Once the economic powerhouse of Canada but now the recipient of equalization payments, Ontario needs to strike the right balance between growing its economy while reining in government spending.
It's a delicate exercise that could cost the province hundreds of millions of dollars more each year to service the debt, which already costs $9 billion annually, should it get hit with a credit downgrade. Moody's Investor Services put Ontario on credit watch last fall.
A senior government source tells The Canadian Press the budget will take steps to address the cost of public sector pensions — costs which have been forecast to jump 70 per cent between now and 2017-18. The province's fiscal blueprint will call for a review of the pension plans, but not specific legislation, the source said.
The credit agencies will look closely at Ontario's fiscal blueprint to make sure the plan to eliminate the deficit gets approval from the opposition parties, Finance Minister Dwight Duncan acknowledged Monday.
"I'll remind you the United States of America was downgraded not because of their numbers, but because of their inability politically to deal with their deficit," said Duncan.
"The credit rating agencies are one audience that we need to speak to."
Ontario's debt was estimated at $241.5 billion for 2011-12, and its debt-to-GDP ratio of 37.4 per cent was second only to Quebec's 51.2 per cent.
Economist Don Drummond, who reviewed government programs and made hundreds of recommendations for the province to lower its spending and balance the books, warned Ontario could end up with a debt-to-GDP ratio similar to Quebec's if something isn't done.
"Ontario must act to put its finances on a sustainable path and must be prepared for tough action — not just for a few years, but until at least 2018," concluded Drummond.
The collapse of Ontario's manufacturing sector has taken a stinging toll on the provincial economy. Premier Dalton McGuinty has complained that a petro-dollar fuelled by the oil and gas boom in the West hurts Ontario's wellspring manufacturing and export sectors, but critics — including Alberta's Premier Alison Redford — have called that simplistic.
And while Ontario is often the target of national scorn, professor Henry Jacek of McMaster University in Hamilton says Tuesday's budget should be of concern to people right across the country.
Despite qualifying for equalization payments in recent years, Ontario still sends a lot more tax dollars to Ottawa for distribution to the rest of the country than it ever gets back, he added.
"There's been a lot more concern about the Ontario budget, with the minority government and the big deficit," said Jacek.
"When you look at the amount of money that flows to the other provinces from Ontario on a net basis, we still are supporting a lot of the rest of the country.
"We're still subsidizing the rest of Confederation."
The Liberals rejected a number of Drummond's cost-saving ideas, such as scrapping full-day kindergarten, lowering class sizes, ending the 10 per cent rebate on electricity bills and charging parking fees at GO train stations.
But Drummond's warning about public sector pension costs jumping 70 per cent will not go unheeded, the source said. While there won't be any specific legislation, the Liberals feel it is important to start a public debate about the future provisions of the pension plans without lowering benefits for current retirees.
"We're reviewing and proposing changes to public sector pensions to make them sustainable for the employees, and for the two-thirds of Ontario taxpayers that don't have a pension plan," said the source.
The Liberals already announced they would freeze welfare and disability payments, delay promised increases in the Child Benefit, cancel financial supports for the horse racing industry and the Ontario Northland railway service, and increase licence fees for drivers.
The minority government is taking a balanced approach to the fiscal problems and will introduce a "uniquely Liberal budget," said Duncan.
The Liberals listened to the demands of the Progressive Conservatives and New Democrats, but did not give either opposition party all that they wanted in the fiscal plan, he added.
"We have a strong plan. We’re prepared to go to an election with it if necessary," said Duncan.
"I hope that doesn’t happen. I hope the opposition won’t compel an election five months after the last one."
However, all signs were the Tories would to vote against the budget, especially if the Liberals delay planned cuts in the corporate tax rate, from 11.5 to 10 per cent, in order to get NDP support.
"We were sent here to fight for two things: balancing the books and getting our economy moving with private sector jobs, and if those things aren’t in the budget, we can’t support it," said Opposition Leader Tim Hudak.
"I am worried about the signals I’ve received from this government so far, because they seem to have no jobs plan whatsoever and they just keep increasing spending."
The Liberals could put the entire PC campaign platform in their budget and the Tories would likely vote against it, said Jacek.
"They are so negative and they are so against the Liberals they will vote against whatever’s in that budget," he said.
"I can’t imagine how they would ever, ever vote for a Liberal budget."
The Tories have already warned they would consider a delay in the corporate tax cuts — which the Liberals are expected to include in order to get NDP support on the budget — as a tax hike on job creators.
But the New Democrats really don't like the Liberals' decision to freeze welfare and disability payments that go to some of the poorest people in Ontario and say the minority government should not take their support for granted.
"We’re definitely taking a wait and see approach," said NDP Leader Andrea Horwath. "I'm pretty disappointed with some of the things we’ve seen already."
The minority Liberal government needs the support of at least two opposition members to pass the budget.
Fifty-five cents of every dollar the cash-strapped provincial government spends goes for salaries and benefits to about one million public sector workers.
The Tories want a mandatory two-year wage freeze for the public sector, while the New Democrats want the government to cap salaries and benefits for public sector CEOs and executives. Duncan suggested it was the NDP idea that would get the nod.
"There will be a robust narrative on executive compensation in the budget," he said.
Finance Minister Jim Flaherty will table the federal government's budget in Ottawa on Thursday.
Also on HuffPost