Ontario Put on Credit Watch

Any way you measure it, credit rating agency Moody's Investors Service doesn't like Ontario's increasing debt. It has put the province on notice, revising its outlook to negative from stable. Ontario's 2012-2013 budget will determine whether the province's Aa1 rating is downgraded come spring.

Certainly, Ontario has accumulated a mountain of debt ó $238.4 billion as of the province's March 31, 2012, fiscal year end. According to data from RBC Economics Research, that is the highest provincial debt by far; the next closest is Quebec, at $166.1 billion, with third-place British Columbia, at $36.5 billion, presenting another sizeable gap. Alberta is at the other end of the spectrum, with an $11.3-billion surplus. Ontario's debt is surpassed only by the federal debt of $585.2 billion. On a per-capita basis, Ontario's debt is $17,830, second only to Quebec's $20,829. Federally, debt per capita is $16,970.

But perhaps a more important indicator is net debt as a percentage of gross domestic product (GDP). For the 2011-2012 fiscal year, Ontario's debt-to-GDP ratio is 37.4% and, although the province promises to balance the books by 2016-2017, debt is expected to rise for the next few years. Derek Burleton, deputy chief economist at TD Bank Group, expects the debt-to-GDP ratio to reach an uncomfortably high 40.6% before it stabilizes in 2015-2016.

As part of its undertaking to reduce its $16-billion 2011-2012 deficit, Ontario's government has promised to keep increases in program spending over the next six years to 1%-1.5% a year. Burleton says that represents "the longest period of austerity Ontario has seen in the Post-War period.î Ontario's ability to stick to the plan worries not only Burleton but also Moody's. It is concerned an unexpected economic shock could knock Ontario plans "off target.î

Ontario has already adjusted its projections for economic growth downward because of the worsening global outlook. In its November 2011 Economic Outlook and Fiscal Review, it projected real GDP growth for 2011 and 2012 at 1.8%, revised from 2.4%. Growth in 2013 will be 2.5%, it says, and 2.6% in 2014.