Minority government adds to Ontario's budget hurdles

Fri Oct 7, 2011 3:09pm EDT
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By Claire Sibonney

TORONTO (Reuters) - A minority government will make it harder for Ontario's Liberals to make tough decisions to rein in a C$16 billion ($15.4 billion) deficit, which may require tax hikes and painful spending cuts.

The Liberals have said they will work with opposition parties to meet their goal of wiping out the deficit by 2017-18, but their rivals may tire of cooperation if the economy slows and the action needed gets harder.

"The minority government has the potential to complicate fiscal management over the years to come, especially if further actions are required in response to another economic slowdown, as the Liberals are no longer alone in the driver seat," said Eric Beauchemin, managing director of public finance at credit rating agency DBRS.

He said bigger deficits, or a slower track to a balanced budget, would put pressure on Ontario's credit rating, although the province has some flexibility because it has so far exceeded deficit cutting targets.

Ontario's long-term credit rating is investment-grade AA low at DBRS, AA- at Standard & Poor's and AA1 at Moody's, all between one and three notches below the top rating that the federal government enjoys.

The province is Canada's economic powerhouse, accounting for some 40 percent of gross domestic product. The Liberals won a third straight term in Thursday's election, but were one seat shy of a majority and will need support from opposition legislators to stay in power.

But it won't be easy for the party to keep its promises of balancing the budget without raising taxes, or to rein in the growth in healthcare costs, the biggest line item in a C$114 billion spending program.

Ontario's manufacturing and export-reliant economy was hit hard in the last recession and recovery is slow. Its debt levels are among the highest in the country and Ontario lags other provinces in growth projections that private sector economists recently downgraded further.   Continued...