Standard and Poor's revised its Ontario outlook from stable to negative, saying it was concerned about the minority government's ability to rein in spending and stay on track to achieve a balanced budget by 2017-18.
"The outlook revision reflects our view regarding the minority legislature's ability to meet what we view as challenging cost containment targets in the next one to two years necessary for the debt burden to peak in fiscal 2015 as planned," concluded Standard and Poor's in its report.
Moody's Investor Services took the same action last fall, but that was before the Liberals introduced an austerity budget that limited government spending increases to just one per cent a year for the next five years. S&P was concerned the Liberal government would not be able to keep spending that low.
"In our opinion, it is a challenge for any province to sustain this low growth rate in spending, due to the substantial cost pressures in health care delivery alone," said the ratings agency.
Finance Minister Dwight Duncan said the S&P report shows how important it is for the province to stick to its deficit-reduction targets, and warned an actual credit downgrade would prove very expensive for a province that already spends over $10 billion a year to service its debt.
"S&P says there’s a one in three chance it will lower Ontario’s credit rating in the next two years," said Duncan.
"If we don’t hit our targets we’ll end up paying more money to bond holders instead of for schools and health care."
The credit agency warned the province's debt reduction plan depends on achieving a two-year wage freeze for about one million public sector workers.
"For us today’s action is a reminder to the minority legislature and to all Ontarians," said Duncan.
"It sends a message to our bargaining agents and bargaining partners, our teachers and doctors and other public servants, that there is no new funding for wage increases."
The Tories said the credit rating agencies know the Liberal government has a spending problem and warned the province can't afford a credit downgrade.
"I think it’s terribly serious and portends the next step ... a downgrade in the credit rating, and that means an increase in interest (rates)," said Progressive Conservative finance critic Peter Shurman.
The New Democrats said Ontario cannot slash its way to a balanced budget, which is why the party convinced the minority Liberal government to adopt a new tax on incomes over $500,000 to help generate more revenue.
Earlier Wednesday, Duncan announced the new tax on the rich that helped keep the minority Liberal government alive will also help lower the province's deficit before it's even implemented.
The deficit for the 2011-12 fiscal year fell to $15 billion from the $15.3 billion projected in the 2012 budget, in part because the government agreed to a two percentage point surtax on incomes over $500,000, said Duncan.
"Some of the tax will accrue in the previous year because of the way the tax system is set up," Duncan told reporters.
The Liberals agreed Monday to introduce the new tax bracket so the NDP would not vote against the minority government's budget and trigger another election. The Conservatives had already vowed to reject the budget, even if it meant defeating the government.
The new surtax on high income earners will help stem the flow of red ink sooner than planned, added Duncan.
"Yes that tax does get us there more quickly," he said. "If you look at the 2012 budget we projected balance in 2017-18. We now have a half-a-billion dollar surplus in that year."
The Liberals estimate the tax on the rich will bring in $470 million a year, and "every nickel" will be used to pay down the deficit, said Duncan.
During question period Wednesday, the NDP accused Duncan of low-balling revenue projections in the budget so the Liberals can paint a rosier picture later and claim to be good fiscal managers.
"This minister changes his numbers more often than most people change their socks," said Prue.
"The fact is this minister’s credibility is fading fast. Will we be hearing more surprise good news about these deficit projections from this minister?"
The shot from the NDP just two days after their budget deal with the Liberals seemed to catch Premier Dalton McGuinty off guard.
"I thought we were friends," McGuinty said before Duncan could even respond to Prue's question.
The surtax on the rich will be eliminated when the books are balanced.
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