TORONTO — CANADA'S most populous and prosperous province is facing unfamiliar problems: high unemployment and a ballooning deficit. Recession has hit especially hard in Ontario, and the province's left-of-center government is worrying about the effect of some of its promises, made when it thought it would never achieve power.
One problem arises from the newly elected government's plan to take over Ontario's auto-insurance business. Critics say this could cause a sharp rise in unemployment and even push up interest rates across Canada.
Job loss and capital flight
Though introduction of state-run auto insurance might produce short-term difficulties, it would lower premiums for the average driver, admits a study by the Toronto office of DRI/McGraw-Hill, an economic consulting firm. It says 24,000 people in Ontario would lose their jobs as the government took over all aspects of the car-insurance business, from private agents selling insurance to clerks and money-managers working at large insurance companies.
``A change would be detrimental to consumer welfare and the economy,'' says Andrew Rogacki, general manager of the Progressive Casualty Insurance Company, which paid for the report.
Interest rates across the country would be driven up, holds the DRI study, because foreign insurance firms operating in Canada would withdraw as much as $3.1 billion (Canadian; US$2.7 billion) of capital they have invested in the insurance business. Interest rates would have to rise to attract that capital back to Canada, the economists reason.
One question is the right of car-accident victims to sue. Under the present no-fault system they can sue only in severe cases, and are limited to C$600 a week - a number based on the average industrial wage. The new legislation would limit the right to sue even further, perhaps setting up a permanent adjudicator to rule on auto accident claims.
Three other provinces have some form of province-run car insurance: Quebec, Saskatchewan, and British Columbia. The Fraser Institute - a free market-oriented economic think tank in British Columbia - has been critical of the schemes; other economists say they seem to be working.
But for Ontario, ``higher unemployment rates and lower incomes ... will result in a decline in net migration by up to 34,000 persons over five years,'' says David West, the economist who prepared the report.
Ontario doesn't need any other financial troubles. Its manufacturing sector has been particularly battered and Ontario's unemployment rate was at 9.9 percent in March, up four tenths of 1 percent from February.
``Whereas the last recession was more broadly based, affecting all parts of the country and most industries, employment declines in the current recession were concentrated in Ontario and in the following industries: manufacturing, construction, and (retail and wholesale) trade,'' according to a recent report from Statistics Canada, a federal agency.
The jobless rate is higher in cities such as Windsor and Oshawa where the car industry is concentrated. Before the recession, economists said the auto business produced one job in six in Ontario.
A province-wide housing slump has pushed unemployment in the construction industry to more than 30 percent. Just two years ago, Ontario had the lowest unemployment rate in Canada.
Fiscal crunch in Toronto
``The '80s were fantastic for Ontario, but the '90s are going to be a real struggle because of the reliance on manufacturing,'' says Irene Ip, an economist with the C. D. Howe Institute in Toronto. She says the New Democratic Party government is ``putting too heavy a burden on business with more regulations and higher taxes.''
Tax revenues have slumped and spending on social welfare programs has risen, leaving Ontario with a budget deficit of more than C$3 billion (Canadian; US$2.58 billion) for the fiscal year that ended March 31. There are concerns that Ontario, once home of the budget surplus, may lose its AAA credit rating; Premier Robert Rae says he is not worried. ``We're in a recession and that is obviously going to have an impact on our revenues and our debt,'' he says.