Bloomberg News

Ontario Faces Austerity as Debt Weighs on Provincial Vote

June 12, 2014

Ontario voters will probably deny a clear victory to either Premier Kathleen Wynne’s Liberal Party or challenger Tim Hudak’s Progressive Conservatives, polls show, as their competing plans for the economy of Canada’s largest province fall short of majority backing.

The Liberals have 37.3 percent voter support based on polls taken through June 9, compared with 36.5 percent for the Conservatives, according to survey aggregator threehundredeight.com. The figures suggest neither party will win a majority of the 107 seats in the legislature today, which may leave them relying on the New Democratic Party under Andrea Horwath to pass laws and continue to govern.

With the Ontario economy struggling gain momentum, Wynne has promised to boost spending in a bid to stoke growth while Hudak said he would cut 100,000 government jobs to allow for corporate tax cuts. Whoever wins will face a C$12.5 billion ($11.5 billion) deficit in the fiscal year ending March 31, and the largest total of debt of any sub-sovereign borrower tracked by Moody’s Investors Service.

“Tough choices regarding government cuts and tax increases lie ahead for any government,” said John Shields, who teaches politics at Ryerson University in Toronto, the provincial capital, making another minority government more likely.

Hudak campaigned on a platform of boosting business confidence and stimulating growth by reducing the size of government. While the Liberals attacked his “Million Jobs Plan” plan, saying it contained a basic math error and opponents said it would hurt growth and lead to reduced services, Hudak stuck by his platform.

Fresh Spending

Wynne has courted voters with fresh spending, promising to add C$3 billion on schools, roads and hospitals. That would be followed by three years of austerity to eliminate the deficit by the fiscal year starting April 2017, though she was unclear on how this would be achieved.

Ontario’s C$250 billion of bonds rated by Moody’s is the most of any sub-sovereign borrower tracked by the New York-based ratings company. Its debt-to-revenue ratio, which measures its ability to pay back the bonds, is at 237.7 percent, among the worst of the sub-sovereigns, according to Moody’s. Ontario is rated Aa2 by Moody’s, the company’s third-highest investment-grade rating, while Standard & Poor’s rates it AA-, the fourth-highest rank, with a negative outlook.

Agency Pressure

“That pressure from the credit rating agency is going to remain in the background no matter who takes office,” said Mazen Issa, senior Canada macro strategist at TD Securities in Toronto.

A rating change may not have the expected change on Ontario bond yields. Yields on sovereign debt moved in the opposite direction than suggested by rating changes 47 percent of the time, according to data compiled by Bloomberg in June 2012 on 314 upgrades, downgrades and outlook changes going back to 1974. Yields were measured after a month relative to U.S. Treasury debt, the global benchmark.

The province’s borrowing advantage over Quebec has narrowed over the course of the election, with investors asking for only six basis points more in yield to hold Quebec’s most recent 10-year bond compared with Ontario’s today. The difference was 19 basis points as recently as March 12, according to data compiled by Bloomberg.

Struggling Heartland

Investors demanded 82 basis points more yield to hold Ontario’s latest 10-year bond today compared with a Canadian government benchmark, down four basis points from the start of the election, according to data compiled by Bloomberg.

Ontario, known for years as Canada’s industrial heartland, has been struggling. Economic growth has been 1.3 percent in each of the past two years, as a Canadian dollar near parity with the U.S. and a slow global recovery has crimped exports.

The province, which boasts the headquarters of financial institutions such as Toronto-Dominion Bank (TD) and manufacturers such as auto-parts maker Magna International Inc., will see growth of 2.3 percent this year, economists at Royal Bank of Canada forecast yesterday. That compares with a 2.4 percent forecast for all of Canada and 3.7 percent growth for oil-rich Alberta.

The provincial jobless rate, at 7.3 percent in May, was higher than the national average on 7.0 percent, and well above the 4.6 percent seen in Alberta and 3.7 percent in Saskatchewan.

Wynne’s latest fiscal plan -- presented May 1 -- led to the election when opposition leaders said they would vote against it. The budget proposed raising taxes on top income earners, and also pledged to search for C$1.25 billion in unspecified savings over the next three years.

No Plan

“They simply don’t have a plan to balance the budget,” Hudak, 46, said in a May 27 interview at Bloomberg’s Toronto office. “They haven’t put a single idea on the table,”

Hudak has said his plan includes cutting off subsidies for some of Ontario’s biggest employers, including automakers such as Ford Motor Co. (F:US) and Chrysler Group LLC. He has suggested a public-private partnership should develop mineral deposits in the so-called Ring of Fire in northern Ontario, while Liberals have said they will offer as much as C$1 billion for roads if the federal government matches the money.

Wynne has said Hudak’s cuts will be harsher than the ones imposed after Harris’ election in 1995. Harris cut program spending by about C$2 billion in his first budget and kept it near those lower levels for two additional years, leading to hospital closures, government-job losses and social unrest, including a province-wide strike by teachers.

Risks Recession

“This election is coming down to whether you believe you can cut your way to prosperity,” Wynne, 61 said May 13 at the Bloomberg Canada Economic Summit in Toronto. Hudak’s plan “would risk driving us back into recession.”

Neither leader has done much to court the NDP Leader Horwath’s support, even though she could hold the balance of power in a minority parliament. Horwath attacked Liberal “corruption,” a reference into an Ontario Provincial Police investigation into the possible deletion of e-mails related to canceled gas-fired power plants under the previous Liberal government, estimated to have cost more than C$1 billion.

An election that fails to give a party a majority of seats means the leader with the most seats in the legislature gets the first chance to govern under the country’s constitution, said Cameron Anderson, who teaches political science at Western University in London, Ontario. If that fails the second-biggest party could seek to win a vote of confidence to govern, he said.

Coalition Possible

The Liberals may also seek to govern if they win the second most seats and if they can quickly secure NDP support, he said.

Hudak may find it harder to win the confidence of the legislature in a minority given his wider differences with the two other parties, Anderson said.

“The interesting thing is if the PCs won a plurality but not a majority - where they would find support to pass legislation?,” he said.

Polls close at 9 p.m. Toronto time tonight. More than 9 million people are eligible to cast ballots. When the election was called the Liberals held 49 seats in the 107-seat legislature, ahead of 37 seats for Hudak’s party and 21 for the NDP.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net

To contact the editors responsible for this story: Paul Badertscher at pbadertscher@bloomberg.net Jacqueline Thorpe


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