Ontario forecasts widest budget deficit in seven years, cuts spending

By Fergal Smith

TORONTO (Reuters) - The Canadian province of Ontario, the nation's growth engine, is cutting spending and taxes in an effort to boost the economy and rein in a deficit, which is projected to reach its widest level in seven years in 2018-19, a fiscal update showed on Thursday.

The province's new Conservative government said it will run a budget deficit of C$14.5 billion ($11 billion) in 2018-19, its widest since 2011-12 and more than double the C$6.7 billion deficit projected by the previous Liberal government in March.

The update did not provide forecasts beyond the current fiscal year, which disappointed some investors.

Ontario, with about a third of Canada's population of 36 million, has one of the largest sub-sovereign debts in the world, at nearly C$350 billion in March. The province said its net debt-to-GDP ratio will rise to 40.5 percent in 2018-19 from 39.2 percent in the prior year.

Borrowing in the current fiscal year is seen dipping to C$33.2 billion from C$33.9 billion in 2017-18. Some of this year's borrowing requirement was pre-funded.

Ontario's appetite to borrow in more expensive international debt markets than Canada and rising rates "will further pressure finances while sending more taxpayer interest payments out of the country," said Ryan Goulding, a fixed income analyst at Leith Wheeler Investment Counsel Ltd, which owns the province's bonds.

The projected deficit for the current fiscal year is less than the C$15 billion deficit projection reported in September by the Independent Financial Commission of Inquiry, launched by the new government.

That projection reflected the commission's proposed accounting adjustments and adjustments for revenue and expense projections, which were accepted by the Conservatives.

The fiscal update includes spending cuts of C$3.2 billion, about 2 percent of program expenses in the province, home to Canada's biggest city, Toronto.

Those savings were offset by a C$2.7 billion reduction of revenue, of which C$1.5 billion was due to cancellation of a cap and trade carbon tax. The government also proposed tax cuts for low-income workers.

The gap between Ontario's 10-year yield and its federal equivalent narrowed by 0.5 basis point to a spread of 66.50 basis points in favor of the province, according to Refinitiv Eikon data.

The government, which has a majority in the provincial legislature after it ended 15 years of Liberal rule in June, expects the economy to grow by 2 percent this year and 1.8 percent in 2019.

"The economic growth assumptions remain conservative enough to potentially allow for some upside," said Robert Kavcic, senior economist at BMO Capital Markets.

(Reporting by Fergal Smith in Toronto; Editing by Grant McCool and Matthew Lewis)