Bloomberg News

Ontario Freezes Wages, Scraps Tax Cuts to Balance Budget by 2017

March 27, 2012

Ontario plans to freeze public- sector wages and scrap corporate tax cuts to balance its budget by 2017-18 as it tries to close Canada’s biggest provincial shortfall.

The deficit in Canada’s most-populous province will fall to C$15.2 billion ($15.2 billion) in the fiscal year that begins April 1, down from C$15.3 billion in the current year, according to the budget released in Toronto today. Absent the measures, the gap would have ballooned to a record C$25 billion within three years.

“Ontario needs to take strong action to balance the budget and build a better future,” Finance Minister Dwight Duncan said in the text of a speech presenting the 354-page report. “It meets the needs of markets and meets the needs of Ontarians.”

Liberal Premier Dalton McGuinty is trying to reduce the deficit to avoid a credit rating downgrade while winning support for his budget from opposition lawmakers. The New Democratic Party said it would review the budget before making a decision, while the Progressive Conservatives plan to vote against it.

The government said it would pare outlays on teachers’ salaries, public servants and an electricity-rate subsidy to cut spending by C$17.7 billion over three years. It will also freeze the corporate income tax rate at 11.5 percent until the budget is balanced. Ontario had planned to cut the rate to 10 percent by the middle of next year, which would have lowered revenue by C$1.5 billion over three years.

Credit Ratings

The widening budget gap and rising debt load threaten the credit ratings of Canada’s biggest provincial economy at a time when it’s relying on the bond market to extend debt maturities. The province faces a rating downgrade by Moody’s Investors Service if it doesn’t pare its debt and deficit. The burden of debt is expected to peak at a record 42 percent of gross domestic product by 2015, the budget shows. The ratio was 27 percent of GDP in 2007-08.

Ontario’s economy is forecast to grow 1.7 percent this year and 2.2 percent in 2013. Private-sector economists expect growth of 1.9 percent for 2012, according to the budget. The 2011-12 deficit is narrower than the C$16 billion forecast in November.

Even as Ontario’s deficit narrows, the government will need to increase borrowing to reflect higher bond maturities in the next few years. Borrowing will rise to C$35.6 billion next fiscal year, from C$34.9 billion in 2011-12. Borrowing needs rise to C$39.6 billion in 2013-14.

Ontario bonds have lost 1.9 percent this year compared with a decline of 2.4 percent for provincial bonds in a Bank of America Merrill Lynch index. Moody’s cut its outlook on the province to negative in December. Moody’s rates Ontario Aa1, its second-highest level, two notches higher than Standard & Poor’s.

Wage Freeze

As part of public-sector wide salary caps, the province will propose cutting educators’ salaries for two years and wages for Members of Provincial Parliament for an additional two years. The budget also assumes no wage increases in upcoming collective bargaining with 65,000 government employees. Wages and payments would also be capped for doctors and executives at hospitals, universities and school boards.

Senior couples earning more than C$160,000 would pay more for prescription drugs under the proposed budget. Ontario will also close “underutilized” jails in Chatham and Brantford and the Toronto West Detention Centre.

The province plans to pool pension fund managers to reduce costs, while forcing public-sector plans to lower future benefits to cover any funding deficits. The government will also propose that members of university pension funds match contributions made by their employers within five years.

“The inescapable fact is that over half of the government’s costs go to wages, benefits and pensions,” according to the budget. “We will need to address the issue of compensation.”

Property Taxes

Businesses will lose a planned cut on the portion of the property tax levy that funds education. The Business Education Tax will be held at an average of 1.33 percent, down from 1.85 percent in 2007. The tax freeze will save the government C$300 million a year by 2014-15.

The province forecast a 2.7 percent revenue increase, or almost C$3 billion, in the next fiscal year. Revenue will rise to C$112.2 billion in 2012-13, from C$109.3 billion this year. Revenue is expected to grow at an annual rate of 3.5 percent over the next three years.

Spending will rise 1.5 percent over the same period, with projected expenses of C$126.4 billion in the next fiscal year. The government aims to limit spending increases to 0.9 percent each year by 2017.

Drummond Report

Other revenue generators include the sale of the head office of the province’s alcohol monopoly, known as the Liquor Control Board of Ontario, which will generate C$200 million in profit. The government plans to save C$3.2 billion in borrowing by scrapping several infrastructure projects, including expansions at hospitals such as the Sunnybrook Health Sciences Centre in Toronto.

The province commissioned an independent report by former Toronto-Dominion Bank Chief Economist Don Drummond on saving measures that could be included in the province’s 2012 budget.

The Drummond report recommended Ontario overhaul its public health-care system and scrap the Ontario Clean Energy Benefit, which gives Ontarians a 10 percent rebate on electricity bills at a cost of C$1.06 billion this fiscal year.

Instead, the government will retain the benefit except for users -- mostly businesses -- consuming 3,000 kilowatt-hours per month. The change will save on average C$125 million a year.

McGuinty won re-election for a third term Oct. 6 with a minority government, which may trim policy options. His Liberal party must rely on the help of at least two opposition Progressive Conservatives or New Democrats to pass the budget or face an election.

PC Rejects

“This budget stifles job creation,” said Conservative Leader Tim Hudak. “The PC party cannot support this budget.”

New Democratic Party Leader Andrea Horwath said she’ll be “talking to families” before making a decision.

“We’re committed to making this minority government work as long as it provides results for people,” she said.

To contact the reporters on this story: Cecile Gutscher in Toronto at cgutscher@bloomberg.net;

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net.


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