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Ontario, the world’s biggest subsovereign debtor, faces an uphill task to balance the books in the coming years after its government failed to deliver a “trophy” cost-saving in last week’s budget, bond investors say.

Elected last June, Premier Doug Ford’s Conservatives are relying on bureaucratic efficiencies to reduce spending and balance the budget in 2023-24. That may be difficult in the wake of the previous Liberal government’s belt-tightening and as a projected slowdown in economic growth crimps revenue.

“They haven’t gone out and found the big trophy cost-saver,” said Brian Calder, a portfolio manager at Franklin Bissett Investment Management, which owns the province’s debt.

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“They haven’t announced anything that you can point your finger to and say this is going to make the difference on the budget balance,” said Mr. Calder, who sees other bonds as offering greater opportunity.

Failure to eliminate the deficit could prompt investors to demand a higher return from Ontario, which already pays more to borrow than some other major provinces, such as Quebec and British Columbia, that are running balanced budgets.

It could also put at risk some Conservative election promises, such as cutting income taxes, and hurt the province’s ability to reduce its heavy debt load.

After running deficits every year since 2008-09, Ontario’s net debt-to-GDP, a key measure of fiscal health, has climbed to an estimated 40.2 per cent in 2018-2019, the second highest among Canada’s 10 provinces.

Ontario’s estimated net debt of about $343-billion in 2018-2019 makes it the world’s largest subsovereign debtor, according to Moody’s Investors Service.

‘RISKS AND HEADWINDS’

The Conservatives, who see the biggest cost savings coming from administrative efficiencies and consolidating procurement practices, have projected spending growth to slow to an average rate of 1 per cent over the coming five years. But experts argue that pace, which is less than inflation and population growth, may be difficult to achieve.

The province has previously been unable to sustain such a low level of spending growth, said Michael Yake, a senior credit officer at Moody’s, which cut the province’s credit rating in December to Aa3 from Aa2.

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The previous government had already constrained spending earlier in the decade, “so it’s really a question of how much can the system withstand on further restraint at this point,” Mr. Yake said.

While spending growth increased in the last two fiscal years, it averaged just 1.4 per cent in the period between 2010-11 and 2016-17.

A slowdown in the housing market, high consumer debt and global headwinds could increase the fiscal challenges for Ontario, which accounts for about 40 per cent of Canada’s economy and is a major exporter of cars and other manufactured products.

The provincial budget projected growth to slow to 1.4 per cent in 2019 from 2.2 per cent in 2018.

“We see there are many risks and headwinds that will make the execution of the plan extremely challenging, and the lack of progress on the fiscal front will eventually lead to some meaningful credit spread underperformance for Ontario,” said Trevor Li, a senior research analyst at Aviva Investors.

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