November 14, 2022 | 15:33
Ontario FY22/23 Fiscal Update
The Province of Ontario is projecting a $12.9 billion deficit for FY22/23 (1.2% of GDP), much smaller than the $19.9 billion shortfall estimated in the initial budget plan. While that marks a meaningful in-year improvement, it's also a turn back down after the public accounts reported a $2.1 billion surplus for FY21/22.
So, what's going on? Within the current fiscal year, stronger revenues are driving the improvement. Total revenues are now pegged at $187 billion for FY22/23, up $7 billion from the budget. Personal and corporate income tax revenues drive the increase. However, cuts to the gas tax and a weaker housing market combine to carve off just under $1 billion. Compared to last fiscal year, revenue growth really flattens out (+0.9% after surging more than 12% in FY21/22) with ebbing momentum across most categories.
There are a few new measures announced alongside this update, but they are mainly lower-ticket items. For example, the gas tax cut will be extended through 2023, as already announced; direct payments to households with children are costed; and the small business tax rate phase-in is made more generous. Most spending measures announced since the spring are covered by contingency amounts, leaving program spending unchanged. On that note, an additional $3.5 billion in spending contingencies remain embedded in the forecast, along with the $1 billion reserve allowance.
All told, we could still see some upside to this fiscal year if spending contingencies don't get fully used or, more substantially, if revenues get revised higher as they have been known to do lately.
The refreshed medium-term outlook sees the deficit falling gradually to $8.1 billion next fiscal year, and then just $0.7 billion by FY24/25. Those following two years are the real crux of the fiscal situation given the deteriorating economic outlook. At this point, Ontario's planning assumption is based on 2.6% real GDP growth in 2022 and 0.5% in 2023 (BMO is currently stronger this year, but weaker next). Ontario's slow growth planning scenario would see the deficit widen next year to $13.8 billion, and we can very roughly say that our current base case is somewhere about in between the two.
Total long-term borrowing requirements are now estimated at $32.2 billion for FY22/23, down from $41.5 billion assumed in the spring ($13.6 billion remains to be completed). The decline is the result of the smaller deficit and the timing of some cash/non-cash expenses. That is partly offset by an expected $3 billion of pre-borrowing ahead of FY23/24.
Net debt is also tracking much lower, at 38.4% of GDP. Recall that the budget pegged this ratio at 41.4%, and it wasn't long ago that Ontario was staring at the 50% mark in some of its projections. It certainly helps that nominal GDP has been on a tear, pulling down debt ratios across the country, but the borrowing program has also come in under the bar. That said, Ontario maintains the highest net debt-to-GDP ratio among the provinces.
The Bottom Line: Ontario's finances have come a long, long way from the darkest of the pandemic-era forecasts. The move back into a modest deficit this fiscal year is partly the result of a big spending pre-election budget, and could ultimately still look better when the year is closed out. The next two years, however, depend heavily on how much the economy weakens. The good news is that Ontario, like almost all of its provincial peers, is starting on much better footing.