November 6, 2019 / 9:33 PM / 15 days ago

UPDATE 2-Ontario cuts budget deficit forecast, keeps eye on spending restraint

(Adds quotes from economist and finance minister, updates details)

By Fergal Smith

TORONTO, Nov 6 (Reuters) - The Canadian province of Ontario, the world’s biggest sub-sovereign debtor, kept its focus on spending restraint in a budget update on Wednesday that included a small business tax break and cut the deficit forecast for the current fiscal year.

Ontario, which accounts for nearly 40% of Canada’s gross domestic product and is a major exporter of manufactured products, including autos, faces economic headwinds from global trade frictions and high household debt.

The ruling Progressive Conservative Party, which won a majority government in last year’s election, has faced a backlash after it cut spending on some public services in its first budget in April, aiming to balance the books over the coming years.

After higher than anticipated revenues in the current fiscal year, the Conservatives eased some spending restraint but maintained their target to eliminate the deficit in 2023-24.

“They are boosting spending a little bit but not that much,” said Robert Hogue, a senior economist at Royal Bank of Canada. “They are still focused on restraining expenditures, would be the overall theme.”

Compared to April’s budget, spending on programs such as healthcare, education and childcare and social services was boosted by C$1.3 billion in the 2019-20 fiscal year, which ends on March 31, the fiscal update showed.

Revenue for Canada’s most populous province, which includes the cities of Toronto and Ottawa, was seen C$1.6 billion higher at C$155.8 billion.

“We worked diligently to reduce wasteful spending, fix inefficiencies and make government smarter,” Ontario Finance Minister Rod Phillips said in prepared remarks. “Our government has adopted a balanced and prudent approach to governing.”

The deficit projection was cut to C$9.0 billion ($6.8 billion), which includes a C$1 billion reserve, from C$10.3 billion estimated in April, while lower deficits were projected in future years. The deficit was C$7.4 billion in 2018-19.

The Tories said they would reduce the small business corporate income tax rate to 3.2% from 3.5%, beginning on Jan. 1, 2020.

The 2019 economic growth forecast was left unchanged at 1.4%, compared with 2.3% growth in 2018.

Ontario’s net debt, which is the highest of any sub-national borrower rated by Moody’s Investors Service, is expected to drop to C$353.7 billion at the end of the current fiscal year, from C$359.9 billion forecast in April.

Ontario, which is planning C$144 billion in infrastructure spending over 10 years and has run deficits every year since 2008-2009, pays more to borrow than some other major provinces such as Quebec and British Columbia that are running balanced budgets.

The yield on Ontario’s 10-year bond was 2.213% on Wednesday, about 67 basis points more than the equivalent federal government bond.

Net debt-to-GDP, a key measure of fiscal health, was projected at 40.0% in 2019-20, versus 40.7% estimated in the April budget. It was 39.6% in 2018-19.

$1 = 1.3180 Canadian dollars Reporting by Fergal Smith; Editing by Leslie Adler and Grant McCool

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