March 26, 2009 / 8:15 PM / in 9 years

Hard-hit Ontario headed for 6 years of deficits

TORONTO (Reuters) - The government of Ontario said on Thursday it would run budget deficits for the next six years as it spends heavily on infrastructure and cuts some taxes to offset the impact of the global financial crisis on its export-oriented economy.

<p>Ontario Finance Minister Dwight Duncan (R) and Ontario Premier Dalton McGuinty sit before Duncan delivers the provincial budget at Queens Park in Toronto, March 26, 2009. REUTERS/Mark Blinch</p>

Ontario, the Canadian province hardest hit by the global economic slowdown, said it will run a deficit of C$14.1 billion for the 2009-10 fiscal year, a figure that the Liberal government said it plans to reduce each year before balancing the budget by 2015-16.

“Ontario is in the middle of a global and financial storm not of our making,” Ontario Finance Minister Dwight Duncan said during a news conference. “Ontario families are feeling the impact. Our job as a government is to take immediate action to create jobs now.”

Duncan acknowledged several challenges facing Ontario, including a sharp downturn in demand for the vehicles produced by the province’s auto industry, and the pressing global financial meltdown that has crimped exports to the United States, Canada’s biggest trading partner.

To help kick start the battered economy back to growth, the province has committed C$32.5 billion in infrastructure spending that it expects will create more than 300,000 jobs over the next two years to build roads, transit, hospitals and schools.

During the first two months of 2009, Ontario shed 106,000 jobs. The unemployment rate rose to 8.7 percent in February from 7.2 percent in December.

The budget also included a proposal to harmonize Ontario’s 8 percent sales tax with the 5 percent federal goods and services tax, a move the government says will help businesses become more competitive.

The new sales tax structure will increase prices for a number of consumer items. To help individuals adjust, Ontario will send residents who qualify payments totaling C$1,000 in three installments over a one-year period starting in mid-2010.

Ontario said the budget includes C$4.5 billion in tax cuts for businesses over three years, which it says will make companies more competitive with their U.S. peers. There will also be C$10.6 billion in income tax cuts over the same period to help people adjust to the new sales tax structure.

The province, which relies heavily on manufacturing and the export of autos and auto parts to the United States, predicted its economy would start to recover in the second half of 2009, but that it will still shrink by 2.5 percent for the year.

It expects the economy will return to growth in 2010 with real gross domestic product rising to 2.3 percent and then to 3.3 percent in 2011.

PROVINCES AWASH IN RED INK

The province said it will have a deficit of C$12.2 billion in 2010-11, a figure it expects to steadily decline to C$3.1 billion in 2014-15 before returning to balance in the following fiscal year.

“The infrastructure spending in the short term will help but the true stimulus is going to be when the U.S. picks up,” said Derek Burleton, economist at Toronto-Dominion Bank.

For the first time Ontario, once the country’s richest province, will receive a handout in 2009-10 from a federal program designed to help poorer provinces.

For the 2008-09 fiscal year that ends March 31, the Liberal government projects a C$3.9 billion deficit. Final figures for the year will be released this summer.

The Ontario deficit is expected to be the biggest among Canada’s provinces, many of which have already issued a budget deficit warning or rolled out a red ink budget.

The much smaller province of Newfoundland and Labrador forecast a 2009-10 deficit of C$750 million in its budget on Thursday.

Ontario said its net debt, the difference between its total liabilities and financial assets, would rise to C$169.8 billion in 2009-10 and to C$189.5 billion in 2010-11 from C$149.4 billion in 2008-09. The province also said its debt financing program will total C$34.8 billion in 2009-10 and C$34.3 billion in 2010-11.

Ontario government debt underperformed following the release of the budget. The yield on the province’s 10-year benchmark bond widened to 131.9 basis points above the Canadian government yield curve from 131.1 basis points before the budget was released.

($1=$1.23 Canadian)

Editing by Peter Galloway

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