Ontario budget sits on ‘significant uncertainty,’ FAO says

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Ontario's budget watchdog warned that the province's fiscal plan is "heavily exposed" to factors outside of its control and said the government could miss its deficit-reduction goals if the economy slows.

The Financial Accountability Office took issue with the Liberal government's reliance on about $5-billion in revenue from three areas: cap-and-trade, new federal payments and equalization cheques from Ottawa.

The sources of revenue are "subject to significant uncertainty," Financial Accountability Officer Stephen LeClair said in remarks accompanying his office's semi-annual report on Ontario's finances released Wednesday. "Differences in the timing, duration or net fiscal benefit of these revenue sources could have a material impact on the government's fiscal position," he said.

For example, Ontario is on tap to receive just over $2-billion in equalization cheques from Ottawa to pay for services. But those payments have fluctuated wildly since Ontario first started receiving the extra funding in 2009, coming in as low as $350-million and as high as $3-billion.

The payments "could be eliminated entirely if the province's fiscal capacity remains above the national average or if the federal government changes the rules governing the program," the FAO report said.

But Ontario Finance Minister Charles Sousa said there are other factors that affect equalization calculations. "Ontario has always been a net contributor to the federation," he said in an e-mailed statement. "With Ontario representing nearly 40 per cent of the national economy, a strong Ontario means a strong Canada."

Ontario and British Columbia are the two bright spots in the country's economy. Ontario's diversified economy has shielded it from the collapse in oil prices. Unlike resource-dependent Alberta and Saskatchewan, Ontario's economic growth is expected to outpace the national average. The weaker loonie has been credited with helping the province's manufacturing sector, though recent data showed significant losses in factory jobs and weaker manufacturing sales.

Mr. Sousa's budget, unveiled in February, forecasts a $4.3-billion deficit for fiscal 2016-17 and a balanced budget in the following year partly due to stronger economic growth.

Although the FAO report said the province's deficit-elimination target was "achievable," the watchdog said "maintaining balance will be challenging" and could easily be derailed if the economy grows slower than expected.

Mr. LeClair predicted a gradual fiscal deterioration for the country's most populous province, citing the government's plans to curb spending despite population growth, older demographics and related costs.

"It is unclear to what extent the government will achieve this level of spending restraint or what the implications are for public services," the report said.

Mr. Sousa said his government recognizes that global economic uncertainty persists. "That is why we base our plan on concrete actions and build in prudent measures to guard against risks, which the FAO acknowledges," he said.

If Ontario's economy underperforms, the FAO predicted a $1.4-billion budget deficit in 2017-18 and a shortfall of $3.5-billion by 2020-21.

"A fiscal plan should balance risks. However, we see most of the risks tilted to the downside," FAO chief Mr. LeClair said.

The FAO, a non-partisan watchdog that was created three years ago, sees Ontario's net debt increasing by about $50-billion to $350-billion over the next five years, largely due to the government's ambitious infrastructure spending plans.