Managing the federation

[ * ] An asterisk appears where sensitive information has been removed in accordance with the Access to Information Act and Privacy Act.

Managing the federation

Overarching fiscal and economic context

Modest growth, debt pressures, and uncertainties in trade and resource extraction industries drive uneven pressures across jurisdictions

In 2018 there was modest economic growth in nine provinces and in all territories, with only Newfoundland and Labrador posting a decline. Growth eased to a more modest pace across all provinces in 2018, with much less divergence between oil-producing provinces and others. Provincial labour markets are generally healthy, with job creation recorded in all provinces so far in 2019. Most employment gains have been recorded in Ontario and Quebec, while the unemployment rate currently stands at or near historical lows in other provinces. In August 2019, Quebec had the lowest unemployment rate in the country.

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Provinces and territories (PTs) are facing fiscal challenges to varying degrees. Ontario, Manitoba, Alberta, Yukon, and Nunavut are in budgetary deficit positions, while Quebec, Prince Edward Island, New Brunswick, Nova Scotia, and the Northwest Territories are projecting budgetary surpluses. Although a surplus is expected in British Columbia, the struggling forestry sector is a challenge for the province. Newfoundland and Labrador is also projecting a surplus this year due to the upfront booking of a $2.5 billion revenue stream from the newly-signed Atlantic Accord [ * ].

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For more detailed information on regional economies, please see the Annex.

National unity: Western alienation

There is evidence of growing dissatisfaction in Western Canada [ * ].

Recent surveys have shown that close to 80 per cent of those in Western Canada (British Columbia, Alberta, Saskatchewan and Manitoba) feel ignored in national politics. Alberta and Saskatchewan lead the country in terms of discontent, with the lowest percentage of Canadians believing that being a part of Canada has been good for their provinces. Residents in these two provinces are also the least likely to support equalization and are the most likely to believe that their province does not receive its fair share of federal spending. [ * ]

While both premiers Kenney and Moe have repeatedly expressed concerns about the policies of the Government of Canada, particularly with respect to energy and environmental issues, [ * ] .

Challenges and opportunities for the mandate

Your Government’s collaborative approach over the last five years, including five First Ministers’ Meetings and regular calls with premiers on Canada-United States relations and other issues, produced a solid record of results despite increased recent federal-provincial-territorial (FPT) tensions around some issues. Achievements included alignment on Canada-United States relations and trade, support for the middle-class and job creation, agreement on improvements to the Canada Pension Plan, focused regional collaboration (e.g., the Atlantic Growth Strategy), and the conclusion of several bilateral agreements transferring significant dollars to PTs in areas such as housing ($5.3 billion over ten years), health ($11 billion over ten years), early learning and child care ($7.5 billion over 11 years), labour ($1.8 billion over six years), and infrastructure ($33.1 billion over ten years).

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In areas such as economic development, there has been general FPT alignment on priorities and ongoing cooperation is expected to continue. PTs have also been successful partners in advancing the international trade agenda. [ * ]

Environment and climate change

[ * ] Alberta, Saskatchewan, Manitoba, Ontario and New Brunswick [ * ] All five provinces are also involved in ongoing litigation challenging the constitutionality of the Greenhouse Gas Pollution Pricing Act (GGPPA) and an appeal to the Supreme Court of Canada is scheduled to be heard beginning on January 14, 2020.

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Natural resources/energy

The new Impact Assessment Act for major projects [ * ]. Alberta has launched a legal challenge of the Act, with Saskatchewan seeking intervener status in the case. Nova Scotia and Newfoundland and Labrador also remain interested in ensuring that the joint management principles outlined in the Atlantic Accords are upheld.

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There is positive collaboration with PTs in areas such as electrification, forestry, wildfire management and mining. On electrification, there is broad consensus on the value of increasing electricity exports across jurisdictions, modernizing infrastructure and bringing clean power to communities that currently lack access to electricity from emissions-free sources. In December 2018, First Ministers agreed to lead the development of a Framework for a Clean Electric Future and work to deliver on this commitment is ongoing. Regional work with Atlantic provinces and bilateral work with British Columbia on electrification is also underway.

Fiscal transfers, cost-sharing and compensation

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Internal trade

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Working with Indigenous and municipal partners in the FPT context

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Proposed strategic approach

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Continued engagement with First Ministers to help advance the FPT agenda

Since 2015, you have hosted yearly First Ministers’ Meetings with premiers. In addition, you held a number of multilateral calls with premiers to share information on key priorities and to provide updates on issues of importance to the PTs, such as trade.

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Annex: Regional economic overviews

Western Canada

Western Canada encompasses 2.7 million square kilometers and is the region with the fastest population growth. Over half (55 per cent) of Canada’s Indigenous peoples live in the West and over 40 per cent of the population are recent immigrants. The region’s economy accounted for 36 per cent of Canada’s gross domestic product in 2017. Accounting for almost 40 per cent of the economy and nearly one-third of the population, the west drove Canada’s economic growth for over a decade. However, in the wake of weak potash, uranium, and oil prices, western Canada’s overall economy has slowed considerably. Commodity prices are not expected to rebound to the highs experienced in 2014 and continued delays on pipeline projects are contributing to business closures and job losses. A recent report calculated that nearly 300 western Canadian oil and gas firms have disappeared since 2014. This overall economic uncertainty is pulling on the social fabric that binds the west, and has lowered confidence in Canadian federalism, particularly in Alberta and Saskatchewan.

Despite an effort to diversify the economy through opportunities in cluster growth (clean tech, health data analytics, food and ingredient manufacturing, and electrification of heavy equipment vehicle manufacturing), many sectors and communities remain vulnerable to fluctuating commodity prices or are reliant on one economic driver. With the majority of western exports (70 per cent) destined for the United States and Asia (15 per cent), the region has been impacted by global trade action and tariffs (United States imposed aluminum and steel tariffs, trade action from China on canola seed and meat products and India’s tariffs on pulse crops affecting pea and lentil exports).

In addition to trade disputes impeding commodity exports, transportation bottlenecks further limit economic growth. British Columbia, Alberta and Saskatchewan account for nearly 60 per cent of all Canadian rail shipments. Increases in the movement of oil by rail creates competition with other commodities and places significant pressure on the system. Without significant investments in key ports, rail, road, and air infrastructure to move more western products to market, global instability in trade and investment will continue to limit the ability of western firms to export products, attract foreign capital, and establish business partnerships.

Ontario

Ontario is home to nearly 39 percent of the Canadian population. It has a growing and increasingly diverse population. Nearly 30 percent of Ontario’s population was born outside of Canada and 40 percent of all new permanent residents in Canada choose to call Ontario home.  The region is a major driver of the Canadian economic engine, accounting for close to 40 percent of the country’s gross domestic product, exports, venture capital and high-growth firms. The automotive, mining, manufacturing, agriculture, financing, information and communications technology, and pharmaceuticals and medicine sectors are key to Ontario’s economy. Despite strong recent performance, medium to long-term growth is expected to slow, with rising trade frictions and global monetary policy creating headwinds for the province.

Population diversity, growth and economic prosperity is concentrated in the major metropolitan areas. Smaller, rural and manufacturing communities are facing decline, with income inequality in Ontario the highest of any of the provinces. The diverging growth between urban and rural areas is exacerbated by an acutely felt shortage of skilled labour in rural communities, particularly in skilled professionals and tradespeople.

Northern Ontario faces a different outlook than its southern counterparts. The region experiences slower population growth, higher rates of unemployment and lower immigration levels when compared to the province as a whole. Northern Ontario covers 90 percent of the province’s landmass but only holds six percent of its population (840,739). More than half of the population lives in the region’s five urban centres, with the remainder living in small and dispersed communities, most of which have a population of less than 2000. The region is home to 105 of the province’s 126 First Nations Communities, of which 30 are remote and accessible only by air or winter road. Population growth has been small and is expected to decline in the next decade due to aging, low fertility rates, out-migration and limited immigration (approximately six percent of the population immigration from outside of Canada, much lower than the 22 percent national average).

Northern Ontario’s strong resource-based industries such as mining and forestry are key contributors to the provincial economy, with demand for natural resources (precious and base metals, wood products, biofuel, minerals and forestry) rising over the last decade. That said, resource-based industries remain susceptible to global economic influences and fluctuations and high costs of energy and transportation as well as lack of reliable and affordable broadband are barriers to business growth and community development. Infrastructure expenditures are higher than the provincial average due to climate, geographic size and remoteness and a more limited tax base making necessary improvements more expensive and difficult to execute, limiting potential development and growth. Attracting funding and investment to businesses is more challenging given the perception that the risk of doing business is higher than in other parts of the country.

Quebec

Quebec is home to nearly 23 percent of the Canadian population, with 80 percent living in only ten percent of the region. Immigrants make up 14 percent of the population (below the national average of 22 percent).

The economy is strong, but does not yet equal its demographic weight at only 19 percent of the country’s gross domestic product (GDP). Quebec is nearing full employment and unemployment is at an all-time low (5.5 percent in 2018). Labour shortages will continue to put small and medium sized enterprises (SMEs), which make up 87 percent of private sector jobs, under pressure as many SMEs have had to postpone projects or refuse contracts due to a lack of workers. The economy is also expected to continue to feel the effects of an ageing population, which is a drag on GDP growth.

Quebec boasts a diversified, small business economy, focused on services, manufacturing, construction and natural resources. Services are the most important sector of the Quebec economy, both in terms of employment (80 percent) and production (72 percent). Manufacturing also plays an important role and generates significant economic spinoffs, accounting for 14 percent of Quebec's GDP and more than 80 percent of the value of exports. Advanced, emerging and green technologies as well as start-ups play an increasingly important role. Agriculture, mining, forestry and fisheries carry less overall weight, but these industries continue to be important in rural communities.

Montreal is considered to be the economic engine of the province of Quebec. Several indicators show that its economic weight is higher than its demographic weight. Outside the major urban centres (Montreal, Quebec City, Gatineau and Sherbrooke), the demographic and economic outlook is worrisome as there is both a decline in the population and an exodus of young people. Many rural communities lack the infrastructure to cope with technological, economic and climate change and many are dependent on industrial activities that are in decline or at risk of decline.

Atlantic Canada

Energy, oceans, and fisheries are the key sectors in Atlantic Canada. Energy accounts for more than 12 percent of regional gross domestic product, more than 18,000 direct jobs and nearly 60 percent of regional exports. The energy sector has been the largest source of major capital investment in the last ten years, and it is estimated that eight indirect and induced jobs are created in the region for every direct job in oil and gas extraction. Atlantic ocean sectors are projected to grow by $10 billion between 2015 and 2030, in large part driven by activities in the aquaculture and oil and gas sectors, with the possibility of aquaculture growth exceeding $3 billion over the coming decade.

Overall economic growth may be hampered by a number of factors including a declining labour force (between 2012 and 2018 the workforce declined by 31,000 workers and 229,000 are set to retire over the next decade), an aging population (the number of people over age 65 has increased by more than six percent since 2001), and a higher share of rural population (nearly 50 percent of the region lives in rural areas). Rural areas remain critical for key sectors such as extraction industries and food, but these areas face acute labour declines and shortages, with a mismatch between positions offered and the available labour force. The population is growing for the first time in many years, due largely to the influx of immigrants, supported by the Atlantic Immigration Pilot. That said, retention has been a challenge and immigration will not address the labour shortage, particularly if outmigration continues.

Less access to financing is also cited as a limiting factor, with most companies (98 percent are considered small businesses) lacking the scale required to access national business programs and other financing options, typically located outside the region. While Atlantic Canada benefits from a strategic geographic location close to major North American markets and easy access to international markets, the region has critical aging infrastructure that requires remediation and rehabilitation, including highways, air access, ports and reliable broadband. Provincial spending in these areas is constrained by competing pressures on budgets, including debt obligations.

The Territories

The territories account for nearly 40 percent of Canada’s landmass, and constitute a large part of the world’s longest coastline, but hold less than one percent of Canada’s population with approximately 114,000 residents, half of whom identify as Indigenous. The region’s population is young (over 60 percent is under the age of 40) and highly dispersed.

The territorial economies are forecasted to grow an average rate of 4.4 percent in 2020 before averaging 1.5 percent between 2021 and 2025, although this growth is not evenly distributed. Strong growth forecast in Nunavut and Yukon, largely driven by their mining sectors, whereas the Northwest Territories outlook is comparatively modest with growth expected to decline over the medium term due to mine closures. While the public sector and resource industry (in particular, mining) remain the cornerstones of the territorial economies, new opportunities for growth are emerging across a number of sectors that include tourism; renewable energy; northern food systems; commercial fisheries; and cultural and traditional services and products. Despite this overall regional growth in the short-term, the lack of skilled labour and high unemployment rates outside of territorial capital cities pose broader, systemic challenges.

In addition, the region’s infrastructure deficit, including connectivity, has created a premium cost to doing business, impacting the ability to attract industry and promote economic development. The cost of living in the region is among the highest in the country, particularly in communities that lack year-round road access, making it difficult to attract and retain a labour force, professionals in areas such as health and education, and new immigrants. The infrastructure deficit is increasingly shaped by the rapid impacts of climate change in the North as a region that has had to, and continues to, adapt more quickly and intensely than southern Canada.

The balance of approaches between economic development and environmental sustainability further defines the territories’ regional economic landscape. There is recognition that the North contains world-class mineral deposits (e.g., the Slave Geological Province), which could provide significant national and local economic benefits if developed on a sustainable basis and leveraged to promote the growth of other sectors. As a means to improve resource development activities but also to facilitate territorial participation in the digital economy, northern innovation ecosystems present both opportunities (e.g., nimbleness given its relatively small size) and challenges as access to the necessary expertise, capital and markets may be limited. Strengthening northern companies, including Indigenous ones, involves enhancing the region’s internal capacity as well as its linkages to southern systems.