Derek Burleton, VP & Deputy Chief Economist | 416-982-2514
Rishi Sondhi, Economist | 416-983-8806
Date Published: March 24, 2021
Today's budget is focused on providing additional pandemic-related support to households and businesses. A key takeaway of this budget is the longer-term legacy that the pandemic leaves on the province's finances. With shortfalls remaining elevated in the short run and falling only gradually over time, the province's net debt burden is forecast to reach a lofty 50% of GDP. On the plus side, debt servicing charges are expected to remain well below historical peaks, helped by continued relatively low interest rates. In addition, the budget is based on very cautious near-term economic growth assumptions, leaving room for an upside surprise on growth and revenues.
The scope of new initiatives introduced in this year's budget is narrower than last year. That said, the government is introducing new tax relief for households while adding some $6.1 billion in new COVID-19 support spending, bringing the total to $51 billion over four years.
In FY 2020/21, the deficit was $38.5 billion, unchanged from the autumn fiscal update, as both revenues and expenses came in roughly as expected. At 4.5% of GDP, this shortfall was one of the largest in the country. However, Ontario was also among the provinces hardest hit by the pandemic, which took a massive toll on revenues.
A theme so far in this year's provincial budget season is the incorporation of cautious economic assumptions into fiscal planning reflecting still high levels of uncertainty. Ontario has gone a step further in terms of prudence. This includes considering multiple economic scenarios, building healthy reserves into their planning and using economic growth projections on the low side of consensus in its baseline scenario. On the latter front, our forecasts anticipate much stronger nominal GDP growth than the government this year, in line with consensus estimates at the time the budget was generated. However, in recent weeks, 2021 and 2022 growth prospects for the province have brightened considerably in lockstep with the US and Canada. Using the government's sensitivities, our forecast would result in revenues coming in about $4 billion higher in 2021 alone than what the government expects. It's also worth noting that real GDP growth could even top the 5.9% advance for 2021 that the government assumes in its "faster growth" scenario.
The deficit is expected to narrow over time in all three scenarios provided by the government. Our current baseline forecast appears to be most in line with the government's "optimistic" scenario that shows the budget position moving back into balance by FY 2027/28, two years earlier than the government's baseline (FY 2029/30).
Consistent with their forecast for a rebound in economic activity, the budget anticipates a healthy 7.2% rebound in own-source revenues in FY 2021/22. However, federal transfers are forecast to fall after surging in FY 2020/21.
Budget 2021 includes no new taxes, but announces additional relief including:
On the spending front, several new measures are announced, including:
Program spending is projected to remain elevated over the medium term. For FY 2021/2022 however, expenditures drop by 3%, as time-limited COVID-19 spending falls from $20.1 billion to $6.7 billion.
As for the other big-ticket items, healthcare spending is forecast to rise by 4.6% in FY 2021/22, nearly matching the prior year's gain. In the education sector, spending is projected to rise by 2.7%, marking an acceleration from FY 2020/21.
[ Percent change unless otherwise noted ]
|Real GDP (Planning Scenario)||-5.7||4.0||4.3||2.5||2.0|
|Nominal GDP (Planning Scenario)||-4.8||6.2||6.4||4.5||4.0|
|Real GDP (Slower Growth Scenario)||-||3.1||3.4||2.3||1.8|
|Real GDP (Faster Growth Scenario)||-||5.9||4.7||2.7||2.2|
Even with the expectation of a reasonably robust economic recovery, net debt-to-GDP is forecast to increase from 47.1% in FY 2020/21 to 50.2% by FY 2023/24. However, there is some room for improvement on this front should growth surprise on the upside as we anticipate. The government expects the debt ratio to top out at 50.5% by FY 2025/26 – which the government has set as a ceiling – before heading lower thereafter.
Through FY 2023/24, net debt will be driven higher by persistent deficits and an uptrend in infrastructure spending. This elevated stock of debt leads to rising debt servicing charges. As a share of revenue, debt service costs are set to drift higher over the next few years, although are forecast to remain about 6-7 ppts below historical peaks.
The province’s overall funding requirement is expected to drop from $59.0 billion in FY 2020/21 to $54.7 billion this fiscal year. Meanwhile, the average cost of borrowing is forecast to increase from 1.6% last fiscal year to 3.2% in FY 2023/24, reflecting the rising interest rate environment. However, the average term of the province's debt portfolio remains lengthy, at 10.7 years. This should give the government some cover against rising interest rates.
While Ontario's economy is rebounding faster than many had expected, the impact of the pandemic on the province's fiscal position will be felt well into the future. Additional provincial supports will help households and small businesses continue to navigate the pandemic and support a sustained recovery in the near term. Moreover, these amounts are almost certainly to grow larger once the federal government brings down its budget on April 19th. Still, it will leave Ontario facing a major debt challenge, and one that would only be exacerbated if the economy were to experience another unanticipated shock over the next few years.
[ C$ billions unless otherwise noted ]
|Fiscal Year||2021 Budget Plan|
|% of GDP||-4.5||-3.7||-2.9||-2.0|
|% of GDP||47.1||48.8||49.6||50.2|
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