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Ontario cuts deficit, ups health, school spending

Ontario's Liberal government said on Tuesday that a tight cap on spending growth will keep it on track to eliminate its budget deficit by 2017-18, even as it allocates more to education and health care in hopes of winning reelection.

Finance Minister Dwight Duncan forecast that Ontario, which has the largest economy and population of any province, will run a deficit of $16.3 billion for the 2011-12 fiscal year.

This marks a decline from a record $19.3 billion two years earlier, when its manufacturing-oriented economy was ravaged by the global financial crisis.

The spending plan is being closely watched by domestic and international investors, who have scooped up the province's bonds, but also expressed concerns about the province's growing debt pile.

The Liberals are also under pressure from the opposition Progressive Conservatives, who have capitalized on the anger of some voters about higher electricity costs, changes to the province's sales tax and rising government spending.

"The 2011 budget builds on the government's plan to eliminate the deficit and at the same time protect education and health care," Duncan told reporters.

Ontario's ruling Liberal party, reelected with a majority in 2007, has sought to revive the province's economy partly through initiatives like building infrastructure and expanding green power, as well as increasing spending on education and health care.

The province said its total expenses will be $124.1 billion in the coming fiscal year, up from $122.9 billion in 2010-11.

Total program spending, which excludes interest on debt, is projected to come in at $113.8 billion, an increase of less than 1 percent. Even so, health and education spending are set to rise more than 4 percent in 2011-12.

The government forecast overall program spending will rise by just 1 percent per year between 2010-11 and 2013-14. Measures to control spending include cutting 1,500 public service jobs and getting rid of redundant agencies.

Duncan also announced a commission that he said will review the public service with an eye to speeding up deficit reduction while protecting health care and education - which make up 70 percent of government spending.

Total revenues in 2010-11 were $106.2 billion and are expected to rise to $108.5 billion in 2011-12. Corporate tax revenues are projected to increase over the medium term due to stronger than expected economic growth and corporate profits. There are no tax increases or tax cuts in the budget.

Overall, revenues are projected to increase at an average annual rate of 3.3 percent between 2010-11 and 2013-14.

The province, which relies heavily on manufacturing and the export of autos and auto parts to the United States, said its economy grew 2.8 percent in 2010. It predicted its economy would grow 2.4 percent this year, slightly below the private-sector average call for 2.6 percent. It said it is likely the economy will have surpassed pre-recession levels by the first quarter of 2011.

NET DEBT BUILDING UP

The province's deficit for the fiscal year to the end of March fell by $2 billion to $16.7 billion compared to its fall economic statement, but the budget kept the province's plan of returning to balance by 2017-18 unchanged. Duncan forecast a $15.2 billion deficit for 2012-13.

The government said its net debt would rise to $241.5 billion in 2011-12, up from $217.3 billion in 2010-11. By 2014-15, Ontario's debt to GDP ratio is seen peaking to almost 41 percent.

For now, lower interest rates are helping the government finance that debt easily. But the biggest wild card is the prospect of higher interest rates in the near future, said Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities.

The province said its long-term public borrowing need for the current fiscal year was $39.9 billion, an increase of $200 million from the forecast last spring but up $1.2 billion from fall targets.

Gadi Mayman, chief executive of the Ontario Financing Authority, told Reuters the increase was due to healthy investor appetite that allowed the province to pre-borrow for the next fiscal year.

The budget shows this figure declining to $35 billion in 2011-12, down from $38.8 billion predicted in the last budget. The program will then increase to $38.6 billion in 2012-13 and $42.2 billion in 2013-14 due to refinancing needs of maturing long term debt, Mayman said.

The province was able to return to its historical preference for domestic issues, borrowing 59 percent at home in 2010-11 versus 49 percent a year earlier.

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