The McGuinty government is bracing for a sharp decline in revenues as the weakening global economy begins to take a toll on the province, forcing it to implement much more stringent spending restraints.
The much bleaker economic outlook is what accounts for a major discrepancy between spending targets outlined by the government in this year's budget and the recommendations of an economist and trusted adviser who is conducting a wide-ranging examination of how Canada's largest province delivers public sector services.
"It's largely because of changes in revenue forecasts," Finance Minister Dwight Duncan told reporters on Tuesday.
For this fiscal year, he said, private sector economists are forecasting that the Ontario economy will grow 2.1 per cent. "Next year [will be]even lower, so that does impact our revenues."
Mr. Duncan said Ontario's fall economic statement, which he will release shortly after the legislature resumes sitting on Nov. 21, will contain lower his growth forecasts for future years, in lockstep with economists who are rapidly revising their numbers.
"This will be a long period of restraint," Mr. Duncan warned. "My view continues to be that there will be a lot of difficult choices."
The Ontario government will not meet its target to erase the province's multi-billion dollar deficit by fiscal 2018 unless it caps the growth rate in spending on health care, education and other programs at 1 per cent a year for the next six years, according to former Toronto-Dominion Bank economist Don Drummond, who has been appointed by the government to review program spending.
This is much more aggressive than the government's target, which called for spending increases of 1.7 per cent a year.
"It's because of the changing economic forecasts," Mr. Duncan said, also adding that his federal counterpart, Jim Flaherty, announced on Tuesday that the worsening economy is forcing him to delay Ottawa's target to balance its books.
Mr. Duncan is ruling out raising taxes to raise revenue. It is also difficult for the province to keep borrowing to finance social programs, he said. As a result, the only recourse is to curb spending growth, which has historically climbed 7 per cent a year.
Every dollar in spending on new programs will have to be found elsewhere, Mr. Duncan said. In the Liberals' platform for the Oct. 6 election, they promised to reduce post-secondary tuition for all but the most affluent students by 30 per cent a year.
Mr. Drummond is examining all aspects of the province's spending, including health care and education, which together consume just under 70 per cent of program spending. But he is not looking at making across-the-board spending cuts.
"It's more about reforming the way we deliver public services than it is about a slash and burn approach," Mr. Duncan said in an interview on Monday.
The province's deficit is forecast to come in at $16-billion in fiscal 2011-12.