Provincial Updates

October 30, 2024 | 14:54

Ontario FY24/25 Fiscal Update

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

The Province of Ontario is projecting a $6.6 billion deficit for FY24/25 (roughly 0.6% of GDP), notably smaller than the $9.8 billion shortfall estimated in the initial budget plan. Considering that this update comes with a strong dose of new spending measures, it speaks to the large improvement in the underlying fiscal situation—on the back of both higher revenues and lower interest costs.

The improvement also carries through the forecast horizon, with the deficit shrinking to $1.5 billion in FY25/26 (previously $4.6 billion) and then settling at an $895 million surplus by FY26/27 (previously $500 million). Combining a better-than-expected finish to FY23/24, and this improved outlook, the cumulative bottom line over the four-year (FY23/24 through FY26/27) period has improved by a hefty $9 billion.

For this fiscal year, total revenues are revised up by $6.9 billion, with large improvements across personal, corporate and sales taxes. The economy simply hasn’t struggled as much as expected coming into the year, with the very modest 0.3% real GDP growth assumption revised up to 0.9% for 2024. Nominal growth also received a big boost, now pegged at 3.8% this year versus 2.7% in the budget plan. The Province then sees real GDP growth picking up to 1.7% in 2025. This updated outlook is still softer than BMO’s view (1.0% real growth in 2024 and 2.1% in 2025). Ontario has a recent history of conservative assumptions which then get topped as the fiscal year progresses, and this update is no different. A higher capital gains inclusion rate announced by Ottawa earlier this also adds to Ontario revenues.

There are a few new measures incorporated into this update, which have already been announced in recent days. The real headline grabber is a $200 cheque that will be sent directly to all Ontarians, and for all children. That will flow in early 2025 and cost $3 billion. The temporary gas tax cut will also be extended by an additional six months to June 30, 2025. An additional $1 billion will flow into health care supports in FY24/25, and compensation settlements in the public sector will cost a further $607 million. Lower debt service costs help, down $1.2 billion versus the budget plan.

Total long-term borrowing requirements are now estimated at $37.5 billion for FY24/25, down from $38.2 billion assumed in the spring ($31.4 billion, or a large 84%, has been completed to date). The trim comes largely as a result of the smaller deficit, while borrowing for capital purposes remains unchanged. Borrowing also runs lower than previously planned in FY25/26 ($35.0 billion), and then about in-line by FY26/27 ($32.6 billion).

Net debt is tracking lower with the improved bottom line. The net debt-to-GDP ratio is now pegged at 37.8%, down 1.4 ppts from the budget plan. Small deficits have helped, as has the boost to underlying nominal GDP. Remember that it wasn't long ago when Ontario was staring at the 50% mark in some of its projections, so the improvement on this front has been significant. Relative to its peers, Ontario has again shifted meaningfully below Quebec (40% with a mid-year update still pending) and is moving closer to the provincial median.

The Bottom Line: Ontario has gone from a tough news fiscal story to one of the good news fiscal stories on the provincial landscape. That doesn't change in this fiscal update despite chunky one-time spending bill.