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The Ontario government will record a $900-million revenue shortfall in fiscal 2009, the first decline in five years, raising fears that the worst is yet to come and that the province's municipalities, hospitals and schools will bear the brunt of any cost-cutting measures to address the ailing economy.

The collapse in Ontario's economy reveals a dramatic reversal of fortune for Canada's largest province, which just seven months ago was awash in cash and embarking on a spending spree.

Finance Minister Dwight Duncan officially said the good times are over with the release of an economic outlook Wednesday.

It shows Ontario coping with a revenue shortfall and rising expenses that will push the province into a projected deficit of $500-million in the fiscal year ended March 31, 2009 – reversing three consecutive years of surpluses. The deficit would have been $1-billion had the province not dipped into its rainy-day fund to offset a chunk of the revenue loss.

Ontario has been bracing for an economic decline for some time. It had been preparing for a decline even as the government continued to increase spending. More than 230,000 manufacturing jobs have vanished over the past five years as the sector felt the ravages of high oil prices, slowing growth in the United States and a strong Canadian dollar. The liquidity crisis that has undermined business and consumer confidence around the world has just hastened and deepened the pain.

“The liquidity crisis in financial markets has undermined business and consumer confidence around the world,” a sombre Mr. Duncan said in the provincial legislature Wednesday. “Ontarians are understandably anxious and concerned for their future.”

Despite this dreary prognosis, the government does not appear to have a comprehensive plan for steering the province back to health. The 73-page Economic Outlook and Fiscal Review is less than half the size of last year's outlook, when the government used a revenue windfall of $2.6-billion to provide relief to first-time home buyers and cash-strapped municipal transit operators.

Mr. Duncan told reporters the government will put the brakes on new program spending as the province copes with a “remarkable decline” in revenues. The economic outlook says the government will realize $108-million in savings by the end of fiscal 2009 by such measures as deferring spending on education-related capital improvement projects and by taking longer to hire 9,000 new nurses.

But the document does not address key priorities of the McGuinty government, including tackling poverty and reversing some of the offloading of responsibility for social programs to municipalities that occurred in the mid-1990s.

“I think they're warming people up for things to come,” Progressive Conservative Leader John Tory told reporters. “These guys don't know how to make a tough decision. I think they're paralyzed in the face of tough times.”

New Democrat Leader Howard Hampton said what's missing from the economic outlook is a strategy to sustain jobs and to address the province's social safety net at a time when more Ontarians are slipping into poverty. The fallout from the province's declining fortunes will be felt next year, he said.

“This is the setting of the stage for municipalities, school boards and hospitals that are going to be left high and dry in about six months.”

Mr. Duncan said it is difficult to speculate on how long the province might be in the red. The alternative to slipping into the red, he said, would be deep cuts to spending on health care and education, something the government is not prepared to do.

The global financial crisis has forced the province to cast aside projections made in the budget last March. Revenue is forecast to come in at $96-billion, 0.9 per cent less than what was forecast in the budget. Most of the decline comes from a sharp drop in corporate taxes. The government has also shaved its growth forecast for the economy this year to just 0.1 per cent from 1.1 per cent in the budget.

“Today's economic reality is forcing governments around the world to re-examine their expenditures, adjust their assumptions and respond to an environment where the only constant is uncertainty,” Mr. Duncan said.