October 22, 2008 / 7:36 PM / in 9 years

Ontario on deficit path as revenue picture dims

TORONTO (Reuters) - The Canadian province of Ontario, wounded by the global economic slowdown, expects to swing from a budget surplus to a deficit of C$500 million ($400 million) in the current fiscal year as it projects revenues to be C$918 million less than forecast in March.

The provincial government said on Wednesday that it plans to rein in spending on some programs and cut internal government expenditures to help limit the size of its first budget shortfall in four years.

Measures, such as delaying the hiring of nurses and cutting government travel, should preserve C$108 million in the remaining five months of the fiscal year.

But overall spending in 2008-09 is expected to hit C$96.3 billion, or C$132 million higher than previously planned, due to rising health care-related expenses, it said.

"Economists have been forced by unprecedented economic volatility to dramatically alter their growth projections for the United States, for Canada, for Ontario, and for the world," Finance Minister Dwight Duncan told the provincial legislature in an economic and fiscal update.

Last March, Ontario had expected to balance its books in the 2008-09 year, which ends March 31, 2009, and the Finance Ministry reiterated that view in the summer.

But it is no longer "business as usual," Duncan said.

The province slashed its projection for 2008 economic growth to just 0.1 percent, down from 1.1 percent previously. For 2009, it sees economic growth of 0.7 percent, but did not make any budget projections for 2009-10 or beyond.

As for how it will curb costs in the next five months, the government said it will:

*slow the pace of hiring more nurses

*defer some "less urgent" education capital improvement projects

*reduce government travel and the use of external consultants

*freeze the purchase of government vehicles this year, and cut printing and fax costs.

The economic outlook had already deteriorated soon after the government's March budget because of weaker U.S. demand, turbulent financial markets, the sharp jump in oil prices, and upheaval in the North American auto sector. Numerous auto plant shutdowns have been announced in Ontario in recent months.

All Canadian provinces will face pressure from slowing revenues, said Mario Angastiniotis, a credit analyst in the public finance group of rating agency Standard & Poor's.

"I think the bigger risk is for 2009 because, so far, while the economy has slowed down in manufacturing, overall Ontario's economy until the second half was still posting modest growth rates," Angastiniotis told Reuters.

"The U.S. economy could get even worse than we expect today, so I think the risks are all to the downside," Angastiniotis said. "If we hit a serious recession next year, we could end up with back-to-back deficits."

Under Premier Dalton McGuinty, Ontario ran consecutive budget deficits in 2003-2004 and 2004-05, but like most Canadian politicians he has shunned red ink in recent years.

Jim Stanford, economist at the Canadian Auto Workers union, told CBC television that the projected deficit is small in the context of a nearly C$100 billion fiscal plan, and other governments could follow Ontario.

"I suspect it won't be long before we have the federal government back in deficit as well," Stanford said.

At the national level, Canada still projects a surplus this year, although several economists have said the Conservative government will have to make changes if it wants to avert a shortfall next year.

Ontario posted a C$600 million budget surplus in 2007-08, and Duncan said the government did not take lightly the decision to return to a deficit position.

"We recognize the importance of a strong balance sheet in the formation of future prosperity," Duncan said in the legislature.

Reporting by Lynne Olver; Editing by Peter Galloway

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