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TORONTO (Reuters) - Ontario's Liberal government said on Tuesday a tight cap on spending will keep it on track to balance the provincial budget by 2017-18, even as it boosts education and health care funding in hopes of winning reelection.
Finance Minister Dwight Duncan forecast that Ontario, which has the largest economy and population of any Canadian province, will run a deficit of C$16.3 billion for the 2011-12 fiscal year.
This marks a decline from a record C$19.3 billion two years earlier, when its manufacturing-oriented economy was ravaged by the global financial crisis.
The spending plan is being closely watched by domestic and international investors, who have scooped up the province's bonds, but also expressed concerns about the province's growing debt pile.
The Liberals are also under pressure from the opposition Progressive Conservatives, who have capitalized on the anger of some voters about higher electricity costs, changes to the province's sales tax and rising government spending.
"The 2011 budget builds on the government's plan to eliminate the deficit and at the same time protect education and health care," Duncan told reporters.
Ontario's ruling Liberal party, reelected with a majority in 2007, has sought to revive the province's economy partly through initiatives like improving infrastructure and expanding green power, as well as increasing spending on education and health care.
The province said its total expenses will be C$124.1 billion in the coming fiscal year, up from C$122.9 billion in 2010-11.
Total program spending, which excludes interest on debt, is projected to come in at C$113.8 billion, an increase of less than 1 percent. Even so, health and education spending are set to rise more than 4 percent in 2011-12.
The government forecast overall program spending will rise by just 1 percent per year between 2010-11 and 2013-14. Measures to control spending include cutting 1,500 public service jobs and getting rid of redundant agencies.
"Given Ontario's high debt load there is a vulnerability there to any nasty surprise along a fairly long course to eliminate the deficit," said Derek Burleton, assistant chief economist at TD Economics.
"Getting spending growth down to just over 1 percent per year over seven years ... would represent one of the most significant periods of austerity in Canadian provincial history ... it's going to be tough."
Duncan announced a commission that he said will review the public service with an eye to speeding up deficit reduction while protecting health care and education - which make up 70 percent of program spending.
Total revenues in 2010-11 were C$106.2 billion and are expected to rise to C$108.5 billion in 2011-12. The budget included no new tax initiatives. Revenues are projected to rise at an average annual rate of 3.3 percent between 2010-11 and 2013-14.
The province, which relies heavily on manufacturing and the export of autos and auto parts to the United States, predicted its economy would grow 2.4 percent this year, slightly below the private-sector average call for 2.6 percent.
The province's deficit for the fiscal year to the end of March fell by C$2 billion to C$16.7 billion compared to its fall economic statement, but the budget kept the province's plan of returning to balance by 2017-18 unchanged. Duncan forecast a C$15.2 billion deficit for 2012-13.
The government said its net debt would rise to C$241.5 billion in 2011-12, up from C$217.3 billion in 2010-11. By 2014-15, Ontario's debt to GDP ratio is seen peaking to almost 41 percent.
For now, lower interest rates are helping the government finance that debt easily. But the biggest wild card is the prospect of higher rates in the near future, said Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities.
Ontario will once again look to the domestic market to meet most of the next year's borrowing needs, but is exploring new international products to meet fierce global appetite, top officials told Reuters on Tuesday.
Ontario government debt prices were little changed following the budget.
The yield on the province's 10-year benchmark bond was 67.2 basis points above the Canadian government yield curve.
With additional reporting by Ka Ya Ng; editing by Jeffrey Hodgson