Pressure mounts on Ontario after S&P's negative outlook

Ontario's bold austerity budget and accelerated path to balance were met with nagging skepticism on Wednesday after credit rating agency Standard & Poor's lowered its outlook on the province's debt ratings to "negative."

The revised outlook on Ontario's AA- rated debt follows a similar move by Moody's in December. The news came hours after the minority Liberal government announced forecasts for lower budget deficits and a surplus in 2017-18.

"The outlook revision reflects our view regarding the minority legislature's ability to meet what we view as challenging cost containment targets," S&P analysts Mario Angastiniotis and Stephen Ogilvie said in a research update to clients.

"The negative outlook reflects our view that there is at least a one-in-three likelihood that we could lower the long-term rating one notch within two years," they said.

Ontario Finance Minister Dwight Duncan was not disturbed by the outlook. "I don't think that should surprise anyone. Moody's did the same thing back in December," he told reporters.

"This is something I think all Ontarians need to embrace and we need to make the legislature work."

ONTARIO TRIMS DEFICIT FORECASTS

Earlier in the day, Ontario offered a slightly rosier financial outlook, trimming its budget deficit forecasts to 2017-18, when it projects the province will run a $500 million surplus.

Other credit rating agencies and economists were cautiously encouraged by the revisions. "Obviously any improvement is welcome, but at this stage, it's not a material change to the credit story," said Eric Beauchemin, managing director of public finance at credit rating agency DBRS.

"They still have a lot of work to do going forward and our focus will be on their progress with respect to some of the key assumptions factored to the budget," Beauchemin added, noting that Ontario still faces hurdles in its attempts to freeze public sector pay and constrain health care spending growth.

Duncan delivered the budget update a day after the provincial government passed its 2012-13 budget with the help of the left-leaning New Democratic Party.

To get NDP support, and avoid a second election in six months, the Liberals said they would introduce a surtax on the rich.

The Liberals said the extra revenue, which they project will rise to an annual $495 million by 2014-15, would go to pay down the deficit, and was partly responsible for the revised deficit forecasts.

Duncan said the higher tax bracket for residents who earn more than $500,000 a year will be eliminated in 2017-18, along with the deficit.

The government forecast its 2012-13 budget deficit at $14.8 billion versus the $15.2 billion estimated in the budget and said its 2011-12 deficit was $15 billion instead of the $15.3 billion estimate.

Revenue resulting from a number of changes to federal-provincial taxation agreements helped reduce the deficit forecasts, the government said.

For 2013-14, the government pegged the budget shortfall at $12.8 billion against the $13.3 billion it previously estimated, and for 2014-15 it forecast $10.1 billion instead of $10.7 billion. In 2015-16 and 2016-17, the deficit will fall to $7.2 billion and $3.5 billion respectively, the government said, compared with its previous estimates of $7.8 billion and $4.2 billion.

Duncan added that as a result of the lowered deficits, the province's debt would be reduced by $3.5 billion by 2017-18.

In turn, the province's long-term borrowing is down by $700 million this year, $500 million next year and $600 million in 2014-15.