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Ontario's fat budget deficit: 'One year down, seven to go'

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What the analysts say Ontario's budget shows the province is trying to climb out of deficit by shrinking the size of government and asking for a wide-ranging examination of how it delivers public sector services ranging from birth certificates to health care, The Globe and Mail's Karen Howlett reports today.

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Here's what some observers say after Dwight Duncan's budget yesterday:

"In what is quickly becoming a theme in this year's budget season, the Ontario government has dedicated a good part of the additional fiscal room to a speed up the pace of deficit reduction rather than unveil significant new tax and spending measures. If good fortune prevails and the economy continues to grow moderately, Ontario's deficit will likely fall to a more manageable level of less than 2 per cent of GDP within a few years. The most notable challenge facing the government is holding program spending down to a rate below that of inflation over an extended period of time." Derek Burleton, Pascal Gauthier, Sonya Gulati, Toronto-Dominion Bank

"Ontario's fiscal hole was the deepest in Canada and Ontario's economy is the most vulnerable to overall U.S. economic developments. This placed, and continues to place, constraints on the pace of deficit reduction. However, by not permitting recent positive deficit surprises to more fully pass through to the medium-term, the credibility of the plan to balance the budget by [fiscal year 2017-18]is undermined. In fairness, Finance Minister Duncan did not succumb to the temptation to broadly sprinkle the budget with pre-election goodies (unlike his federal counterpart). Nevertheless, over the medium-term, deficit reduction delayed is still fiscal flexibility denied." Michael Gregory, Robert Kavic, BMO Nesbitt Burns

"One year down, seven to go. Ontario's 2011/12 budget took advantage of better-than-expected results in the outgoing fiscal year to aim for a deficit $1-billion lower than previously planned, while not accelerating an earlier timetable for restoring an outright balance in 2017/18. Despite this being an election year, the budget was lean on new initiatives in keeping with the need for restraint. A thin document for thin fiscal times." Avery Shenfeld, Warren Lovely, CIBC World Markets

"Controlling the growth in overall program spending hinges on the province's ability to control health‑care costs, since health‑care spending consumes approximately 43 cents of every dollar collected in revenue. The government plans to hold growth in health‑care spending to three per cent per year from fiscal year 2012/13 through 2017/18, but an aging population will make this a difficult task. Over the past 15 years, health‑care spending has grown at an average pace of 6.5 per cent annually. Without a clear strategy, it will be difficult for the government to hold to its targets for health‑care spending growth while at the same time protecting the quality of the health‑care system." Matthew Stewart, Eric Thomson, The Conference Board of Canada

Valeant v. Cephalon The battle by Valeant Pharmaceuticals International Inc. for U.S.-based Cephalon Inc. is shaping up to be a classic slugfest.

Valeant, which includes the old Biovail Corp., announced late yesterday it had made repeated attempts to acquire the biopharmaceutical company for $5.7-billion (U.S.), but that its $73-a-share offer had been rejected, The Globe and Mail's Tim Kiladze reports.

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Valeant then went public, announcing not only the offer but an attempt to oust Cephalon's board and replace the directors with its own nominees.

The announcement included comments worthy of a good, old-fashioned takeover battle, financed solely by debt.

Then last night, Cephalon responded, confirming the unsolicited bid and disclosing it is represented by U.S. legal heavyweight Skadden, Arps, Slate, Meagher & Flom.

"Cephalon's board of directors and management are very aware of their fiduciary responsibilities to shareholders and will act in accordance with shareholders' best interests interests, with the goal of maximizing shareholder value.

Lundin v. Equinox

Analysts are taking a fresh look today at the scenarios for Lundin Mining Corp. after it called off its friendly merger with Inmet Mining Corp. late yesterday, and set in motion a new auction.

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The death of the deal to create a Canadian copper giant paves the way for a hostile move by Equinox Minerals Ltd. , which is offering $4.8-billion. Lundin has rejected that, and says it will continue to fight.

UBS Securities Canada analyst Onno Rutten today boosted the 12-month price target on Lundin stock to $8.90 from $8.10. Here's how UBS sees it: A 40-per-cent chance of drumming up rival bids at an estimated price of $10.40 a share, a 50-per-cent probability of a successful Equinox bid at $8.10 a share, and a 10-per-cent chance of no deal, which would put the stock at $6.70.

"We therefore raise our target by 10 per cent to $8.90 and maintain a Buy rating, while highlighting the relatively short window of opportunity for [Lundin]"

UBS also believes Equinox could legally challenge Lundin's 11th-hour poison pill.

Stock markets buoyed Global stocks are on the rise this morning as investors set aside concerns over Europe's debt troubles, Japan's nuclear crisis and the upheaval in the Middle East and North Africa.

Tokyo's Nikkei climbed 2.6 per cent and Hong Kong's Hang Seng 1.7 per cent, though the Shanghai composite dipped. In Europe, London's FTSE 100, Germany's DAX and the Paris CAC 40 were up by between 0.5 per cent and 1.5 per cent by about 6 a.m. ET. Dow Jones industrial average and S&P 500 futures also rose.

Oil prices fell.

"Global equities are trading higher as concerns over Japan's nuclear crisis and the ongoing turmoil in the Middle East are taking a back seat to investor optimism on reports Japanese companies are resuming production," said BMO Nesbitt Burns economist Carl Campus.

"European equities are broadly higher ... despite a slightly worse than expected reading on euro zone economic confidence for March."

Portugal spirals toward bailout Sound familiar? Portugal plans to restate its deficits, the government announced today as the country edged ever closer to taking a bailout, despite its protestations.

Borrowing costs spiked, with the yield on 10-year government bonds topping 8 per cent. That's the highest ever in its history with the euro monetary union, although so was the last one.

"Portugal is smelling like Greece to accountants, as the country's statistics office has announced that it will restate the deficit tally by the end of the week," said Scotia Capital economists Gorica Djeric and Derek Holt.

"One issue is that the original print didn't include all cash injections into banks, which makes the European push toward blaming ratings agencies for the timing of their announcements including recent downgrades rather curious," they said in a research note.

"Blame the governments for losing market confidence in reporting their figures from Greece through to Portugal. Germany's decision to drop the hair-cut bomb last October was also unusual timing in the midst of the crisis; it may make sense in principal, but the timing was a tad off. Or how about the use of derivatives and other tools to mask the true extent of the problems facing sovereigns like Greece? Rating agencies, for once, are doing their job."

Manufacturing costs rise Input costs for Canadian factories are rising at a much faster pace than prices for their finished products.

Statistics Canada's raw materials price index climbed in February by 1.8 per cent, much faster than expected, while its industrial product price index rose just 0.7 per cent. On an annual basis, raw materials surged by 11 per cent in February from a year earlier, compared to just 3.4 per cent for the finished goods, Statistics Canada said today.

Both indexes have been on an upward trend since mid-2010. the federal statistics gathering agency said.

"We see no inflation risk despite elevated prices for industrial input," Carl Weinberg, the chief economist at High Frequency Economics, said before the report was released.

In Economy Lab today

Hurting the one you love the most: Mike Moffatt examines the NDP's credit card proposal.

The Liberal plan for a Canada Learning Passport is worth a close look, Kevin Milligan writes.

In Personal Finance today

From your business to your investments, there are ways to get a bigger tax return.

In this week's Cash Clash, a retired couple debate the pros and cons of selling their city house and living all year round in their vacation home. Financial expert Kelley Keehn has the answer.

From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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