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TORONTO (Reuters) - Ontario's minority Liberal government put corporate tax cuts on hold and pledged a renewed effort to rein in public sector labor costs in an austerity budget designed to eliminate the deficit in six years and convince rating agencies the province is fiscally sound.
Canada's most populous province, which accounts for about 40 percent of the country's economy, will run a budget deficit of C$15.3 billion ($15.4 billion)in 2011-12 under the budget plan unveiled by Finance Minister Dwight Duncan, down C$700 million from November's forecast and below the record C$19.3 billion deficit three years ago.
The shortfall is seen edging down to C$15.2 billion in the coming fiscal year and disappearing by 2017-18. But this requires that the center-left government, which lost its majority in a hard-fought 2011 election, holds rising health care costs to just 2.1 percent annually.
This means they must convince powerful public-sector unions to accept a wage freeze when contracts with teachers, doctors and other public-service workers expire this year.
Duncan has faced off against the unions before with only middling success - stymied in part by sympathetic arbitrators. But he pledged this time to rewrite legislation if that is what it takes to control compensation costs that account for over half of Ontario's program spending.
"Compensation is our greatest single cost and we can't carry out our plan to strengthen our economy and create jobs without addressing it and we need everyone to do their part to balance the budget," Duncan told a news conference.
The ruling Liberals will need support of either opposition party - the right-leaning Conservatives or the left-leaning New Democrats - to pass the budget into law. While the suspension of additional corporate tax cuts may appease the NDP, taking aim at the left's traditional union allies will not.
Conservative leader Tim Hudak said his party would opposed the budget and all Conservative members of the Ontario legislature would appear to vote against it.
NDP leader Andrea Horwath, who holds the balance of power among the three parties, said she will consult with voters in days to come to decide whether her party will support the budget or oppose it, triggering a snap election.
But an Ontario election this year - a second in six months - is a remote possibility given a lack of interest among the electorate in returning to the polls so soon, said Nelson Wiseman, politics professor at University of Toronto.
"I just don't think there's an appetite among any of the parties for an election. It's posturing … the Conservatives have decided they're going to come out against everything and so they're putting the NDP in a spot," he said.
Ontario's deficits spiraled higher in the wake of the 2008 financial crisis when global automakers shed jobs, sending shudders through the province's industrial base. This drew the attention of rating agencies worried about Ontario's growing debt load.
The budget will trim growth in total program spending to under 1 percent annually over the next three years, in part by attempting to hold growth in education to 1.7 percent in addition to the limits on health spending. That's an ambitious goal for areas that account for about 63 percent of program expenses and have seen increases closer to 6 percent in recent years.
"It's not the same kind of austerity as what we are seeing Europe, you have to put things in perspective. I think it's a fine balancing act between cost containment and promoting economic growth. You do not want to bring down the economy with your budget and I think the government will be able to achieve that," said Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities.
Total program spending, which excludes interest on debt, is projected to come in at C$115.8 billion in 2012-13 while revenues are projected to rise to C$112.2 billion. Interest on debt will cost C$10.6 billion in 2012-2013, the province's third-largest expense behind health care and education.
No new taxes were introduced but Duncan said the province will boost revenue by suspending its previous plan to cut the corporate tax rate of 11.5 percent to 10 percent by 2013. Instead, the tax rate will be frozen until the budget is balanced, saving the province C$1.5 billion over the next three years. Duncan will also freeze the business education tax cut plan, saving more than C$300 million annually by 2014-2015.
The Liberals, who have been in power since 2003, will also change the province's drug benefit program so that the wealthiest 5 percent of seniors pay a larger share of their prescription drug costs.
Pay freezes for legislators and executives at hospital, universities, school boards and government agencies will be extended for another two years. The Liberals will also trim some elements of public sector pension plans.
The government said net debt would rise to C$237.6 billion by the end of the current fiscal year on March 31, up from C$214.5 billion in 2011-12. By 2014-2015, Ontario's debt-to-GDP ratio is seen peaking at 41.6 percent.
Ontario will again look to the domestic market to meet most of the next year's borrowing needs. It expects to borrow C$35.6 billion in 2012-13, down C$3 billion from last year's forecast.
Ontario government debt very slightly outperformed following the budget. Ontario's benchmark 10-year bond yield was 99 basis points above the Canadian government counterpart, compared with 100 basis points before the budget. The spread was below 40 before the last recession.
"Investors are going to wait for two things. One is the ratings agencies' response. The other is how successfully the government is able to achieve these targets and obviously one we will learn relatively quickly, the other will take time to learn," said Eric Lascelles, chief economist at RBC Global Asset Management.
With additional reporting by Andrea Hopkins; Editing by Jeffrey Hodgson