Ontario Budget Deficit Jumps as Government Spending Rises

Ontario’s deficit will swell for a second year as the Liberal Party increases spending on transit, schools and hospitals in a bid to spark a stagnating economy even as it raises taxes by almost C$1 billion ($910 million).

The budget gap in the fiscal year ending March 31 will rise to C$12.5 billion from C$11.3 billion deficit last year, with revenue expected to come in C$1.6 billion less than the province forecast last year, according to the 2014 budget released in Toronto yesterday.

The government plans to boost spending by C$3 billion this year while raising taxes on high-income earners and tobacco as it faces a budget vote that could see its minority government defeated.

“The higher short-term deficits will allow the government to immediately strengthen the economy today and make the investments necessary to grow the economy for tomorrow,” Finance Minister Charles Sousa said, according to the text of his budget speech. “But let me be clear: we will balance the budget by 2017-18.”

They government is relying a lot on moderate to healthy growth to meet their goals, Derek Burleton, an economist at Toronto-Dominion Bank, said in an interview in the budget lock-up.

“Any kind of disruption will throw a wrench in their plans,” Burleton said.

Opposition Support

With a minority in the legislature Premier Kathleen Wynne’s Liberals will need the support of either the Progressive Conservatives or the New Democratic Party to pass their budget and avoid an election.

Progressive Conservative Leader Tim Hudak said he would not support the budget while a New Democratic leader Andrea Horwath said in a statement she wouldn’t comment on the budget until today.

“The Liberals are increasing taxes and deficit at the same time,” Vic Fedeli, finance critic for the Progressive Conservatives, said in the lock-up. “It’s obvious they have no plan to balance the budget.”

The Liberal government survived the 2012 budget vote by imposing a 2 percent surtax on people with incomes greater than C$500,000, a demand of the New Democratic Party. Last year it created a youth employment program to garner support.

This year, the government is proposing to boost personal income taxes on top earners again. The budget proposes a new tax rate of 12.2 percent on annual income of C$150,000 to C$220,000, while income above C$220,000 will be taxed at 13.2 percent. The government projects the changes to raise C$700 million by the 2016-17 fiscal year.

Tobacco, Fuel

Increased taxes on tobacco will raise C$100 million a year while higher aviation fuel taxes will bring in an additional C$25 million this year and C$45 million the year after, the budget documents said.

The budget also pledges to find C$750 million in savings over the next three years as it focuses on new programs to keep expenditure growth to an average of 1.1 percent annually through 2017.

“It’s still very much a restrained budget,” according to TD’s Burleton. “They’ve been announcing these big programs, but the slant’s been more to capital programs than operating. They can argue they’re tackling a longer-term challenge, building public assets.”

The Liberals will also introduce an provincial retirement pension plan by 2017 to help the 35 percent of households it says don’t have sufficient savings to maintain similar living standards in retirement. The plan would run alongside the federal Canada Pension Plan.

Growth Stagnating

The province faces an aging workforce, a shrunken manufacturing base and an economy that has stagnated at 1.3 percent gross domestic product growth in each of the past two years.

The budget proposes a variety of new measures to help stimulate growth, from pouring C$2.5 billion over 10 years into a ’Jobs and Prosperity Fund,’ making C$29 billion available over the same period for transportation infrastructure, and another C$22.4 billion over ten years on schools and hospitals. The government will also raise the minimum wage to C$11 per hour. The province forecast gross domestic product growth to pick up to 2.1 percent this year and 2.5 percent the next two years.

Less Borrowing

The government plans to borrow C$1 billion less this fiscal year than last year, bringing total borrowing to C$35 billion and net debt to C$269 billion, or 38.9 percent of gross domestic product. Net-debt as a percent of GDP will continue to rise this year to 40.3 percent and peak at 40.8 percent in 2015, the budget forecasts.

Ontario has a AA- credit rating with a negative outlook from Standard & Poor’s and a Aa2 rating from Moody’s Investors Service with a stable outlook.

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