The ballooning cost of rescuing the ailing auto sector has led to a sudden 24-per-cent jump in Ontario's deficit, pushing it to $18.5-billion for this year and raising questions about the McGuinty government's plans for digging Canada's largest province out of the worst recession in generations.
Finance Minister Dwight Duncan unveiled his deficit surprise at a hastily arranged fiscal update yesterday, citing Ontario's $3.5-billion commitment to the bailout of General Motors Corp. as the reason the province is slipping deeper into the red. Ontario was already bracing for a record deficit of $14.1-billion for this year - a figure Premier Dalton McGuinty stood by as recently as last Wednesday, the day the provincial budget was passed.
The federal and Ontario governments announced yesterday that they were contributing a total of $10.6-billion to the bailout of GM, which finalized its restructuring package with government officials in the United States and Canada over the weekend.
"The General Motors numbers were bouncing around as late as yesterday, and this has been an enormously complex piece," Mr. Duncan told reporters.
Yesterday's sudden change in the deficit number had economists saying that Mr. Duncan must quickly come up with a plan to bring spending and the deficit under control or he could lose credibility and the endanger the province's credit rating.
Toronto-Dominion Bank chief economist Don Drummond said it is not surprising that Ontario revised the deficit, given that governments are injecting more money into GM than anyone contemplated back in March when the budget was released.
Nevertheless, he said, "The magnitude of the deficit for this year is troubling."
For Mr. Duncan to retain his credibility and the province to keep its high standing with debt-rating agencies, there must be a plan to rein in spending and eventually balance the books again, Mr. Drummond said.
"The task will not be easy."
Mr. McGuinty said yesterday that Ontario has not specified how GM is to use Ontario's share of the bailout money.
"We've not earmarked any of those dollars," he told reporters. "I don't think you can take Ontario, Canadian and U.S. dollars and specifically say where they're going to go in terms of the restructuring plan."
However, federal Industry Minister Tony Clement countered yesterday that the Ontario government took the lead in managing the shortfall in GM Canada's pension funds. He said a large portion of the province's contribution will be used to address the shortfall.
"Yes, it's one deal, but we all had our various responsibilities in order for the deal to happen," he said.
General Motors will be responsible for putting $4-billion toward addressing the estimated $7-billion shortfall in the pension plans of its Canadian subsidiary. The company has also agreed not to improve pension benefits until at least 2015, and to put $200-million a year into the plans over the next five years.
These measures will put the pension funds north of 80-per-cent solvency right now, with a clear plan to achieve 100-per-cent solvency, government officials said at a technical briefing.
The province will also introduce legislation requiring GM to continue funding the pension plans on a solvency basis.
Several large companies, including GM Canada, were given pension holidays in 1992 under what became known as the "Too Big To Fail" program. These employers were permitted to fund their pensions to a less-onerous "going concern" level, which assumed the companies would continue operating and need to cover only short-term costs.
Companies must normally finance their pension plans to a "solvency" level, which assumes they are winding up their operations. GM Canada was the only company grandfathered when the program was cancelled in 2002.
With a report from Shawn McCarthy in Ottawa