March 25, 2010 / 8:16 PM / 7 years ago

Struggling Ontario delays balanced budget goal

<p>Ontario's Premier Dalton McGuinty applauds as Finance Minister Dwight Duncan (R) delivers the 2010 Ontario provincial budget in Toronto, March 25, 2010. REUTERS/Mike Cassese</p>

TORONTO (Reuters) - Ontario’s government said on Thursday it would run budget deficits most of this decade and plans to increase spending on infrastructure, healthcare and education to help offset the recent recession’s impact on its export-oriented economy.

Canada’s most populous province, hit hard by the global economic slowdown, said it will run a deficit of C$19.7 billion ($19.3 billion) for the 2010-11 fiscal year. The Liberal government plans to reduce that each year before balancing the budget by 2017-18, two years later than what the government projected last fall.

“We will not put job creation and economic growth at risk by cutting too soon, nor will we spend as if there is no deficit. Eliminating the deficit is important if we are going to open Ontario to new jobs and growth.” Ontario Finance Minister Dwight Duncan told reporters.

Ontario’s governing Liberal party, reelected with a majority in 2007, has sought to resuscitate the province’s battered economy partly through spending on initiatives like green power.

Duncan said the province will spend C$13.2 billion on infrastructure in the coming fiscal year. It expects the spending on roads, transit, hospitals and schools will help contribute to job growth. The province forecast 200,000 new jobs overall will be created over the next two years.

New initiatives included more post-secondary school placements and boosting jobs and growth in Northern Ontario.

The province said its total expenses will be C$125.9 billion in the coming fiscal year, up from C$117.7 billion in 2009-10. Total program spending will rise 6.5 percent. It forecast spending will dip to C$124.1 billion in 2011-12 before resuming a steady rise.

To help contain some costs, Ontario said it is proposing reforms that would facilitate lower generic drug prices.

“There are not a lot of big ticket items in today’s budget. It’s very much a stay-the-course budget,” said Derek Burleton, a senior economist at Toronto-Dominion Bank.

The province will freeze some internal operating expenses, including MPP salaries from one to three years, and slow the pace of some capital projects such as new transit initiatives once the stimulus funding has ended.

Revenues are expected to rise to C$106.9 billion in 2010-11 from C$96.4 billion in the current fiscal year. The current year’s figures were hurt as tax revenues came in at C$65.8 billion, 12.2 percent below their level two years ago.

Overall revenues are projected to increase at an average annual rate of 5.1 percent between 2009-10 and 2012-13, but not recover to their 2007-08 level until the next fiscal year.

The province, which relies heavily on manufacturing and the export of autos and auto parts to the United States, predicted its economy would grow 2.7 percent this year, slightly below private-sector predictions.

NET DEBT ON THE RISE

The province said it will have a deficit of C$17.3 billion in 2011-12, a figure it expects to steadily decline to C$4.2 billion in 2016-17 before returning to balance in the following fiscal year.

This is “by far the longest and deepest stretch of projected deficits among the Canadian provinces,” Bank of Montreal economist Robert Kavcic said in a research note.

He added that provinces are having to choose this budget season between immediate spending restraint or letting the economic recovery to take firmer root.

“Ontario is leaning toward the latter, despite being the least able among the provinces to do so.”

Ontario said its net debt would rise to C$220 billion in 2010-11 and C$245 billion in 2011-12 from C$193.2 billion in 2009-10.

By 2013-14, Ontario’s debt to GDP ratio is seen peaking more than 40 percent.

The province said its long-term public borrowing need for the current fiscal year was C$43.8 billion, down about C$1.2 billion from its fall forecast. It said this figure will decline to C$39.7 billion in 2010-11 and C$38.8 billion in 2011-12.

Bond investors may have “some concerns about the longer term trend for borrowing, the debt-to-GDP ratio, the sharp upticks, so it’s mixed,” said TD’s Burleton.

Ontario government debt prices were little changed following the budget.

The yield on the province’s 10-year benchmark bond was 54.4 basis points above the Canadian government yield curve. It was about 56.2 basis points above its Canadian government counterpart earlier in the session.

The Ontario 10-year yield traded about 130 basis points above the Canadian government curve when Ontario presented its last budget in March 2009.

Reporting by Claire Sibonney; editing by Jeffrey Hodgson

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