in Ontario—as anywhere—being seen as abandoning workers to their fate is unlikely to get you elected. Progressives, on the other hand, might hope to spend their way out of the problem, but on what? On existing manufacturers, in the hope the entire sector will regain momentum? On government employment, which they at least control? On the supposed industries of the future?

The Wynne Liberals are trying to do all three. In 2014-15, the province forked out $1.96 billion in business and employment support, mostly to existing firms. Horse-racing tracks got $100 million to help wean them off slot machines. Another $50 million went to one auto parts plant in Guelph as part of a jobs and prosperity fund. This despite advice the McGuinty government commissioned from TD economist Don Drummond, who urged the Liberals to phase out direct grants and subsidies by 2013. “Subsidy programs,” Drummond observed drily in his 2011 report, “can distort business decisions to the point they are no longer based on sound economic criteria.”

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Since that report was issued, meanwhile, the province has added $8.7 billion to its health and education budgets, preserving, among other things, a $1.5-billion full-day kindergarten program Drummond said it couldn’t afford. And it has lavishly funded so-called “emerging sectors,” dropping $60 million last year on a program to support technology-based innovative entrepreneurs, while carrying on its multi-pronged—and controversial—green technology initiatives, including $25 million in funding for ethanol producers.

The approach has come at enormous cost, saddling Ontario with the world’s largest sub-sovereign debt, at $307 billion, which has twice been downgraded by rating agencies. But Dimitry Anastakis, an economic historian at Trent University in Peterborough, Ont., believes the situation is dire enough that the government has to act. And if it’s going to act, he says, it makes sense to go all-in. “When you lose that manufacturing base and the technology that comes with it, you have to do something,” he says. “Wynne is focusing on some green tech, some information technology and some services. This is a slow-motion attempt to ratchet the economy into the 21st century. Whether it’s going to be a success is a completely different story.”

Success would be more likely if the Liberal program didn’t so often emit the stench of self-serving politics. The green power strategy, in particular, has been undermined by scandals involving natural-gas power plants that were planned as part of the phase-out of carbon-spewing, coal-fired generating stations. Faced with local resistance that threatened Liberal fortunes in key GTA ridings, the Grits scuttled the new facilities just before the 2011 election, claiming a cost to taxpayers of $230 million. The actual tab came in just below $1 billion, and two former McGuinty staffers now face criminal charges for allegedly plotting to destroy emails that might have shown who knew what about the real cost.

The fiasco is one of a series that have cost Ontarians dearly in the name of environmental responsibility (Wynne denied involvement, but it occurred while she was in cabinet). A massive contract with Samsung to generate solar and wind power had to be rewritten after the South Korean giant began missing production deadlines. Instead of spending a promised $7 billion to build manufacturing plants for green energy components, the company will now spend $5 billion, while delivering half the energy originally promised. More fractious still has been the feed-in tariff—a premium for solar and wind-generated electricity whose cost utilities pass on to consumers. In a report last December, the provincial auditor-general found Ontarians had paid a whopping $37 billion more than market value for electricity between 2006 and 2014.

The common thread in these cases, says Bryne Purchase, a former deputy minister of finance and energy in Ontario, is the Liberals’ tendency to equate the public interest with their party’s. “They’ve adopted this notion that the Liberal brand is all about the environment,” he says, “and they’re willing to spend countless billions of our money in order to reinforce that.” Purchase, who served during the transition from the Progressive Conservatives to the McGuinty Liberals in the early 2000s, believes they’re succumbing to the “ultimate moral hazard” of governing: “They’re not spending their own money, so everything looks like a good idea. Some guy walks in with what sounds like a neat thing to do, and you’ve got a few billion around, well, why not pursue it?”

Prime Minister Justin Trudeau, left, and Ontario Premier Kathleen Wynne pose as they plug in a 2017 Chevrolet Volt electric vehicle before making an announcement at the General Motors plant in Oshawa, Ont., on Friday, June 10, 2016. (Chris Young/CP)

Prime Minister Justin Trudeau, left, and Ontario Premier Kathleen Wynne pose as they plug in a 2017 Chevrolet Volt electric vehicle before making an announcement at the General Motors plant in Oshawa, Ont., on Friday, June 10, 2016. (Chris Young/CP)

In the Liberals’ case, the impression has been amplified by a suite of experimental policies and public musings that smack of “government knows best.” When Justin Trudeau promised to legalize marijuana, for instance, Wynne reflexively declared that the stuff should be controlled and sold through the provincial liquor monopoly, the LCBO. She did so, ironically, just as the government buckled to pressure to modernize its archaic liquor regime, by allowing limited sales of wine and beer in supermarkets. But this too got bogged down in Byzantine regulation. Hamstrung by trade rules governing retail wine sales, and wary of stepping on the LCBO’s business, the province devised an interminable rollout that, when done, will bring the beverages to fewer than a third of the province’s 1,500 grocery stores, while maintaining priggish restrictions on the hours during which Ontarians are allowed to buy alcohol. More than a year after the program was announced, only 60 supermarkets stock beer, including just one along the 430 km of Highway 401 between Oshawa and the Quebec border. Wine sales don’t start until fall.

To critics, these disparate actions constitute a behavioural pattern, sending the message that the ruling party’s agenda must come first, that the public sector is the real engine of economic growth. Cross, the former StatsCan analyst, notes that Ontario manufacturers plan just $6.6 billion in capital outlays in 2016—well below the $8 billion they were spending annually before the 2009 recession. Next door in Quebec, by contrast, planned investment has grown 8.4 per cent above pre-recession levels, as its cheap electricity counters its long-standing reputation for meddlesome government.

That’s precisely why a group of Liberal cabinet ministers got an earful last month when they gathered in the mining city of Timmins for the annual conference of the Federation of Northern Ontario Municipalities. Steve Black, the host mayor, told them he was fighting an uphill battle to convince a gold-mining company to build an ore-processing facility in the area, rather than in Quebec, and he put a personal spin on his story. In 2010, he recalled, the copper-mining company he’d been working for, Kidd Operations, shifted its metallurgical operations to a plant the other side of the provincial boundary, casting 650 workers at a Timmins plant out of work. Black, who has run provincially for the Progressive Conservatives, says electrical rates were a big part of that decision. In an interview, he dismisses Liberal assurances that discounted rates provided to large northern Ontario industries make up the 50 per cent gap in the two provinces’ power prices. Other charges—including a so-called “global adjustment factor” put in place to ensure contracted generators get their agreed-upon rates—comprise as much as 60 per cent of the electricity bills of Ontario mining operations, he says; in many cases, they cancel out any advantage the discount program gives Ontario over adjacent jurisdictions.

Beer is shown on newly stocked shelves as customers shop at a Loblaws grocery store in Toronto on Tuesday, December 15, 2015. (Nathan Denette/CP)

Beer is shown on newly stocked shelves as customers shop at a Loblaws grocery store in Toronto on Tuesday, December 15, 2015. (Nathan Denette/CP)

“The reasoning companies give when they leave is that it’s just becoming too expensive and burdensome to work through the processes in Ontario,” concludes Black. “When you think about natural resource and manufacturing, representing thousands and thousands of jobs in Ontario, it’s a shame to be losing those. We have to think about the future.”

The future, it goes without saying, is precisely where Wynne insists she’s fixed her gaze—a thought that sustains her as conservatives accuse her of kneecapping Ontario’s economy just when the rest of the country needs it most. Last fall, Cross authored a report for the Fraser Institute titled “Ontario: No Longer a Place to Prosper,” noting that real per-capita incomes in the province fell below the Canadian average for the first time ever in 2012, while its unemployment rate climbed above the national average for the first time in 2007. “It is a matter of deep concern for all Canadians,” he wrote, “that its leading province has become a laggard.”

Wynne counters with a checklist of projects funded through its jobs and prosperity fund that she says will support 17,000 skilled jobs while leveraging investment in plant upgrades. Linamar, the Guelph parts maker, and Toyota are among the recipients, she notes. And the government got an added boost last week when General Motors announced plans to hire as many as 750 engineers over the next two years to develop vehicle automation technology. “I’m not ashamed to say that we’re taking a very activist approach in working with companies,” Wynne says. “These jobs are in the manufacturing sector. There are success stories in high-tech. We’re also seeing food processing in the new, advanced manufacturing sector. So it’s different kinds of industry, that’s for sure. But it is export-oriented. Ontario’s always going to have a diverse [economic] base, and manufacturing will be part of that.”

For the premier, it’s all part of a vision for the modern economy in which, as she puts it, “civil society, government, private industry and the labour movement come together and say, ‘What’s in the best interest of our kids and our grandkids?’ ” In this scenario, government invests in hand-picked industries to create clusters of economic growth while spending on education and health care to create a workforce to fill the resulting high-skilled jobs. Green technology is an example: Wynne describes it as one of “the industries of the future.”

As for the climate change action plan, the Liberals insist its nannyish elements have been exaggerated. The government is not banning natural-gas heating, they say, and the transformation it imagines will be driven not by sticks but by financial carrots, such as a $14,000 maximum rebate for the purchase of electric cars. “There isn’t any coercion here,” Glen Murray, the environment minister, recently told reporters.

That’s not strictly true. Those incentives will be funded through carbon credits purchased under compulsory emissions limits, which will add $5 a month to an average home heating bill and 4.3 cents to the cost of a litre of gas. As it is, says Desrochers, the economic geographer, the province’s entire green strategy is underpinned by a monstrous presumption—namely, that the state can identify both the industries and the products of the future. “Governments cannot pick winners,” he says. “They don’t have any insights that people on the ground or in business don’t already have. The only thing they can do is borrow and tax and spend on pet projects.”

Desrochers has studied state attempts to foster business clusters, and concluded they rarely work. That’s because they usually involve projects that, he says, “nobody would put their own money into.” Worse, he adds, “there is no feedback mechanism, no imperative to terminate projects that shouldn’t continue.” In a study released in 2009, he and his co-authors found that successful clusters occur spontaneously, due to factors like proximity to markets, supplies and labour. Government’s role, they said, is best confined to promoting and marketing a cluster’s existence.

Cross, the former StatsCan analyst, believes that will be hard to do given the province’s relatively high cost of doing business. “Firms will just not invest or expand in a province where they have no idea what the rules of the game are going to be,” he says. “They don’t know what they’re going to be paying for energy.” He’s not the only one getting anxious. According to the Angus Reid Institute’s quarterly survey, Wynne’s 24 per cent approval rating in May was second-lowest among premiers; only the 17 per cent pulled by Dwight Ball of Newfoundland and Labrador, who’d just brought in one of the most punishing budgets in his province’s history, ranked lower.

Yet the Liberals keep getting elected. Wynne scored her majority despite poll numbers suggesting 60 per cent of Ontarians thought the province was on the wrong track, and barring some unforeseen crisis, she’ll see the Grits through their 15th consecutive year in office. Cross chalks up their success to the poor performance of their opponents: whatever voters’ qualms about the Liberal program, he says, PC leader Tim Hudak’s promise during the 2014 campaign to vaporize 100,000 public sector jobs came across as excessive and punitive. But it’s also true that young voters in particular seem to be shedding hang-ups about state spending on the economy that have prevailed since the mid-1980s. In another Angus Reid survey taken in January, 43 per cent in the 18-to-34 age bracket said the federal government should promote jobs and economic growth through deficit spending. Only 29 per cent of those aged 34 to 54 approved of the idea.

For Wynne, such results raise hope that she’s ahead of the political curve, and won’t be the one to steer the Liberal bus into the ditch. “They’re a very practical generation,” she says. “They recognize the need for an environment in which they can thrive.” It’s also possible they fear what will happen if government turns off the tap. Nostalgia for the rusting, smoke-belching province their parents knew may be weak, after all. But so too is confidence in the Ontario to come.

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