Ontario budget targets labour costs to cut deficit

Government says it needs public sector workers to support wage freeze
|labour-reporter.com|Last Updated: 03/27/2012

(Reuters) — Ontario's minority Liberal government put corporate tax cuts on hold and pledged a renewed effort to rein in public sector labour costs in an austerity budget designed to eliminate the deficit in six years and convince rating agencies the province is fiscally sound.

Canada's most populous province, which accounts for about 40 per cent of the country's economy, will run a budget deficit of $15.3 billion in 2011-12 under the budget plan unveiled by Finance Minister Dwight Duncan, down $700 million from the November 2011 forecast and below the record $19.3 billion deficit three years ago.

The shortfall is seen edging down to $15.2 billion in the coming fiscal year and disappearing by 2017-18. But this requires that the centre-left government, which lost its majority in a hard-fought 2011 election, holds rising health care costs to just 2.1 per cent annually.

This means they must convince powerful public-sector unions to accept a wage freeze when contracts with teachers, doctors and other public-service workers expire this year.

Duncan has faced off against the unions before with only middling success — stymied in part by sympathetic arbitrators — but pledged this time to rewrite legislation if that is what it takes to control compensation costs that account for over half of Ontario's program spending.

"Compensation is our greatest single cost and we can't carry out our plan to strengthen our economy and create jobs without addressing it and we need everyone to do their part to balance the budget," Duncan told a news conference.

OPPOSITION SUPPORT NEEDED

The ruling Liberals will need support of either opposition party — the right-leaning Conservatives or the left-leaning New Democrats — to pass the budget into law. While the suspension of additional corporate tax cuts may appease the NDP, taking aim at the left's traditional union allies will not.

Conservative leader Tim Hudak said his party would opposed the budget and all Conservative members of the Ontario legislature would appear to vote against it.

NDP leader Andrea Horwath, who holds the balance of power among the three parties, said she will consult with voters in days to come to decide whether her party will support the budget or oppose it, triggering a snap election.

Ontario's deficits spiraled higher in the wake of the 2008 financial crisis when global automakers shed jobs, sending shudders through the province's industrial base. This drew the attention of rating agencies worried about Ontario's growing debt load.

The budget will trim growth in total program spending to under one per cent annually over the next three years, in part by attempting to hold growth in education to 1.7 per cent in addition to the limits on health spending. That's an ambitious goal for areas that currently account for about 63 per cent of program expenses and have seen spending increases closer to six per cent in recent years.

"It's not the same kind of austerity as what we are seeing Europe, you have to put things in perspective. I think it's a fine balancing act between cost containment and promoting economic growth. You do not want to bring down the economy with your budget and I think the government will be able to achieve that," said Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities.

NO NEW TAXES, PENSIONS TARGETED

Total program spending, which excludes interest on debt, is projected to come in at $115.8 billion in 2012-13, an increase of 1.1 per cent, while revenues are projected to rise 2.6 per cent to $112.2 billion. Interest on debt will cost $10.6 billion in 2012-2013, the province's third-largest expense behind healthcare and education.

No new taxes were introduced, but Duncan said the province will boost revenue by suspending its previous plan to cut the corporate tax rate of 11.5 per cent to 10 per cent by 2013. Instead, the tax rate will be frozen until the budget is balanced, saving the province $1.5 billion over the next three years. Duncan will also freeze the business education tax cut plan, saving more than $300 million annually by 2014-15.

The minority government, which has been in power since 2003, will also change the province's drug benefit program so that about 5 per cent of seniors — those with the highest incomes — pay a larger share of their prescription drug costs.

Pay freezes for legislators and executives at hospital, universities, school boards and government agencies will also be extended for another two years, as previously promised. The Liberals will trim some elements of public sector pension plans.

The government said net debt would rise to $237.6 billion by the end of the current fiscal year on March 31, up from $214.5 billion in 2011-12. By 2014-2015, Ontario's debt-to-GDP ratio is seen peaking at 41.6 per cent.

Duncan has said the prospect of higher rates keeps him up at night. A one per cent increase in the province's interest rates is projected to cost an additional $467 million a year.

Ontario will again look to the domestic market to meet most of the next year's borrowing needs. It expects to borrow $35.6 billion in 2012-13, down $3 billion from last year's forecast.

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