Influential credit rating agency Standard & Poor's has put Ontario on notice that it could downgrade the province if it does not get its fiscal house in order.
S&P warned after the markets closed on Wednesday that it might lower the province's rating if the minority Liberal government does not meeting "challenging" cost containment targets over the next two years.
S&P is the second major rating agency to raise doubts about the government's plan to eliminate its multibillion deficit by fiscal 2017-18. Moody's Investors Service also revised its outlook to negative from stable last December.
A credit rating downgrade would not only make Ontario's government bonds less attractive to investors, it could also make it more expensive to borrow money at the very time when the debt is mounting.
Finance Minister Dwight Duncan said S&P's action sends a strong message to the province's doctors, teachers and other public-sector workers who bargain collectively that there is no new funding for wage increases. The government is calling on unionized public sector workers to freeze their wages for two years.
"Standard & Poor's is telling us those concerns and those concerns centre on whether or not we can hit our targets," Mr. Duncan told reporters at a hastily-called news conference on Wednesday. "If we don't hit our targets, we'll end up paying more money to bondholders instead of for schools and health care."
Mr. Duncan said there is a one in three chance that S&P will lower the province's credit rating in the next two years amid uncertainty that the government will hit its fiscal targets.
"We have to embrace this." He said. "They're worried that the targets can't be met because they are aggressive."
S&P said the gloomier outlook reflects its view regarding the minority Liberal government's ability to meet "challenging cost-containment targets" in the next one-to-two years.
The agency revised its outlook the same day Mr. Duncan unveiled a rosier fiscal outlook for the province, thanks largely to what he calls the "NDP surtax."
One day after the minority Liberal government survived its first budget vote with the help of New Democratic Party Leader Andrea Horwath, Mr. Duncan unveiled an updated fiscal plan that pegs the deficit forecast at $14.8-billion for fiscal 2012-13, $400-million lower than what he forecast in last month's budget.
The revised forecast follows an accord between Premier Dalton McGuinty and Ms. Horwath that would raise income taxes on the small number of Ontarians who make $500,000 or more a year. The new surtax of 2 per cent was a key demand of Ms. Horwath in return for her party's support of the budget.
"That tax does get us there more quickly," Mr. Duncan told reporters at an earlier news conference.
The provincial deficits are now projected to be lower than forecast in each of the six fiscal years between 2012 and 2018, he said. Rather than breaking even in fiscal 2017-18 – the year he is forecasting the deficit will be eliminated – he is now projecting a surplus of $500-million, largely because of the new surtax.
The Progressive Conservatives voted en masse against the budget. PC Finance Critic Peter Shurman said S&P's announcement illustrates that the Liberals' deficit reduction targets are not realistic.
"We were shouting from the mountain tops, 'you have to address your debt. You have to address your spending,'" Mr. Shurman told reporters.