Tories release briefing note warning Wynne of need for dramatic cuts or higher taxes

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Ontario cannot meet its deficit reduction targets over the next two years without making dramatic cuts to spending – including slashing the health-care budget – or hiking taxes.

That was the stark warning the province's civil service gave Premier Kathleen Wynne in a briefing note when she took office early last year. The briefing was released Monday by the Progressive Conservatives, who found it in a pile of finance documents recently requisitioned by a legislative committee.

The note confirms what has long been suspected: that the government was not entirely certain how to hit the aggressive deficit targets set by former finance minister Dwight Duncan, and that to do so will require harsher austerity than the province has yet seen. Spending, the briefing says, would have to be cut to the level it was in the 1990s. Funding for health care, for instance, would need to be cut by 5 per cent when population growth and inflation are factored in.

"The Ontario plan to balance … is the longest and most likely stringent in Canada," reads the note. "No other Canadian jurisdiction, over their anticipated timeframe to balance, projects a decline in real per capita program expense of this magnitude."

The briefing helps explain why Finance Minister Charles Sousa announced last fall he is prepared to miss medium-term deficit reduction targets. In effect, he chose potentially missing the targets over making deeper cuts to spending or raising taxes.

However, Mr. Sousa maintains he can still balance the budget on schedule in fiscal year 2017-18 by relying on economic growth. The government is banking its plans to spend $35-billion on infrastructure over the next three years will give the province's economy a badly needed boost.

Ms. Wynne reiterated her government's reasoning Monday, arguing that making too many cuts will damage the province's economic recovery. "You can't strangle the economy and then expect it to grow. You can't step back and take a passive role in economic growth," she said after a meeting with business leaders in Toronto's financial district. "We're not going to step back and we are not going to slash across government."

The Tories, however, argue it is not possible to balance the books by 2017-18 without meeting interim targets. They say the memo – and the Liberals' reaction to it – shows the government has no idea how it will slay the deficit. "This looks like a premier who has no plan, who is making things up as she goes," PC Leader Tim Hudak told reporters. Derek Burleton, deputy chief economist at Toronto-Dominion Bank, says the Liberals' contention – that they can miss interim targets while still balancing by 2017-18 – could work out, but would be tricky to pull off. Most economists believe Ontario's economy will see moderate, steady growth in the coming years, he said, but it is possible things could go better than expected. "Just because they were to miss a near-term deficit target does not completely rule out the chance of meeting [the 2017-18 balance date]," he said in an interview. "But it makes it more difficult. One of the reasons is that the cost of servicing debt goes up, the debt goes higher and that's a big concern."

Mr. Duncan laid out the targets in 2012. He saw some early success in cutting the deficit, such as when the government imposed new contracts on teachers. But the note suggests even more austerity would be required over the longer term. When Ms. Wynne came to office and Mr. Sousa took over Finance a little over a year ago, they eased off on some aspects of Mr. Duncan's plan, in efforts to repair the government's relationship with teachers and signal they want to spare the province from the harshest cuts.