Thursday, June 12, 2014

On the demographic background behind the Ontario election tomorrow

Tomorrow, the Canadian province of Ontario will go through an election. The Liberal minority government failed to get the support of the left-wing NDP in passing its provincial budget, triggering an election. Right now, the parties seem tied; the election can go any way. (I myself intend to turn up at the polls in my riding, or electoral district, of Davenport and vote for the Liberal candidate; the NDP may have overplayed its cards in Davenport specifically and Toronto generally.)

As noted by Jason Kirby of MacLean's, the demographic background of Ontario is rather unpromising. The economic growth that all three parties count on may just not happen as the workforce ages.

[F]or all the thousands of kilometres the leaders travelled, for all the babies kissed, promises made and millions of pixels burned out by instant online analysis, it’s remarkable how little attention went to the only mathematical reality that matters as Ontario tries to get back on its feet. Its workers are getting old, fast, and that simple fact is the demographic hand grenade that threatens to blow an even bigger hole than already exists into Ontario’s economy.

The reality is Ontario’s creaking workforce is likely to upset everyone’s plans, no matter which party wins. That’s because underlying the various party platforms was a common assumption: that Ontario’s economic growth will kick into higher gear over the next few years, providing a boost to the provincial budget and doing much of the heavy lifting needed to haul Ontario out of its fiscal hole. The impetus for the growth might vary (Tory cuts, Liberal corporate welfare and taxes on the rich, NDP corporate taxes), but once past the nitty-gritty each party was in the same finger-crossing territory: our plan will boost the economy, and that growth will bring Ontario’s $11.3-billion deficit under control.

Partway through the campaign, Doug Porter, chief economist at BMO Nesbitt Burns, published a report entitled “Destiny dictated by demography” (PDF) that should have given all parties pause. In it, he sketched some of the ways Canada’s aging population will hit the economy over the next five to 15 years. Top of the list: “Average growth rates will be slower; get used to it.” For Ontario in particular, he estimated, that means an annualized rate of real GDP growth of just 1.7 per cent for 10 years. Yet the Liberal’s last budget before the election forecast growth of 2.5 per cent for each of the next two years, rising to 2.6 per cent by 2017—growth rates not out of step with what the other parties might expect.

To see how Ontario’s demographics could undermine the economy, consider the following. In the early 2000s, Ontario was a notch behind Alberta in terms of the pace of growth of its adult, working-age population. Today the two provinces aren’t even close. Ontarians are shuffling into retirement age far faster than new workers are coming along to replace them. Sure, the aging workforce is a nationwide phenomenon. But in Alberta, where the number of people turning 65 last year rose slightly more than five per cent, the working-age adult population also grew five times faster than in Ontario.

Ontario’s labour force participation rate is already deteriorating as a result. While it’s often said that a lower participation rate is a sign of workers giving up and leaving the job market, the real driver is demographics. As this chart shows the participation for most Ontario regions is below the national average, which is saying a lot when you consider the size of the province’s population.

For the curious, Ontario's official population projection to 2036 is here, and Douglas Porter's report mentioned in Kirby's article is here.

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