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Can Wynne put the brakes on Ontario’s credit rating slide?

Kathleen Wynne's Liberals climbed a mountain to get re-elected, with a majority no less, in Ontario's provincial election. But that looks like a stroll in the park compared with the Everest of debt her government faces. And convincing the world's credit-rating agencies that she can conquer it may prove tougher than it was to convince the Ontario electorate to give her the chance.

Ms. Wynne has already vowed to reintroduce the May budget that got her minority government defeated and triggered the election – a budget heavy on spending and carrying an even bigger deficit ($12.5-billion) than the previous year's ($11.3-billion), despite her government's repeated pledges to move its budgets toward balance.

Her government still intends to eliminate the deficit by fiscal 2017-18. But her plan to do it is far from convincing – especially given that this budget puts off taking any tough medicine for another year.

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Now that the budget looks likely to become reality, the big global bond-rating agencies such as Moody's and Standard & Poor's will certainly reconsider whether Ontario still warrants its current high-quality ratings on its debts – which are closing in on an alarming $300-billion and climbing, posing a growing risk to Ontario's lenders and a threat to its long-term economic health.

Moody's has already expressed doubts. In an update published shortly after the May budget announcement, it called the budget "a credit negative," and warned that "the path back to balanced budgets presents more risk than previously assessed." (The note didn't constitute a formal reassessment of Ontario's debt ratings, but that would be the next logical step.)

Ironically, one of Ontario's biggest barriers to reining in its budget deficits, and by extension getting a grip on its debt, is the debt itself. The province will spend nearly $11-billion this year in debt-interest payments alone, and with both the debt and interest rates expected to rise in the next couple of years, interest costs are rising much faster than other expenses: 9.1 per cent in 2015-16 and 10.8 per cent in 2016-17, according to the budget forecasts. By 2016-17, the government expects to be paying $2.3-billion more in interest than it is this year.

That leaves it needing to show considerable (and, frankly, uncharacteristic) restraint in program spending if it's going to meet its budget targets. And its 2014 budget has already put that off for another day; a 2.6-per-cent increase in program spending is planned for the current fiscal year (ending March 31, 2015).

After that, the budget calls for program spending to rise a thin 0.6 per cent in 2015-16 and an even thinner 0.1 per cent in 2016-17. That's well below the rate of inflation, so in real terms, it implies spending cuts. Will they be anything like the 100,000-job purge of the public sector that her opponent Tim Hudak was promising? Probably not. But they will sting nevertheless – if, indeed, Ms. Wynne has sufficient resolve and political capital (her party received just 39 per cent of the popular vote) to pull it off at all.

The budget plan already suggests she prefers to nibble around the edges – avoiding reductions in so-called core services. Health care spending is still budgeted to rise by 2.2 per cent a year, on average, through 2016-17, and education spending is budgeted to rise 2.3 per cent; together, they represent more than 60 per cent of the program budget. Ms. Wynne is counting on cuts in non-core programs to do most of the heavy lifting, but these make up less than 15 per cent of the program budget; it's not a lot of meat from which to carve.

A cut of Ontario's debt ratings would make the task harder still, as it would push up the cost of borrowing. Yet the province is teetering on the edge of just that. S&P warned a year ago that Ontario's debt burden "is already at the high end of the range for similarly-rated domestic and international peers," and it placed a "one-in-three chance" that it would cut the province's long-term debt rating. It also expressed doubts that the province could actually achieve its "aggressive cost containment plan" to balance its budgets. And that was before a budget that ducked cost-cutting for another year.

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One of Ms. Wynne's priorities must be to convince S&P and Moody's that, despite the budget's spend-now, cut-later approach, she can stick to her deficit-fighting guns and reverse Ontario's rising debt tide. That would at least buy her time to put her plan to work. But with a budget that is leaning in the wrong direction, this won't be easy.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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