Ontario could qualify for equalization payments by 2010 as the booming west leaves Canada's biggest province comparatively poor, a new report by TD economists says.

The startling turnaround in the fortunes of Ontario is largely due to soaring commodity prices and a new equalization formula that takes into account non-renewable resource revenues, according to the report's authors.

"We calculate that the province stands to collect as much as $400 million in fiscal 2010-11 and $1.3 billion in fiscal 2011-12," say TD Bank chief economist Don Drummond and the bank's director of economic studies, Derek Burleton.

Payments could start as early as next year if the province's economy deteriorates further, the report says. TD is already projecting that Ontario will barely manage to skirt a recession this year.

The report notes that last year's change to the equalization formula from a five-province to a 10-province standard "brought Alberta into the picture and their soaring resource revenues" have driven up the base upon which equalization payments are based.

The federal equalization program is designed to compensate "have-not" provinces so that their residents can have the same level of services as richer provinces. In the 2008-09 fiscal year, six provinces — the four in Atlantic Canada, Quebec and Manitoba — will receive more than $13.6 billion in equalization payments.

The authors say Ontario's relative decline is "not so much a story of Ontario weakness as it is of booming economic strength in Canada's commodity-based economies."

Since Ontario is a net importer of commodities, its economic performance relative to the west has been hurt.

Parallels to the 1970s

If Ontario does receive equalization payments, it would parallel the situation in the 1970s and early 80s. Back then, soaring energy prices and the recession in the early 80s made Ontario an equalization recipient from 1977 to 1982, the report noted.

But Ontario was retroactively excluded from receiving payments when the federal government brought in a rule change to prevent any province from getting payments if its per-capita income topped the national average.

In 2007, the TD economists say Ontario's per capita GDP had fallen to two per cent below the national average — placing it in fourth place among the provinces.

But even if Ontario does end up receiving equalization payments, the authors say it could be "fleeting if the economy turns in a strong economic recovery in 2010 and 2011."

Time to rework equalization formula?

The authors also say that Ontario is still a net contributor to federal coffers and likely will be in the future. Based on the most recent 2005 data, they say Ontario residents contributed $21 billion more to Ottawa than they got back in federal spending.

So if Ontario does end up getting equalization payments, "Ontario residents will, in effect, be paying the equalization tab with their own money," according to Drummond and Burleton.

The authors suggest that it may be time to take another look at the equalization formula, even though the new formula has been in place for just a year. "Ontario's transformation into an equalization-receiving province underscores the impact of the inclusion of 50 per cent of non-renewable resource revenues for all provinces in the formula at a time of soaring energy prices," they write.

"Is it heresy to ask whether once again the standard for equalization is not appropriate?"