Ontario’s economic plan to shift focus from austerity to spending and growth

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Ontario is prepared to miss its deficit-reduction targets to avoid deep program cuts as Premier Kathleen Wynne's government walks away from austerity.

The shift in priorities – which will effectively see the minority Liberal administration embrace deficit spending as the best way to rev up the province's sluggish economy – will be signalled in Finance Minister Charles Sousa's fall economic statement on Thursday, government sources told The Globe and Mail.

The statement will be an about-face from the tough spending restraint Ms. Wynne's predecessor, Dalton McGuinty, pursued in his final term. As the 2008 global recession took hold, Ontario plunged deep into deficit, in part to rescue its floundering auto industry. But after narrowly winning re-election in 2011, Mr. McGuinty implemented tough austerity measures aimed at balancing the budget.

Governments around the world are facing the same problem as Ontario: how to dig themselves out of debt in a time of slow economic growth. Most are still engaged in aggressive budget-slashing. But Ms. Wynne is hoping instead that spending will spur economic growth that will in turn lead to higher revenues – the classic Keynesian approach.

The Ontario government's statement will emphasize spending, particularly on infrastructure, to increase economic growth. The overall infrastructure outlay – $35-billion over three years – will remain unchanged, but Mr. Sousa is expected to announce new projects within that funding envelope.

He will also announce a dedicated infrastructure trust fund, into which the government can divert money to separate it from general revenue and ensure it is spent on capital projects. The fund could eventually be used to store dedicated revenue from the new taxes or fees the government hopes to put in place to fund public transit expansion.

The plan is as much political as it is policy-driven. With an election widely expected next year, the Liberals see infrastructure spending as a more attractive pitch to voters than cuts and restraint.

The risk in the shift Mr. Sousa will outline is that it would bring back the problems – creditor nervousness chief among them – that worried Mr. McGuinty.

This new direction means the government will be willing to deviate from its strict deficit-busting plan. If the government has to choose between cutting a program it holds dear – delaying the rollout of all-day kindergarten, for instance – and missing its deficit targets, the sources said, it will miss the targets.

Despite this, Mr. Sousa will continue to insist the budget will be balanced by fiscal year 2017-18. He will simply be hoping the economy recovers sufficiently to increase the government's tax base.

Ms. Wynne has been slowly easing off Mr. McGuinty's restraint measures since taking office earlier this year.

Those measures took a heavy political toll on the Liberals. Ending a deal that gave the province's racetracks some of the proceeds from government-owned slot machines whipped up anger in rural Ontario, where the party was already doing poorly. A move by Mr. McGuinty to impose money-saving contracts on teachers turned Liberal-friendly unions into adversaries.

Ms. Wynne has already tried to stop the fallout from these policies by rolling some of them back. She announced transition funds for racetracks earlier this year, along with a plan to integrate them into the province's gambling strategy. And she made deals with teachers that will see a new collective bargaining system.

Government sources acknowledge there is little appetite for further tough restraint with teachers in the next round of bargaining.

Liberal insiders also framed the climb-down from austerity as a matter of protecting the signature social programs the government has built up over its decade in office. One source argued that, if the government sacrifices programs to balance the books, the province would be worse off in the end.

Some insiders also contend that cutting too deeply is economically risky, as it could slow the province's economy even further.

Mr. Sousa is scheduled to deliver the update in the legislature at 1:15 p.m. on Thursday.