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Standard & Poor's dim view of Ontario's credit outlook underlines the big problems with the province's finances: It has a minority government with ambitious targets for eliminating the budget deficit – and no clear plan to get there.
The debt-rating agency on Thursday reiterated its "negative" outlook on Ontario's credit ratings, in the wake of the province's recently tabled budget. That's not the same as a dreaded rating cut (in fact, S&P re-affirmed its current AA-minus rating on the province's roughly $260-billion debt burden), but it does imply that a downgrade is a distinct possibility unless the province can turn its finances around.
That is, of course, precisely what rookie Ontario Premier Kathleen Wynne has pledged to do. Her government's May 2 budget targets a reduction in the deficit from $11.7-billion in the current fiscal year (ending March 31, 2014) to zero by fiscal 2018. It's counting on a combination of economic growth (which will boost revenue) and spending constraints to get there. S&P has had a look, and it isn't convinced.
The problem isn't with the economic growth forecasts baked into Ontario's budget plans. The government's GDP growth assumptions from now through 2016 are actually 0.1 percentage point below the average of private-sector economists' forecasts for each year. Not wildly conservative, but still, conservative enough for some comfort.
Where S&P has its doubts is on the cost side, where the province plans to hold program spending growth to well below the rate of inflation over the next several years.
"The negative outlook reflects our view regarding the minority legislature's ability in the next one to two years to meet what we view as aggressive cost-containment targets" needed to meet the province's plan of both having the debt burden peak in fiscal 2015 and the budget in balance by fiscal 2018, S&P said.
These are the same doubts the government's critics expressed when the budget was tabled. While the province has presented some lovely charts and tables showing the deficit shrinking, it has been frustratingly thin on the details of precisely what it's going to cut, and when, to make it happen. Some big gains have already been achieved, such as the savings of an estimated $700-million a year from the province's deals with major public-sector pension plans to freeze government contributions, but that's just the tip of a very big iceberg. To meet the deficit targets, many more such savings are going to have to be hashed out.
And given Ms. Wynne's minority hold on power, that's a tall task. She has already pledged to protect funding for political hot buttons such as health care and education, which together account for nearly two-thirds of program spending. She's caught between a Progressive Conservative opposition that is morally opposed to tax increases, and a New Democratic Party holding the balance of power that will dig in its heels on any attempt to cut social programs.
Until and unless Ms. Wynne can devise concrete proposals for achieving her budget objectives – and, harder still, ones the opposition can live with – the doubts will remain. It's much easier said than done – and for S&P, that's precisely the problem.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights , and follow him on Twitter at @ParkinsonGlobe.
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