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In Ontario's budget, a little pain now or a lot more later

For months, Dalton McGuinty and Dwight Duncan have ramped up expectations. Tuesday's budget, the Premier and his Finance Minister have promised, will be the biggest and toughest and most consequential that they've ever delivered.

If anything, they've undersold it.

What Mr. McGuinty's Liberals haven't come right out and said, but know as well as anyone, is that this is more than just an opportunity to get their province's troubled finances onto a stable footing. It's a last best chance to avoid the alternative: a downward spiral into debt crisis that could simultaneously decimate the province's social programs and undermine its hopes for a brighter economic future.

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Owing to the advance hype, which began with February's release of economist Don Drummond's landmark public-services review, more Ontarians than usual will be paying attention on budget day. But setting aside the slim possibility of a spring election, voters won't really be the most influential audience.

That honour goes to the markets and the credit raters who have been sending messages that Ontario is in for a world of hurt unless Mr. Duncan can credibly explain how the 2017-18 target for getting out of deficit is achievable.

The skyrocketing of the province's debt burden since 2008, a period in which economic turmoil has led to both increased spending and declining revenues, has thus far come at limited cost. But that's because interest rates have been extremely low.

A credit downgrade, threatened by Moody's Investors Services at the end of 2011, would likely cause borrowing costs to go up. If so, that would force some combination of program cuts and tax increases beyond what any provincial party wants to consider.

At the same time, a loss of confidence in the government's ability to keep its head above water could impede Ontario's already fragile economic growth. Amid ensuing fears about the province's long-term ability to maintain its infrastructure, its core programs and its competitive tax regime, skittish investors would be more inclined to take their business elsewhere.

Mr. McGuinty's government is hardly the first to face this sort of budget crunch, even in relatively recent memory. Few Ontarians have forgotten the cost-cutting exercise undertaken by Mike Harris's Progressive Conservatives in the mid-1990s. Around the same time, Jean Chrétien's federal Liberals went through a similar round of belt-tightening, managing to quickly restore confidence even after a credit downgrade.

But there's a big difference. Although it wasn't fully known at the time, governments in the mid-1990s were able to get away with short-term remedies because of robust recoveries from the economic woes that had largely caused the budget problems in the first place.

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That's not something Ontario can count on; not with Mr. Drummond and other economists predicting that less than 2 per cent annual economic growth will be the new normal.

While other provinces are enjoying resource booms, Ontario – feeling the consequences of a high dollar, rising energy prices and heavy reliance on an unstable U.S. economy – is watching its manufacturing sector dry up. Meanwhile, along with the rest of the Western world, it's facing challenges posed by an aging population, which will simultaneously shrink the tax base and increase the demand for health care – by far the biggest driver of government costs.

In other words, this isn't just a swinging of the pendulum that Ontario is experiencing. It's a glimpse into the precipice. And the only way for the government to avoid plunging into it is with structural changes that would be daunting even for a party fresh to power, let alone one in its third term.

Since they were re-elected last fall, Mr. McGuinty's Liberals appear to have warmed to the challenge.

Although the proof will be in the budget, they've hinted at everything from pension reform, to overhauls of the broader public sector work force, to changes to the way hospitals are funded. And some of their clearer pre-budget announcements – on unloading the money-losing Ontario Northland Transportation Commission, or expanding the Ontario Lottery and Gaming Corporation's operations – suggest more business-minded management of the province's assets.

They're making up for lost time. Yes, as government officials pointed out, last year's budget set ambitiously low spending targets going forward, and Queen's Park appointed Mr. Drummond's commission. But absent specifics on what came next, those were largely punts to get the Liberals past a fall election in which the other two parties joined them in glossing over what lay ahead.

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It may be that Ontarians wouldn't have been ready for this any earlier. Perhaps they're not even ready now. But the nature of last best chances is that missing them only makes things even more unpleasant down the road.

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Political Feature Writer

Adam Radwanski is The Globe and Mail's political feature writer. More

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