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TORONTO (Reuters) - Ontario must clamp down on education and health care spending and scrap some popular programs to keep a C$16 billion ($16 billion) deficit from spiraling out of control, a report commissioned by the provincial government said on Wednesday.
The long-awaited report on public service reform gave the Liberal minority government of Canada's most populous province a range of potentially controversial austerity measures it could introduce.
They include scrapping the Liberals' signature all-day kindergarten program and increasing school class sizes; eliminating electricity bill rebates and a resource tax credit. The report also said the mining tax system should be reviewed to make sure the government was being adequately paid for its natural resources.
Report author Don Drummond, a former federal finance official who played a key role in wrestling down Canada's large federal deficit in the 1990s, warned Ontarians should learn from the debt crisis ravaging Europe.
"The challenge and the solution will have to be pretty much unprecedented in Canadian postwar history ... It won't work if you just have a mindset of 'I'm just going to take some money out of here and there'," the former Toronto-Dominion Bank chief economist told reporters.
"You can't really pick up a newspaper without reading about Greece and Spain and Italy. We're nowhere near there, although keep in mind that Ontario's debt to GDP ratio is 35 percent and Greece's was 35 percent in 1984."
Among the report's more than 360 recommendations, Drummond proposed overhauling how health care services are delivered, axing some of the government's education policies, cracking down on the underground economy to chase lost tax revenue, and reduce incentives offered to companies under the province's green energy program.
He recommended total program spending rise just 0.8 percent a year while the province proceeds to a balanced budget, compared with a recent growth rate of around 7 percent. On a real per capita basis, he said spending will have to fall 2.5 percent a year.
The report said health care spending should rise 2.5 percent, education should increase around 1 percent, social programs should edge up only 0.5 percent and all other programs must be cut 2.4 percent.
Drummond advised against public sector wage freezes, but said the budget for wage costs should be frozen, which would likely lead to job cuts.
He advised against selling key publically owned assets such Ontario's power utilities, unless the government could prove it should do so with a long-term cost-benefit analysis.
Drummond, dubbed Ontario's "austerity czar", also said federal-provincial and provincial-municipal relationships and funding agreements should be changed in some areas, pointing to health, social transfers, employment insurance and infrastructure.
Ontario Finance Minister Dwight Duncan had already indicated the government won't follow all Drummond's recommendations - despite paying the adviser C$1,500 a day. It will not, for example, scrap its popular all-day kindergarten program.
But Duncan said on Wednesday one of Drummond's suggestions to reduce the program costs with a more affordable staffing model will be considered.
"This is a serious report and it shows the magnitude of the challenge facing Ontario, but it doesn't have all the answers. Our plan will need to identify more specifically how we will reduce the deficit," Duncan said in a media briefing after the commission's release.
"Mr. Drummond's work is informed, he's looked deeply at the delivery of public services in a way that hasn't been done before and there are things that ... are very controversial and it will be up to the legislature now to find the right mix. But the one thing we can't do is to do nothing."
The Liberals, who have a minority of seats in the provincial legislature, need the support of at least one other political party to survive.
Duncan gave strong hints on Monday about the shape of a spring budget that could halt plans to cut corporate taxes, curb social programs and sell public assets.
Drummond has warned that if the Ontario doesn't take tough steps, the budget deficit will balloon to C$30.2 billion by 2017-18 - the government's target date for balancing its books.
Ontario cut its growth and revenue targets in November, and said its debt-to-GDP ratios will be higher than previously forecast, peaking at 41.3 percent in 2014-15. Drummond cautioned that figure could jump to just under 51 percent by 2017-18.
"Beyond the inevitable debate on individual recommendations, it is the commission's overall conclusion which is critical - that substantive government downsizing represents a prudent path," Mary Webb, senior economist at Scotiabank, said in a note to clients.
"The commission's broad recommendations offer a solid starting point for the Ontario government, and possibly other provinces, to develop a credible, multi-year restraint strategy."
Editing by Jeffrey Hodgson and Rob Wilson