The uncertain U.S. economy and the length of the war against Iraq threaten to derail economic projections by Ontario in Thursday’s budget, economists say.

TD Bank and BMO Nesbitt Burns said in separate reports that Ontario’s budget is based on possibly “optimistic” assumptions of solid growth this year and next — 3% in 2003, 3.6% in 2004.

“While these are not unreasonable projections, they may well prove optimistic in light of the thick blanket of uncertainty currently surrounding the global economy,” says BMO senior economist Douglas Peters, noting that Ontario is probably the most exposed to the various threats facing the North American outlook.

TD Bank economists Derek Burleton and Marc Lévesque said Ontario managed to fit its large spending program into the fiscal box, “but it did so only by some pushing and squeezing. The revenue assumptions are based on economic growth assumptions that – while not over the top – are on the optimistic side, especially given the heightened uncertainty with respect to the War and the state of the U.S. economy.

TD Bank said the government has based its revenue projections on private-sector consensus expectations of real GDP growth of 3.1% and average annual job creation of 3%-3.5%, which are both higher than those of TD Economics (2.7% and 2.5%, respectively). “And, if the Middle East War is more protracted than 3-4 months, and the U.S. is unable to pull itself out of the doldrums, even our forecasts will prove to be optimistic,” TD said.

Royal Bank economist Allan Seychuk described Ontario’s economic assumptions as prudent compared with the consensus of forecasters, but said several things must happen for the initiatives in Finance Minister Janet Ecker’s budget to come true. “Most importantly, the Ontario economy must avoid being broad-sided by an economic slowdown.”

The banks noted that with an election looming, many of the budget’s measures may never see the light of day.

“In what is widely perceived to be a pre-election document, Finance Minister Janet Ecker unveiled a series of tax cuts – some previously announced, some new – a hefty increase in spending, and a balanced budget,” says BMO Nesbitt Burns.
“The strong 3.8% growth of Ontario GDP in 2002 supported revenues, allowing the government to offer these various goodies. However, the budget is based on the assumption of another year of solid 3% growth in 2003, and a further pick-up in 2004

Ontario has again set aside a contingency reserve of $1 billion, which BMO says will go a long way to protecting finances if it doesn’t manage its plans for $2 billion in asset sales, or sees weaker-than-expected growth.

RBC Financial suggested that Hydro privatization may be revived. It notes that although the projected asset sales could include many things, “it looks suspiciously similar to the $1.8 billion expected from Ontario Hydro privatization in 2002/03. Either Ontario Hydro will soon be back on the selling block or there are very optimistic plans for raising revenue in this coming fiscal year, particularly if revenues don’t rise by the optimistic 7.8% expected in the budget. But that, of course, is in the future. The government needs to be re-elected first.”

As previously promised in the 2001 budget, the government does plan to go through with the final stages of the 20% reduction in personal taxes at the start of 2004. It also proposes to eventually eliminate the surtax, and will begin with an increase in the high-income threshold to $75,000 in 2005.
On the corporate front, Ontario will trim capital taxes, cutting them by 10% at the start of 2004. The previously scheduled cuts in corporate tax rates will proceed, with the general rate set to fall 1.5 percentage points at the start of 2004 to 11.0%, and continue falling to 8.0% by 2006.

Overall spending is slated to rise 7.1% in the coming fiscal year following a 3.9% increase in FY02/03. This will boost the spending/GDP ratio for the first time in a decade. Program spending is set to rise 7.5%, while capital spending will leap 28.5%, largely due to a number of planned transportation projects. Notably, overall health care spending is expected to increase 7.2% in the coming year, little different from total outlays.

TD says that there were few surprises in the budget in terms of new measures. “The government attempted to provide a little something for everyone by promising tax reductions for businesses and individuals on the one hand, while providing considerable support for Ontario’s top priorities of health care, education, and to a lesser extent, infrastructure on the other.