Provincial Updates

November 02, 2023 | 16:33

Ontario FY23/24 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 $5.6 billion deficit for FY23/24 (roughly 0.5% of GDP), larger than the $1.3 billion shortfall estimated in the initial budget plan. Indeed, it's looking more and more like the era of persistent upside fiscal surprises is now over, with a cloudier economic outlook weighing on the revenue forecast.

Downward revisions also carry through the forecast horizon, with the deficit persisting at $5.3 billion in FY24/25, before returning to balance ($0.5 billion surplus) in FY25/26. Cumulatively, this represents a combined $7.1 billion deterioration in the bottom line over the three-year forecast period relative to the 2023 budget. And, this almost entirely reflects a softer revenue growth profile as program spending and debt service costs are little changed by FY25/26.

For this fiscal year, total revenues are revised down by $2.6 billion, with the softer outlook largely carrying forward. While real GDP growth for 2023 is tracking ahead of budget expectations (1.1% versus 0.2%), the outlook for 2024 (0.5% versus 1.3%) and 2025 (2.0% versus 2.5%) has been carved. In other words, the slowdown was delayed, not avoided. That also follows a softer-than-expected budget result for FY22/23, with personal income tax receipts revised down into this fiscal year. Ontario's updated economic outlook is now very much in line with BMO's.

There are a few new measures incorporated into this update, which have already been announced in recent days. For example: the gas tax cut will be extended through June 2024; HST will be removed from new rental construction; and the province will create a $3 billion Ontario Infrastructure Bank. The latter will seek to draw investment from pension funds and institutional investors to help build out infrastructure. The immediate focus will be on long‐term care homes, energy infrastructure, affordable housing, municipal and community infrastructure and transportation.

Also, higher projected program spending this fiscal year (up $2.4 billion) largely reflects higher contingencies. That can be spent, or leaned on in the event the economy softens more significantly than the province expects. An explicit forecast allowance of $1.0 billion also remains in place, so there is some wiggle room to ensure these targets are met.

Total long-term borrowing requirements are now estimated at $34.7 billion for FY23/24, up from $27.5 billion assumed in the spring ($15.0 billion has been completed to date). The increase comes largely as a result of the deeper deficit. Borrowing also holds at a higher level next fiscal year and through FY25/26, at $37.4 billion and $37.0 billion, respectively (both higher than the budget plan).

Net debt is also tracking higher, with the net debt-to-GDP ratio now pegged at 38.4%. Recall that the budget estimated this ratio at 37.8%, so the increase has been modest and tempered by somewhat firmer nominal GDP growth. That said, it wasn't long ago that Ontario was staring at the 50% mark in some of its projections, so the improvement has set a much better starting point if we are indeed going into a tougher period for the economy. But, at the same time, Ontario still maintains the highest net debt-to-GDP ratio among the provinces outside Newfoundland & Labrador.

The Bottom Line: Ontario's finances have come a very long way from earlier pandemic-era forecasts, but the tide of persistently better-than-expected projections has turned. Downward revisions in this update are still relatively modest, and we'll see how the economy is holding up by the time Budget 2024 comes around.