After downwardly-revising this past year’s estimated deficit, Ontario’s FY 2024/25 deficit is expected to triple this year to nearly $10 billion, or about 1% of GDP. Ontario is not alone in reporting a wider deficit in the current provincial budget season, and is no stranger to deficits, having run one almost every year for the past 16 years. The government has delayed its return to balanced books by one year relative to the November 2023 fiscal update, getting back to black in FY 2026/27.

The budget maintains a Contingency Fund within program spending of $0.5 billion in the outgoing fiscal year and $1.5 billion in the year ahead, and “increases” it through the medium term, which could be used to ultimately report smaller deficits. If these contingencies are added to the reserves shown in the fiscal table, the budget could return to balance a bit earlier than currently projected. Thus far, however, the government has favoured raising spending to deal with a host of pressures and infrastructure spending to help “build a better Ontario”. 

Government of Ontario Fiscal Plan

[ C$ billions unless otherwise noted ]

Note : Numbers may not add up due to rounding.
Source: 2024 Ontario Economic Outlook and Fiscal Review.

Fiscal Year	2024 Budget Plan
	22-23	23-24	24-25	25-26	26-27
Revenues	192.9	204.3	205.7	217.4	226.6
% change	4.2	10.4	0.7	5.7	4.2
Expenditures	198.8	207.3	214.5	220.6	224.1
% change	8.6	4.3	3.5	2.8	1.6
Program Spending	186.4	194.5	200.6	205.8	208.9
% change	9.4	4.3	3.1	2.6	1.5
Interest Charges	12.4	12.8	13.9	14.7	15.2
% change	-1.6	3.2	8.6	5.8	3.4
Reserve	0.0	0.0	1.0	1.5	2.0
Budget Balance	-5.9	-3.0	-9.8	-4.7	0.5
% of GDP	-0.6	-0.3	-0.9	-0.4	0.0
Net Debt	400.5	414.8	439.1	459.8	474.5
% of GDP	38.2	38.0	39.2	39.5	39.1

Slowing revenue growth has some room for upside

After recording a 1.2% gain 2023, growth in real GDP is seen slipping to only 0.3% this year, weighed down by a softer global growth backdrop and elevated interest rates. After which, real GDP growth is expected to bounce back to 1.9% in 2025. These projections underpin modest gains in nominal GDP (the broadest measure of the tax base) as shown in the table on page 3.

The government’s growth projections are prudent, and generally align with TD Economics’ view. Our forecast for slightly stronger growth on average over the next two years, suggests some potential upside to their revenue projections. Using the government’s elasticities, cumulative revenues in 2024 and 2025 could be $750 million higher. Of note, the impact of the federal cap on international students and temporary foreign workers disproportionately impacts Ontario, where the intake in both categories has been relatively robust in recent years. The government appears to have already built in the effects of the former. 

In line with a softer economic performance and a weaker job market, revenue growth is forecast to ease to under 1% in FY 2024/25 – well below the long-term average. However, revenues are expected to bounce back in the outer years, growing at 5.0% on average. Personal income and corporate tax revenues are expected to advance modestly in FY 2024/25, though a 2.5% decline in sales taxes unwinds part of the total taxation revenue gain. A 4.5% increase from federal transfers is largely based on existing federal-provincial funding agreements.

The Budget is largely void of any major tax measures though emphasis has been placed on ongoing tax system reviews intended to support greater productivity in the economy. The government is also undertaking a review of the property assessment and taxation system.

Prior to the Budget release, The Ontario government announced extension of the temporary gas and fuel tax rate cut until the end of 2024, estimated to total $620 million in foregone revenues in FY 2024/25. A new computer animation and special effects tax credit along with tax relief on wine and beer will only carry minor impacts on total revenues. We believe some of this hit could be recouped via land transfer tax revenues, where our more optimistic hosing resales forecasts implies a $250 million boost to revenues, given government sensitivities.

Ontario Economic Assumptions

Annual Percent Change (Unless Otherwise Indicated)

Source: Ontario Ministry of Finance, as at March 2024.

Calendar Year	2022	2023	2024	2025	2026
Real GDP
Budget 2024	3.9	1.2	0.3	1.9	2.2
TD Economics Forecast	3.9	1.3	0.6	1.5	1.9
Nominal GDP
Budget 2024	9.2	4.1	2.7	3.9	4.3
TD Economics Forecast	9.2	4.3	3.9	3.4	3.9
3-Month Treasury Bill Yield
Budget 2024	0.0	4.8	4.4	3.0	2.6
TD Economics Forecast	2.2	4.7	4.6	2.8	2.3
10-Year Gov't Bond Yield
Budget 2024	0.0	3.3	3.2	3.1	3.3
TD Economics Forecast	2.8	3.4	3.3	2.9	2.9

Spending growth higher than expected, but restraint still promised

Program spending in the outgoing fiscal year was just shy of a billion dollars higher than at the time of the fall fiscal update, and up 4.3% from the prior fiscal year. Program spending growth does continue to slow in the current fiscal year to 3.1%, but less than planned in the fall economic update (1.7%). But, the government resolves to tighten its belt in the coming fiscal years holding spending growth to 2.6% next year and only 1.5% in FY 2026/27. 

One big ticket pressure was the $6 billion in backpay for public sector workers last year and this year due to the repeal of Bill 124 (which had capped salary increases for public sector workers). Other “new” spending worked into the fiscal framework include $190 billion over ten years in infrastructure and more specifically support for municipalities to enable more housing supply, money for health care and numerous other priorities (much previously announced) including the following big-ticket items:

• $1.8 billion in two funds for municipalities to build “housing enabled” infrastructure.
• $1.2 billion in Building Faster Fund to reward municipalities to achieve their housing targets. 
• $2 billion over three years to expand home cares access and increase compensation for personal support workers and nurses.
• $1 billion for hospitals. 

Interest costs are projected to jump by 8.6% in FY 2024/25. This represents 6.8% of revenues, leaving Ontario’s interest bite below its long-term average and shy of the government’s target of 7.5%. However, putting Ontario’s debt burden in perspective, the $13.9 billion the province will pay to service its debt this year is more than it spends on postsecondary education. 

Another key measure that doesn’t hit the fiscal plan were planned “reforms” to the auto insurance industry, by making only medical, rehabilitation and attendant care benefits for severely injured people coverage mandatory, and other benefits optional to give drivers the opportunity to lower their premiums. 

Deficits, capital spending drive debt higher

The combination of on-going deficits and robust capital spending plans sees the province’s net debt-to-GDP rising from an estimated 38.0% in FY 2023/24 to a peak of 39.5% in FY 2025/26, before retreating to 39.1% by FY 2026/27 (Chart 2). That ratio is just shy of Ontario’s prescribed 40% ceiling and doesn’t provide much wiggle room in the event that economic growth undershoots or the government runs larger-than-expected deficits. Current debt levels are elevated by historical standards  and relative to other provinces (Chart 3).  In FY 2024/25, infrastructure investment is forecast to expand solidly this year, consistent with the last survey of capital spending intentions, which is pointing to a 15% gain in spending in 2024. Planned investments totalling $190 billion are built into the Budget over the next ten years.

Total long-term borrowing requirements are estimated at $38.2 billion for FY 2024/25, edging down from the $41.8 billion in long-term borrowing completed last fiscal year. Borrowing remains elevated over the following two years, averaging $35 billion, as rising capital-spending requirements offset a declining deficit. The government will also continue with its Green Bond offerings, with $3 billion in issuances occurring in FY 2023/24, and a new framework for allowing a broader range of potential offerings in the future.

Bottom Line

Ontario’s fiscal situation is expected to deteriorate further over the next few years relative to the government’s previous expectations, as continued sub-par growth term in the economy and the revenue take battles up against ongoing pressure in key spending areas, notably big outlays on infrastructure, specifically to enable new housing supply and health care. The government is relying on holding spending increases to a modest rate and a normalization in revenue growth to bring the budget back to balance in two years.  

While the government’s finances have come a long way from earlier pandemic-era forecasts, the continued uptrend in the already-high debt burden leaves the province more vulnerable to unexpected economic or financial events. Helping to mitigate these risks are the government’s practice of building in significant contingency reserves, which it maintained in this budget.  Moreover, given the resilience of household spending amid high rates, the prospect that the economy will pull off a soft landing has increased significantly in recent quarters – clearly good news from a fiscal perspective.   

Lastly, it’s importance to recognize that a chunk of the uptick in the province’s debt burden is capital investment. This spending is needed given the demands of a rapidly growing population. More broadly, infrastructure investment can also help boost longer-term productivity, and Ontario has had its issues in in this regard in recent years.