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Finance Minister Charles Sousa speaks in Toronto on Feb. 18, 2014

KEVIN VAN PAASSEN/THE GLOBE AND MAI

Ontario is leaving the door open to a tax hike as it struggles to erase a $12.5-billion deficit amid unsteady economic growth and uncertain revenue.

Finance Minister Charles Sousa – determined to make good on a promise to erase the red ink in three years – is keeping his options open. While he said Tuesday he would like to keep taxes at their current level, he repeatedly declined to rule out an increase.

"I want to maintain our tax rates the way they are now," he told reporters after a breakfast speech to a financial-sector audience at a Toronto hotel. "To maintain our competitiveness and to attract investment and to put everybody at their best."

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Amid an economy still sluggish after the recession – including a manufacturing sector in long-term decline – the province is desperate for ways to raise cash and is out of easy options. The treasury is on track to take in $509-million less tax revenue than expected this year. Mr. Sousa has also revised economic growth projections downward, to 1.9 per cent from 2.1 per cent. The government is even looking to sell off part of the public hydro grid to pay for vital new infrastructure.

Mr. Sousa and many of his fellow Liberals see balancing the books by 2017-18 as vital for both fiscal and political reasons. One government source pointed out that, with natural market cycles generally lasting a decade or so, balancing any later would create the risk of entering a downturn with a deficit. Such a failure could also hurt the party's image before the next general election, in 2018.

Economist Paul Boothe, a former federal finance official, said Mr. Sousa is being responsible by keeping everything on the table.

"I was encouraged to hear the minister say that because it tells me … they're serious about eliminating the deficit, which is a really important thing," Mr. Boothe said. "He is willing to contemplate whatever it takes to balance the budget."

But some experts warn the worrying growth numbers actually demonstrate why the government must do everything it can to cut costs before looking for more revenue.

"The truth is that Ontario's economy isn't going to grow as strongly as it has in the past, and that means the government can't keep going back to the well looking for more revenue," said Glen Hodgson, senior vice-president of the Conference Board of Canada. "Finding new sources of revenue might turn out to be a Pyrrhic victory."

But if the province does opt for higher taxes, it has several options. Economist Don Drummond, for instance, recommended two years ago that the government eliminate some corporate tax credits that serve little purpose but cost the treasury in lost revenue.

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The federal government's string of tax cuts – which it has combined with a steady push for the provinces to take on more responsibility for such things as health care – mean Ontario could increase levies while leaving the overall burden on taxpayers unchanged.

"Over time, provincial governments are going to be relatively more and more fiscally important, and the federal government will become less and less fiscally important," Mr. Boothe said.

So far, the Liberals have tried to steer a centrist course. Mr. Sousa's budget last spring set aggressive targets to cut spending and hold the line on labour costs, projecting most government departments will either have their funding frozen or slashed between now and 2017-18. But he also hiked income tax on those earning more than $150,000 and ramped up spending in some crucial areas, such as infrastructure.

The opposition parties have attacked the government from both sides, with the Progressive Conservatives pushing them to reduce spending further and the NDP arguing Mr. Sousa is cutting too much.

"The government is clearly spending beyond its means," Progressive Conservative finance critic Vic Fedeli said. "The Liberals spun us a fairy tale of balancing the budget with more spending, higher deficits and bigger debt."

NDP Leader Andrea Horwath has argued in favour of raising cash by scrapping input tax credits, which allow companies to write off sales tax on some corporate expenses.

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"They believe that it's right, that it's proper to allow the HST to be written off on Leafs games and limo rides," she said. "I don't think that's the right direction."

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