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Ontario Premier Kathleen Wynne: ‘The teachers’ unions will be required to provide an accounting before the money flows so it will be clear exactly how the costs were incurred.’MARK BLINCH/Reuters

Ontario's budget watchdog is warning there is "significant risk" the province will miss its target to balance the budget in two years if economic growth continues to be slower than expected and the province does not drastically curb spending.

In a report Wednesday, Financial Accountability Officer Stephen LeClair projected the province could be in line for a $5.2-billion deficit next year and a $3.5-billion deficit in fiscal year 2017-18, the year the Liberals have promised to balance the budget.

The economy may grow by only 3 per cent this year, down from the 4.3 per cent projected at the time of last spring's budget, Mr. LeClair said. In order to balance the books, the province would have to reduce annual spending growth to one-third its current rate, well below the amount needed to keep up with inflation and population growth in Canada's most populous province. As it is, spending growth is already lean, an average of 1.4 per cent over the past four years.

"To meet fiscal projections in future years, government must realize an even more aggressive restraint target of an average of 0.5 per cent in each year," Mr. LeClair said at a Queen's Park press conference. "Population growth plus inflation, generally a good proxy for spending growth, is expected to average 3 per cent per year. Add into this mix that spending restraint gets more difficult in each subsequent year, as there are less and less opportunities for efficiencies."

Finance Minister Charles Sousa is expected to update the government's budget projections in a fall economic statement later this month. He hinted on Wednesday his new numbers will not look as bleak as Mr. LeClair suggests.

"We've overachieved our estimates year over year, and we're doing so because we control our spending," Mr. Sousa told reporters following Question Period. "Ontario is leading Canada in growth."

While Mr. Sousa provided few specifics, he suggested the government may have done a better job of restraining expenses than he projected in the budget. It is also possible that growth in tax revenue – which has lagged economic growth for the past four years – will finally catch up, which could provide more money to the treasury than previously anticipated.

Pulling the province out of the red by the 2017-18 fiscal year was a key Liberal promise in the last election, and failing to achieve it would revive long-standing questions about the province's ability to keep a tidy fiscal house. Ontario's $300-billion-plus debt is the largest of any sub-sovereign jurisdiction in the world.

Last spring's budget projected deficits of $8.5-billion for this year and $4.8-billion next year before returning to balance the following year. But Mr. LeClair calculated that if government growth remains at its rate of 1.4 per cent and revenue grows by 3.3 per cent, the province will still have a $3.5-billion deficit in two years instead of a balanced budget. Still, he said, things could improve. If Ontario does better than expected this year, it would remove some of the pressure to cut deeper in future years. And the revenue picture could improve.

"If the government spends less than they were planning this year, if nominal GDP growth comes in at what the targets think the forecast is, if revenue grows in line with nominal GDP and if spending is in line with the 1.4 per cent in each of the next two years – then a balanced budget would be the outcome," he said.

Another unknown factor is whether Justin Trudeau's new government in Ottawa will improve the province's fiscal situation, such as by offering larger monetary transfers from the federal treasury to help pay for social programs.

These nuances, however, did not stop the opposition parties from pouncing.

Progressive Conservative Leader Patrick Brown said the report showed the government has no choice but to raise taxes and slash spending to meet its deficit targets.

"We're in a situation right now where [Mr. Sousa] is going to have to raise even more taxes or cut more services, and we want the Finance Minister to be honest and say what services he's going to cut," he said. "Just tell the legislature, tell Ontarians what his plans are, because the numbers in his forecast don't add up."

NDP Leader Andrea Horwath, who advocates raising corporate taxes in lieu of further austerity, accused the Liberals of planning more cuts to get back in the black.

"The financial accountability officer has put forward clear evidence that the cuts in program spending have to be deep and severe if they're going to be able to come anywhere near their projections," she said. "Where is it going to end?"