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UPDATE 1-Canadian province Ontario cuts budget deficit forecast as revenue rises

Fergal Smith

rises@ (Adds budget details)

TORONTO, Nov 6 (Reuters) - The Canadian province of Ontario, the world's biggest sub-sovereign debtor, said on Wednesday it expects a smaller budget deficit for the current fiscal year than previously anticipated as revenue rose, and while it cut taxes for small businesses.

Canada's most populous province, which includes the cities of Toronto and Ottawa, forecast a deficit of C$9.0 billion ($6.8 billion) in the 2019-2020 fiscal year, down from C$10.3 billion estimated in April's budget, a fiscal update from the Progressive Conservative government showed. The fiscal year ends on March 31.

The province, which accounts for nearly 40% of Canada's gross domestic product and is a major exporter of manufactured products, including autos, faces economic headwinds from global trade frictions and high household debt.

A reserve of C$1 billion was maintained, meaning that the province could run a smaller deficit if it was not used. The deficit was C$7.4 billion in 2018-19.

The Conservatives, who won a majority government in last year's provincial election, projected narrower deficits in future years and stuck to their plan to eliminate the deficit in 2023-24 despite facing a backlash against cuts to some public services. But the Conservatives eased spending restraints for the current fiscal year as the outlook for personal and corporate tax revenues rose.

Revenue was projected at C$155.8 billion, C$1.6 billion higher than seen in April, while the government plans to spend C$1.3 billion more than it previously intended on programs such as healthcare, education and childcare and social services.

The Tories also plan to reduce the small business corporate income tax rate to 3.2% from 3.5%, beginning on Jan. 1, 2020, and said they would cut the aviation fuel tax rate to 2.7 cents per liter from 6.7 cents per liter in the North to make life more affordable for Northern Ontario residents.

The 2019 economic growth forecast was left unchanged at 1.4%, slightly below the 1.5% projection of private sector economists. The economy grew by 2.3% in 2018.

Ontario's net debt, which is the highest of any sub-national borrower rated by Moody's Investors Service, is expected to drop to C$353.7 billion at the end of the current fiscal year, from C$359.9 billion forecast in April.

The province, which has run deficits every year since 2008-2009, pays more to borrow than some other major Canadian provinces, such as Quebec and British Columbia, that are running balanced budgets.

The yield on Ontario's 10-year bond was 2.233% on Wednesday, about 67 basis points more than the equivalent federal government bond.

Net debt-to-GDP, a key measure of fiscal health, was projected at 40.0% in 2019-20, versus 40.7% estimated in the April budget. It was 39.6% in 2018-19.

($1 1.3180 Canadian dollars) (Reporting by Fergal Smith Editing by Denny Thomas, Sandra Maler and Leslie Adler)