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Credit-rating threat undermines Ontario's claim to stability

Ontario Finance Minister Dwight Duncan was in a decidedly testy mood on Wednesday afternoon, sparring with reporters as he sought to downplay more bad financial news for country's largest province: another threatened downgrade by one of the big-three credit-rating agencies.

Standard & Poor's, Mr. Duncan took pains to point out, had in fact reaffirmed Ontario's current AA- rating. Being placed on "negative watch," he stressed, carried only a one-in-three chance of a downgrade. (S&P describes it as "at least" one-in-three.) The debt-to-GDP ratio, he wrongly asserted, went up just as fast under the previous Progressive Conservative government as it has under Dalton McGuinty's Liberals.

"Does anybody think there aren't storm clouds on the horizon?" he demanded. "Does anyone think there aren't challenges?"

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Mr. Duncan's combination of defensiveness and frustration were a stark contrast to his calm reaction last December, when Moody's Investors Services issued a similar warning. And no wonder, because the S&P broadside is a whole lot worse – for Mr. McGuinty's Liberals, for the people they serve, and for an entire country that can't afford the risk of a province that still accounts for roughly 40 per cent of its GDP going in the tank.

The more problematic nature of Wednesday's news is partly practical. The downgrade threatened by Moody's arguably wouldn't be that big a deal, since it currently has Ontario ranked slightly higher than S&P or DBRS, the third of the big agencies. But one by S&P would have a much bigger impact – sending a terrible message to the markets, and likely raising the interest rates for a government that will before long be more than $300-billion in debt.

But the bigger impact for now is symbolic, with S&P's decision sure to be held up alongside Ontario's (somewhat misleading) "have-not" status as evidence of the province's slide from the country's economic engine to its biggest liability.

For Mr. Duncan, it's a particularly hurtful blow. Whereas he welcomed the Moody's warning, because it gave him ammunition to try to get both caucus colleagues and the general public onside for austerity measures, the one from S&P's will be seen as a repudiation of the budget he ultimately came up with.

His efforts over the past few months – an extensive messaging exercise around the release of Don Drummond's report on the future of public services, a series of pre-budget announcements aimed at showing seriousness about cutting spending, a post-budget promise to start auditing every last dollar of government spending – were meant to avoid a moment just like this. And the Liberals seemed reasonably confident that it was working.

On Wednesday morning, just hours before the bad news came down, Mr. Duncan happily announced the provincial deficit is now projected to be below $15-billion. Granted, this was because of a new tax-the-rich scheme that the minority government only reluctantly adopted as a concession to the provincial NDP. Nevertheless, it allowed the Liberals to continue billing the budget as "strong action" to get back toward balance.

But that action is to be brought in gradually between now and 2017-18, and the plan is a little too back-loaded for S&P's liking. While lauding the government's cautious economic-growth assumptions, the agency cites the difficulty in continually maintaining overall program-spending increases of just 1 per cent, given the pressures in health care alone. And it notes that this will be even more difficult with a minority Legislature.

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It's difficult not to feel a little sympathy for Mr. Duncan. He's hardly running the country's most spendthrift treasury; Ontario currently has lower per-capita program spending than nearly every province. A decline of its manufacturing sector, an aging population and an arguably unfavourable fiscal relationship with the federal government have brought structural problems that would have plagued any party in power. And at least to some extent, the government has followed Mr. Drummond's advice to avoid quick across-the-board cuts, in favour of more gradual structural changes meant to stand the test of time.

But the fact remains that, at a projected 39.5 per cent in 2012-13, Ontario has the country's highest debt-to-GDP ratio outside Quebec. S&P's lack of confidence will lend some credence to criticism by the opposition Progressive Conservatives and others that, having vastly ramped up spending in recent years, the Liberals aren't moving with enough urgency to get it back under control. And it will only get worse if Moody's follows up shortly with an actual downgrade, which remains a strong possibility.

Mr. Duncan tried briefly on Wednesday to summon the same collective spirit he encouraged back in December. "I think as a province, we need to embrace it," he said of S&P's warning.

He was clearly hoping that the newest threats will help in looming battles with public-sector unions, and in changing the public-sector culture from within. But his grumpy tone belied him. At a certain point, the silver linings become harder to see.

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Political Feature Writer

Adam Radwanski is The Globe and Mail's political feature writer. More

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