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Ontario Finance Minister Dwight Duncan must balance placating ratings agencies and investors against the political damage of an austerity budget. (Fred Thornhill/Reuters/Fred Thornhill/Reuters)
Ontario Finance Minister Dwight Duncan must balance placating ratings agencies and investors against the political damage of an austerity budget. (Fred Thornhill/Reuters/Fred Thornhill/Reuters)

Ontario's budget pain will affect entire country Add to ...

It’s hard to believe that a single provincial budget could be more important to the Canadian economy than Thursday’s long-awaited federal budget.

But Ontario is in a bind. Growth is stuck in low gear as the province struggles with high unemployment, and challenges in its key manufacturing sector. Meanwhile, just when the province’s economy could use a helping hand from government, business-friendly moves are set to be scaled back as part of an austerity drive aimed at protecting its credit rating from a possible downgrade.

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With the resources boom driving the economy in the West, Ontario isn’t the economic engine it used to be. But at around 40 per cent of Canada’s economy, Ontario still matters, and if the province can’t figure a way out of its current bind the rest of the country will feel the pinch.

“[This]Ontario budget will be more closely watched than the federal one, largely because there are so many questions about how Ontario returns to fiscal balance,” says former federal finance minister John Manley, who now heads the Canadian Council of Chief Executives.

Like other provinces, Ontario cranked up the deficits starting in the 2008-09 fiscal year amid the onset of global economic turmoil. What has put the Dalton McGuinty government in the crosshairs of fiscal critics, however, is the extent of its indebtedness – an estimated $238-billion, up from $157-billion four years ago. Ontario’s deficit, at 2.3 per cent of GDP last year, was the highest among the provinces, and debt service costs of $10-billion this year will represent its third-largest expenditure after health and education. Further, Ontario plans to take three to four years more than any other province to balance its books. Its most recent target for balance is 2017-18, and some are skeptical even that is achievable.

Economists are concerned about the province’s output heading into a period of rising global economic uncertainty, fearing Ontario may not hit already anemic targets of growth in the 2-per-cent range for this year and next. “The amount of budgetary space they have to [boost]economic growth is quite limited,” said Colin Busby, senior policy analyst with the C.D. Howe Institute.

For Ontario Finance Minister Dwight Duncan, delivering a budget Tuesday that fosters economic growth while putting the province on a track to balance its books is a huge challenge.

Corporate Canada is eager for Ontario to get serious about putting its fiscal house in order while remaining competitive for business. One fear is that if deficits aren’t reined in investors may push interest rates higher, adding debt-service costs that could eventually be funded through higher taxes. But for business there’s a cost to balancing the books. Ontario is backing away from plans to cut its corporate tax rate to 10 per cent from 11.5 per cent until the deficit is erased. At the same time, the government has promised to cancel or delay major capital spending projects and hem in business support programs. This depressed spending will reduce economic output, but is part of what is needed to keep Ontario an attractive place to invest in the longer term.

And Ontario may have much more work ahead to fix its fiscal mess. Federal Finance Minister Jim Flaherty – a former Ontario cabinet minister who is often at odds with Mr. McGuinty – is already predicting excuses from the province. “I’m concerned about Ontario,” he said last week. “What we’ve basically seen in Ontario is eight, almost nine, years of spending mismanagement. They need to focus … for the good of the country.”

The federal government, which tables its budget on Thursday, is facing pressure in the opposite direction. Some economists say Ottawa can afford to ease up on cuts and still balance the books around 2015.

While Ottawa says its budget cuts will be “modest,” Prime Minister Stephen Harper’s first budget written with a majority is expected to stir controversy with major changes to research and innovation programs, immigration policy and environmental regulation. But the most explosive debate will likely focus on Ottawa’s plans to raise the eligibility age for Old Age Security.

Mr. Duncan, meanwhile, must balance carefully, placating rating agencies with deep cuts while containing the political damage to his minority government – all without further damaging the economy. Mr. Duncan can’t promise gushier royalties as resource-rich provinces have done; his prospects for increasing revenues are scattershot, ranging from drivers’ licence fee increases to approving construction of a casino in Toronto. Tax hikes and privatizing Ontario’s booze distribution business are non-starters.

The government already has a blueprint for fiscal shock therapy, courtesy of economist Don Drummond, who has warned deficits could balloon if the government strays from his list of 362 recommendations. Mr. Drummond is a hero to fiscal hawks but his prescription for cutbacks is stirring some resistance: last Wednesday, he was temporarily chased from a lecture at Carleton University in Ottawa after some students began shouting at him.

But while Mr. Duncan has said his budget “will lay out the path to balance with some difficult choices in it,” he and Mr. McGuinty have indicated they won’t heed several of Mr. Drummond’s big cost-saving ideas, such as cutting full-day daycare and electricity bill rebates.

Mr. McGuinty is, however, expected to take on teachers, demanding wage freezes and a rollback of sick-day benefits – which has faced a hostile response from unions.

Overall, Mr. Duncan must limit spending growth in health, education and debt service – which account for a combined 71 per cent of the his estimated $124-billion budget – while cutting 2.4 per cent per year in other areas.

If not, a credit downgrade could boost Ontario’s borrowing costs and make matters worse.

“No finance minister wants to be downgraded,” Mr. Manley said. “When the federal government was downgraded by Moody’s in 1994 … that was a pretty critical factor in forcing some fairly drastic action in the next budget.”

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