TORONTO - Class sizes will remain the same in Ontario but some underutilized schools will be closed, Finance Minister Dwight Duncan said Tuesday in releasing his budget.

"Unfortunately school districts and schools get to the point where they're too small to maintain," Duncan said.

"Enrolment has gone down over the past several years, funding per student has gone up."

Gym classes, music programs and other services have returned to schools and "our goal is to protect that," Duncan added.

"This is all about making sure that we have the right services in place at the right cost."

The government says the way school board funding works makes it easier for some boards in urban areas to keep small and under-used schools open than to deliver services more efficiently.

It plans to cut grants to school boards and reduce incentives in education funding formula that facilitate the continued operation of those schools, starting in 2013-14. Duncan said that will mean annual savings of $70 million.

The Liberals will also cut $34 million over three years in student transportation.

It will not, however, merge separate and public boards.

As previously indicated, the Liberals will stick with their plan to implement full-day kindergarten, counter to the advice of economist Don Drummond in his government-commissioned austerity report.

And they ignored another Drummond recommendation by promising to keep the cap on class sizes in the early grades. Those two initiatives will protect nearly 10,000 teaching jobs, including 3,800 for full-day kindergarten and almost 10,000 non-teaching positions, the government said.

The budget also maintains a promised 30 per cent tuition rebate, but proposes to discontinue some grants and bursaries and reduce funding to students living in social housing.

In what may be an olive branch to the Tories, subsidies for international recruitment and study-abroad scholarships for non-PhD students will be eliminated.

Capital funding for college and university projects will also be cut.

One Drummond recommendation that will be adopted is a call to eliminate the so-called "victory" laps that sees high schools students stay back for a year to better their marks. The Liberals will cap high school credits at 34, four more than required to earn a diploma, by September 2013 -- saving $36 million over three years.

"Despite the elimination of the Ontario Academic Credit (OAC) nearly a decade ago, Ontario continues to accommodate up to 20,000 students returning for a fifth year, many of whom have already received their secondary diploma," the budget reads.

"The cap will motivate students to plan their courses appropriately while allowing them to seek additional or upgraded credits."

When it comes to First Nations education, the budget echoed Drummond's call for better funding for on-reserve schools, but the government stopped short of offering to foot the bill.

In his report last month, Drummond had singled out those schools as ones that were in "urgent need" of better funding, saying there is a growing gap in the system between those living on-reserve and the rest of the population.

While such funding falls to the federal government, Drummond said, if Ontario can't persuade Ottawa to provide increased funding, it should find a way to pay for it itself.

The budget agreed Ottawa had "chronically underfunded" First Nations on-reserve education, and said it would work to better the schools "provided the federal government supplies the necessary funding."