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Economist Don Drummond addresses the Economic Club of Canada in January 2010 in Toronto.

Jennifer Roberts for The Globe and Mail/jennifer roberts The Globe and Mail

A government-commissioned review of Ontario's public services is set to deliver a grim diagnosis of the province's financial prospects, and propose a sweeping overhaul of the way it spends money.

At the heart of the new spending model would be a much tighter clampdown on health costs than Dalton McGuinty's government has previously forecast. And among the roughly 400 recommendations for spending reforms are changes to some of the Premier's signature education policies, including a shift away from mandated smaller classes.

The commission, headed by former bank economist Don Drummond, was appointed last spring to help find ways to accelerate the return to a balanced budget. But in an interview on Wednesday, Mr. Drummond made clear that it will be a struggle just to achieve the current target date of 2017-18, and acknowledged that implementing recommendations of the commission would require a significant degree of pain.

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"If there's a way of doing it without that, I haven't been smart enough to find it," Mr. Drummond said. "There's pain in every single chapter."

Mr. Drummond said the government has given the commission "almost shockingly" free rein, making no attempt to censor it. Nevertheless, the coming report – expected to be released within the next month – will present Mr. McGuinty's Liberals with a major dilemma.

The Premier and his Finance Minister, Dwight Duncan, have held off on announcing any cost-cutting measures of their own, pending the commission's findings. The report recently took on additional importance, with the threat of a credit downgrade by Moody's Investors Services. But while Mr. Duncan conceded in a recent interview that he, too, expects some pain, insiders suggest that the Liberals did not initially anticipate how controversial Mr. Drummond's recommendations would be.

While Mr. McGuinty won't comment on Mr. Drummond's recommendations until they're fully public, his officials have recently been dampening expectations about how much the government will act on them. "We look forward to receiving his advice," a senior government source said Wednesday. "But at the end of the day, we're going to have to develop an Ontario Liberal plan to balance the budget."

That plan will be needed urgently, based on the commission's recommendations; otherwise, the report may serve only to further unsettle both investors and the general public.

Mr. Drummond's assessment of the need for sacrifices owes largely to his belief that slow economic growth, widely assumed to be a consequence of global economic turmoil, is in fact Ontario's new normal. Because of low increases in both labour force and productivity, he argues, the province can expect annual growth of only about 2 per cent – not the 3 or 3.5 per cent on which its finances have long been predicated.

"The structure of the government programs in Ontario right now does not fit with the longer-term economic prospects in Ontario," he said, "and this has got nothing to do with the current weakness in the United States and Europe."

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While his report will look at spending in every ministry, much of its focus will be on health care, which is on track to soon account for more than half of provincial expenditures. To date, the government has committed to flattening annual increases in health spending at 3 per cent, which would be a considerable accomplishment given the needs of an aging population. But the report will argue that the increases need to be even lower than that.

The health recommendations will come as the government begins negotiations with the Ontario Medical Association toward a new contract for doctors. Mr. Drummond suggested that "a very reasonable objective would be a zero overall increase on the physician wage bill."

On broader public-sector wage costs, an increasingly hot political issue, the commission will shy away from endorsing pay freezes on the basis that they're difficult to implement and usually don't bring lasting savings. "In 2017, you want a reasonable cost of the work force, but you want the best possible workers working as productively as possible," Mr. Drummond said. "That's a hell of a lot more important than whether they get zero or 1 or 2 per cent [pay increases]at the same time."

As for education, Mr. Drummond admitted he had some trepidation about Mr. McGuinty's favourite policy field. But at 20 per cent of program spending, it was too big to ignore.

"You can't not revisit some of the decisions and some of the things that the Liberals themselves have imposed and get to a reasonable spending growth number in education," he said. "One of our overriding themes is that policy has to be evidence-based. And there isn't really solid evidence of the benefits of the classroom size reduction."

In addition to class sizes in elementary and secondary schools, it appears the report will also criticize the staffing of the province's new full-day kindergarten program. At present, the model has one teacher and one early childhood educator for every 26 children. But the commission found that model impractical, since the province currently has a surplus of teachers and a shortage of ECEs.

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A partial alternative to cost-cutting, which the commission's mandate did not allow it to consider, would be to bring in additional revenues – likely by putting off further corporate tax cuts. But even senior Liberals acknowledge that austerity measures will be needed. It remains to be seen whether they can stomach the ones their hand-picked austerity czar has in mind.

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