November 05, 2020 | 19:17
The Province of Ontario is projecting a $38.5 billion deficit for FY20/21, in line with the estimate published in the August fiscal update. That will weigh in at about 4.5% of GDP, which is a bit on the deep side relative to the basket of Canadian provinces (the average shortfall currently sits at 3.8%). Net debt is still expected to jump to 47% of GDP this fiscal year.
This budget allocates a chunky $15 billion of new spending/support measures spread over three years, bringing the total to $45 billion. But, that was more than fully accounted for (though not yet documented) in the prior fiscal update, so the bottom line is not impacted. An additional $2.6 billion of spending room remains in place this fiscal year, as well as the $2.5 billion reserve allowance.
The Province also laid out a three-year fiscal plan, which is the first real guidance (from a large jurisdiction) on the pace of deficit reduction after the current pandemic-plagued fiscal year, and the short story is that the pace will be slow. Next year's deficit is pegged at $33.1 billion, before shrinking only modestly further to $26.2 billion by FY22/23. It seems that two big factors are at work, and could be a sign of what's ahead for the provinces as a whole. First, while own-source revenues rebound solidly, federal transfers fall off meaningfully after getting juiced in FY20/21. Also, program spending holds near current pandemic levels in the following two years, as the Province maintains support and transitions to measures aimed at spurring the recovery. Adding it up suggests that, while provincial deficits were moderate this year relative to Ottawa and some worst-case estimates, they are going to linger for a while.
Ontario has also laid out two alternate scenarios based on the evolution of the pandemic and the economic recovery. The 'bad' scenario (based on an average undershoot of 1.6 ppts on real GDP through 2023) sees a deficit of $33.4 billion by FY22/23; the 'good' scenario (largely driven by a much stronger 2021 rebound) sees a deficit of $21.3 billion by FY22/23. Building on the points made above, even in the optimistic scenario, Ontario still faces a more than $20 billion shortfall in two years.
Summary of Major Policy Measures
All-in, there's some meat in this budget even though Ontario is still in pandemic mode. An emerging theme seems to be bringing business costs down, or at least changing the perception that Ontario is an uncompetitive jurisdiction to operate.
Total revenues are estimated at $151.1 billion in FY20/21, down 3.2% year-over-year. A $10.0 billion reduction in underlying tax revenues is partly offset by ramped-up federal transfers, which are tracking 32% higher. The Province is assuming a 6.5% decline in real GDP this year, which is somewhat deeper than our current call for a 5.7% decline, and shaded below the current consensus (6.1%) as a form of prudence. The assumed rebound is slightly weaker as well at +4.9% in 2021 (versus our 5.6% call). Additionally, there's some additional underlying prudence in how quickly revenues come back relative to GDP.
Meantime, total spending is expected to jump 13.5% in FY20/21, to $187 billion, with all of the growth driven by program spending. Here, the Province notes that the net position of the dedicated COVID-19 Health Contingency Fund is down to $598 million and the Support for People and Jobs Fund is currently still $2.1 billion in FY20/21. Add it up, along with the $2.5 billion reserve allowance, and there's still some room left to absorb more spending pressure--but this budget took a big chunk out of what was there previously.
Total long-term borrowing requirements are estimated at $52.3 billion, little-changed from that assumed in August. As of mid-October, Ontario has already completed almost $35 billion worth of that requirement. Borrowing then increases slightly in each of the following two years, as the deficit remains large and capital spending borrowing rises. Overall, that leaves net debt at 47.0% of GDP this year, which will mark the highest ratio outside Newfoundland & Labrador. A rebound in GDP will temper the increases next year, but the ratio is expected to keep pushing higher, to 49.6% by FY22/23. The good news is that debt service costs remain well contained as a share of revenue. Long-term interest rates have plummeted since the pandemic began, and credit spreads have tightened since the spring in part thanks to Bank of Canada buying and an improved overall risk appetite. At this point, there no sign of stress on this front even as the debt ratio looks historically high.
The Bottom Line: Ontario's FY20/21 deficit remains on track, but the mechanics are different than usual. That is, the Province is busy filling in spending that was allocated earlier in the year and, in that respect, this budget made significant headway. The other key takeaway that probably applies to the provincial sector overall is that deficits are going to linger at relatively deep levels for at least a few years after the pandemic.