Credit rating agency Moody's has downgraded Ontario's rating, only one day after another credit agency warned the province that it could be in trouble should it fail to meet deficit-reduction measures.
The decision, released by Moody's Thursday, downgrades Ontario's rating to Aa2 with a stable outlook, down from its former rating of Aa1 with a negative outlook.
This follows a previous warning Moody's gave to the province in December, saying the province could get a credit downgrade if it fails to get its deficit under control.
The move also comes one day after ratings agency Standard and Poor's issued a credit outlook warning. The warning did not affect the province's borrowing rates, but it did change the province's credit outlook from stable to negative for a two-year period.
In its rationale for the downgrade, Moody's said the decision was due to a growing debt burden in the province, modest growth potential and "significant risks" in the province's ability to meet its ambitious financial goals.
These ambitious goals were laid out in the Ontario 2012 budget, which passed on Tuesday.
In the budget, the Liberal government predicted it will keep spending increases at only 1.9 per cent per year until 2015, and will then move that spending increase to just 1.1 per cent until 2018.
Moody's was skeptical that the province could meet these targets because they are much lower than previous expense increases.
"Expense growth targets appear particularly ambitious in light of growth in expenses averaging seven per cent annually in the five years to 2011-12 and continued pressures on health expenses, the province's largest expense item, due to demographic pressures," said a report released by Moody's Thursday.
The decision made by Moody's will not change borrowing rates yet, the finance minister said Thursday.
"I look forward to meeting the challenges we set out in the budget," Duncan told reporters.
But Progressive Conservative finance critic Peter Shurman was already firing back, in the hours after the credit decision, calling the downgrade "catastrophic news for Ontario."
"This will drive up interest rates and increase the cost of servicing our $280-billion debt," Shurman said in a statement. "Every one per cent increase in interest rates will cost our province an additional $500 million."
Shurman said it's time for urgent action to get the province's debt crisis under control.
On Wednesday, Finance Minister Dwight Duncan tried to play down the warning from Strandard and Poor's, saying it was just another indication that the government must meet all of its deficit-reduction measures set out in the budget, which was passed Tuesday.
"They're worried that the targets can't be hit, because they are aggressive," Duncan told reporters Wednesday.
A large part of the budget-reduction measures include the difficult task of freezing doctor and teacher salaries in the province for two years.
The province's contract with Ontario teachers expires in August.
Moody's also said that a credit rating upgrade for Ontario in the near term is unlikely, but noted that an upgrade is possible if the province meets the plans laid out in its budget.
With files from CTV Toronto's Paul Bliss
