Ontario’s fiscal watchdog warns the provincial budget is not balanced — due to a difference of opinion over accounting that was first raised by the auditor general last year.

The Financial Accountability Officer (FAO) said Monday that there will be a $4 billion deficit in 2017-18 even though the Liberals maintain the books are in the black.

J. David Wake said the government’s “decision not to adopt the auditor general’s accounting recommendations has contributed to a significant and growing gap between the fiscal outcomes projected by the FAO and the province.”

At issue is whether around $11 billion in the government co-sponsored Ontario Public Service Employees’ Union Pension Plan and the Ontario Teachers’ Pension Plan can be counted toward the bottom line at Queen’s Park.

Auditor general Bonnie Lysyk and her predecessors booked the holdings as an asset starting in 2002, but she changed her mind last year.

The government appointed Tricia O’Malley, chair of the Canadian Actuarial Standards Oversight Council, to lead a blue-ribbon panel to study the accounting change.

O’Malley — along with Murray Gold, of Koskie Minsky LLP, Uros Karadzic, of Ernst and Young and Paul Martin, a controller with the New Brunswick government and former partner at Grant Thornton LLP — concluded the Liberals’ accounting was sound.

But Lysyk said she is not changing her mind and devoted a whole chapter to the accounting dispute in her annual report to the Legislature last week.

Her argument is bolstered by Wake’s fall update.

The FAO also backed the auditor general in questioning the complex mechanism the government has developed to bankroll the 25 per cent electricity rate cut, known as the Fair Hydro Plan.

Because of the actuarial tussle “it is becoming more difficult for legislators and the public to assess the government’s fiscal projections.”

Even though the economy is growing at a pace ahead of the Canadian average, the accounting adjustment left the FAO projecting shortfalls of $7.1 billion in 2018-19, $7.8 billion in 2019-20, $9 billion in 2020-21, and $9.8 billion in 2021-22.

“The FAO is projecting very strong growth for the Ontario economy in 2017,” Wake, who also the province’s integrity commissioner, wrote in his 28-page report.

However, that will be more than offset by increased spending, leading to the deficits, he warned.

That could lead to Ontario’s net debt eclipsing the $400 billion mark in the next four years.

David West, the chief economist for the Financial Accountability Office, responds to question on why they are not following the government's lead in accounting practices. The FAO follows practices supported by the auditor general.

Premier Kathleen Wynne said the government will stick with accounting practices that include the pension assets.

“I want to thank the FAO for his report. He … confirmed that under the accounting presentation that we’ve been using for the last 16 years, the budget is balanced, and in fact, there’s a small surplus for 2017-18,” Wynne told the House.

“So the report actually shows that our plan is working: The economy is growing, our unemployment rate is the lowest it has been in 17 years, and more than 843,000 net new jobs have been created since the recession.”

Progressive Conservative MPP Vic Fedeli (Nipissing) said the findings were “a blistering indictment” of the Liberal government and urged voters to opt for his party in the June 7 election.

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“The PC plan is different from the Liberal plan. (We) will find two cents on every dollar through eliminating waste this government doesn’t even believe exists. The premier says savings are impossible,” said Fedeli.

Wynne countered that electing the Tories would mean $12 billion “out of health care and education and services in this province.”

NDP Leader Andrea Horwath, for her part, expressed concern at the report.

“The most important lesson from the FAO is, once again, him saying … that the Liberal borrowing scheme that they put forward is not in the best interest of the people of Ontario,” said Horwath.

“It’s really clear that the FAO has identified a really big problem here.”

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