December 13, 2007 / 8:19 PM / 10 years ago

Ontario sees balanced books, but pressures ahead

TORONTO (Reuters) - The province of Ontario announced a C$3 billion ($2.9 billion) package of lower business taxes and higher infrastructure spending on Thursday, yet Canada’s most populous province said it is on track to deliver balanced budgets.

Last spring, the government released a budget and spoke of “sustainable surpluses” ahead, but the latest mid-year economic outlook projects smaller surpluses in 2008-09 and 2009-10 than projected in March, and no surpluses at all if reserve funds are needed.

“There is some slack (reserve) that they are building into their balanced budget plan but the question is, is it going to be enough to mitigate any sharp slowdown that occurs next year,” said Mario Angastiniotis, director of public finance ratings at Standard & Poor’s in Toronto.

Ontario is caught between a rock and a hard place, Angastiniotis added.

“I think the tax cuts are probably necessary to keep Ontario competitive, but they may be coming at a time when the economy is least able to afford it.”

The provincial government acknowledged risks to the Ontario economy, including a weaker U.S. outlook, higher oil prices and the strong Canadian dollar. In late September, the currency broke through parity with the U.S. dollar for the first time since 1976, but has since slipped back, and was around 98 U.S. cents on Thursday.

“The Ontario economy has proven resilient in an increasingly challenging global economic environment,” said Finance Minister Dwight Duncan, who took over the key cabinet post on October 30 after the Liberal Party won the provincial election.

But the manufacturing, forestry, agriculture and tourism sectors face “serious challenges,” Duncan said in a statement, so the government will help them adjust to the economic headwinds.

It proposes C$1.1 billion in tax cuts for Ontario business over three years.

Some of the measures include eliminating the capital tax on January 1, 2008, for manufacturers and resource companies, and retroactively cutting the capital tax rate by 21 per cent for all businesses.

The package would also provide C$1.4 billion in new funding to build “strategic infrastructure.”

Ontario’s economy is expected to slow in 2008 and 2009, but “the province is on track to deliver five consecutive balanced budgets between 2005-06 and 2009-10,” the outlook document stated.

Ontario’s Finance Ministry projects economic growth of 1.9 percent this year and 1.8 percent in 2008, down from 2.1 percent growth in 2006.

Private-sector economists agree with that direction, but some see a more drastic deceleration for the province, the center of Canada’s automobile manufacturing and financial sectors.

“Given the challenges facing manufacturing, and autos in particular, the Ontario economy looks likely to grow by a modest 1.5 percent in 2008,” Toronto-Dominion Bank deputy chief economist Craig Alexander said on Thursday in a quarterly report.

In its outlook, the Ontario government also said it could potentially write down the value of its C$720 million holdings in asset-backed commercial paper by up to C$100 million.

The market for some issues of ABCP froze up in August, when buyers became wary about the underlying loans backing the securities. The Ontario government is one of numerous large investors hoping for an “orderly” restructuring of the Canadian ABCP market.

($1=1.02 Canadian)

Reporting by Lynne Olver; Editing by Rob Wilson

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