Ontario is under pressure to reinvent itself.
A decline of the high-productivity manufacturing sector and an economic power shift away from the United States mean the province cannot count on returning to the swift growth that has defined much of its history any time soon.
Its debt, meanwhile, creeps ever higher – at $289-billion, it is one of the largest of any sub-sovereign jurisdiction in the world – requiring more than $10-billion annually to service.
These are the twin problems Premier Kathleen Wynne and Finance Minister Charles Sousa are grappling with in their budget, reintroduced this week after the Liberals trounced their opponents in the June election.
"Ontario is not going to be that rapid-growing a province over the next five or 10 years or maybe even longer. And if that is true, then even a moderate debt problem will become increasingly difficult to get rid of," said Don Drummond, the economic sage who two years ago mapped out a path for the province to balance its books. "Ontario is the quintessential example of an economy caught in the crosshairs of the shift in global growth."
That shift explains the Liberals' wildly split budget. While it pours new dollars into key areas, particularly public transit and business grants, it contains aggressive targets for spending restraint in others.
Ms. Wynne talks significantly more about the first half of this equation than the second.
Earlier this week, she toured the Toronto outpost of video game developer Ubisoft. The company is in the middle of a decade-long expansion of its local facilities, on the second floor of a former General Electric factory building, funded in part by $263-million of government money. Ms. Wynne wants to do more such deals. She is creating a $2.5-billion jobs and prosperity fund offering financial incentives to lure companies to Ontario.
"Our economy is evolving and it's very important that government work to facilitate that transition, facilitate that evolution," she said. "It will not look the same as 1976, but it will be a very bright future."
Those at the forefront of the province's economic shift welcome Queen's Park stepping in.
Communitech CEO Iain Klugman, whose organization helps technology companies in Waterloo Region, points to three key things the sector needs more of: infrastructure, including a light rail line in Kitchener-Waterloo and more frequent train service to and from Toronto; venture capital, which is often in short supply; and larger "anchor" companies to complement the cluster of startups in the area.
"We're at a tipping point right now. We've got the fundamentals in place. We've got talent that's on par with anywhere in the world. It's a couple of key missing pieces that could vault us," he said. "It's the problem that pretty much every jurisdiction on the planet is trying to solve: 'how do we use our talent as opposed to our resources?'"
The downside to the province's transition is that not all jobs, or employers, provide an equal economic lift. Traditional manufacturing offered mass employment in a high-productivity sector. But as it declined – shrinking 9.3 per cent from 2002 to 2011 – the work that has replaced it does not always offer the same number of jobs or productivity levels. That's why the province's prospects for economic growth are modest for the foreseeable future, and why it must tackle the debt.
To that end, the government is promising to erase the province's $12.5-billion deficit in three years.
Mr. Sousa says he has taken action on 80 per cent of Mr. Drummond's 362 recommendations. The claim is difficult to verify: His office refuses to release an internal spreadsheet that shows which recommendations have been implemented and which rejected.
But Mr. Drummond says it is credible. Among other things, the province has successfully controlled health-care costs, including by curbing unnecessary diagnostic tests. It has also saved money by overhauling public-sector pension plans, obliging civil servants to pay more for their retirement benefits, and making them work longer before they can collect them.
He also points to several areas where the Liberals have made little progress. One is business subsidies. He contends many of the government's current grants and tax credits do not have their intended effect, and should be scrapped. Another is education, where the number of administrative jobs has ballooned in the past decade. Mr. Drummond suggested merging office functions and IT departments across the government.
Such steps, he acknowledges, will mean job losses. It's a thorny subject: Ms. Wynne won last month's election largely by campaigning against then-Progressive Conservative leader Tim Hudak's promise to axe 100,000 public-sector jobs.
"That's the interesting thing about the 100,000 job shed – that's probably going to result at any rate. Not as an explicit target, but you can't deliver the numbers that are behind the budget without having fewer civil servants," Mr. Drummond said. "Math is math."
All that said, the province's debt is less dire a problem than it is often portrayed, experts say. The debt-to-GDP ratio is still manageable, at 39 per cent. Most importantly, bond traders and credit raters are confident Ontario has the ability to pay, thanks to a diversified economy and a large tax base. This contrasts with a jurisdiction like California which, although it has a lower debt, is hamstrung by constitutional rules that make it hard for the state to raise taxes.
"At the end of the day, it's the revenues that the province can generate that are going to repay the debt. And that's why the actual debt size is not necessarily a concern, it's the revenue that's behind it," said Michael Yake, Moody's lead analyst for Ontario.
The Liberal budget reflects this nuanced view of the problem – outlining tough targets for reining in spending while trying to preserve and increase the government's footprint in key areas.
"You can see it as 'lots of cuts' or 'lots of spending,' but it's really more of a reallocation of resources. The province is focusing on infrastructure, and the jobs and prosperity fund on one hand, while trying to control costs on things like health care on the other," said Mike Moffatt, an economist at the Richard Ivey School of Business in London, Ont. "Reasonable people can agree or disagree with the details of the plan, but the larger macro picture makes a great deal of sense."