NIAGARA-ON-THE-LAKE, ONT. — Sometimes it's hard to know which Dalton McGuinty will show up: the pauper, or the gloater?

Ontario's economy is in a tough spot, what with the high dollar, high taxes and the China factor squeezing the factories until they turn black, blue, aubergine and every other nasty shade you can think of. That's why Mr. McGuinty thinks he deserves a chunk of the fat federal surplus in which his old political foe, Jim Flaherty, is lolling about like some kind of modern-day Croesus. 

But on the other hand: "Let's not lose perspective," the freshly re-elected Ontario Premier told an audience of 250 academics, bureaucrats and business people at the Ontario Economic Summit. "The economy remains strong ... unemployment is at a five-year low ... 85 per cent of the economy is not manufacturing," and so on. The ranks of the employed have expanded by 165,000 in the past year, not too shabby for a province that derives much of its growth from Michigan and New York - and no doubt, in the Premier's mind, a result of his amazing leadership.

Few aspects of Canada's once-in-a-generation economic boom are as puzzling as Ontario's resilience. Alberta's oil sands-driven prosperity is easy to understand. British Columbia, Saskatchewan and Newfoundland also owe much of their prosperity to stratospheric prices for commodities. In Manitoba - well, Manitobans are simply an industrious bunch. But you'd think that Ontario, if not exactly sliding into economic hell, would be showing more strain than it is. 

Its energy and mining revenues are minimal. It derives a disproportionate amount of its wealth from building fuel-sucking SUVs that consumers don't want. As for the impact of the dollar: If Ontario were a country, it would be more export-reliant - by far - than any other in the G7. Nearly 60 per cent of its economic output is driven by exports; the national average is 38 per cent. (No wonder Linda Hasenfratz, chief executive officer of auto parts maker Linamar, looked like she was about to bust a vocal cord in calling for Mr. McGuinty to cut provincial income taxes on business to offset the dollar's move; three-quarters of her sales last year were exports to U.S. customers.) 

So what's the secret? Perhaps it's the one Mr. McGuinty is responsible for but might not wish to talk about. After watching the flush-with-cash feds expand the public service, Ontario's Grits have jumped on the trend.

David Wolf, Merrill Lynch's top economist in Canada, thought something didn't make sense about the latest employment numbers. He went deeper, and guess what he found? Queen's Park's great job-creation machine is ... Queen's Park! "The majority of the total job gains over the past three months have come from two narrow areas - Ontario education and Ontario public administration," he wrote, which have seen employment rise by 89,000 bodies since July. 

That's a big number and a bit misleading. Mr. Wolf suggests it may partly be caused by the province's decision to end mandatory retirement; older government workers may be hanging in a little longer, even as younger replacements are hired. Plus there was the October election, which gave the McGuinty government reason over the past year to add teachers here and nurses there. If Mr. Wolf is right, then some of Ontario's job growth is temporary.

It's obvious that the Grits don't worry much about restraint. Some conservative economists hold the view that governments should limit spending increases to the rate of population growth, plus inflation. That would imply a 13-per-cent rise in provincial spending since 2003-04. But the budget plan for this fiscal year calls for $91-billion in expenses - or 23-per-cent higher than four years ago. 

More spending is what the McGuintyites promised in 2003 and what they were re-elected on, so fair enough. But can the province afford a public sector spending binge if the private sector economy goes pear-shaped? 

Any budget is based on assumptions, and one of the assumptions the government made was that the dollar would be about 86 cents (U.S.). The fine print says that, for every cent it goes up, the province stands to lose between $25-million and $125-million in revenue. So dollar parity implies a revenue loss of $350-million to $1.7-billion.

U.S. growth is also likely to come to well below the government's estimate, which could cost another billion or two. 

None of this is to say that there won't be offsetting factors or that the province is about to plunge back into deficit. 

But if we had to put money on it, we'd bet that by the time this summit rolls around next year, Mr. McGuinty will be less glib and his pauper routine will sound more credible.

ddecloet@globeandmail.com

The original article can be found here.