April 28, 2022 | 19:18
Ontario Budget (FY22/23) — Poll Positioning
The Province of Ontario is projecting a $19.9 billion deficit for FY22/23, $1.8 billion wider than the estimate published in the fall fiscal update. That will weigh in at 1.9% of GDP, and is also wider than last year's $13.5 billion shortfall, as well as the $16.4 billion in FY20/21, which was the pandemic-worst for most jurisdictions.
Meantime, heavy doses of both operating and capital spending will hold borrowing at a high level, and lift the net debt-to-GDP ratio to 41.4% this fiscal year, up 0.7 ppts from FY21/22.
The Province does not envision a return to balanced budgets in its base-case fiscal plan through FY24/25, but can conceivably achieve that mark under their high-side scenario in two years (although that scenario looks very rosy at this point). The base fiscal plan calls for a lingering $12.3 billion deficit next fiscal year and $7.6 billion in FY24/25, with a steady net debt ratio over that time frame. Considering that nominal GDP growth is running at a robust clip, this speaks to assertiveness on the spending side of the fiscal plan. That said, the Province continues to build in ample contingencies, including an explicit $1.0 billion reserve allowance and a $4.6 billion spending contingency for FY22/23.
There were a few new policy measures announced in this budget in addition to many already detailed in the past month. Perhaps the biggest surprise is the lack of any major headline-grabbing measures given that this document will effectively serve as an election platform.
Summary of Major New Policy Measures
Total revenues are estimated at $180 billion in FY22/23, up almost 4% year-over-year as the economic rebound is expected to extend into this year. Personal, sales and corporate income tax receipts are all expected to rise solidly. Federal transfers are expected to increase again following a dip after some pandemic-related funding expired last year, helped by additional funding under the childcare agreement. Real GDP is expected to grow 3.7% in 2022 before cooling to 3.0% next year. Those calls are largely consistent with our view (3.4% and 3.0%), although the current-year assumptions might have been locked in before some downward revisions by a number of forecasters. Nominal growth is expected at 6.7% this year, which actually lags our own call somewhat. We continue to view Ontario as a driver of Canadian growth, in what is a relatively balanced regional growth picture.
Meantime, total spending is expected to rise at a faster 6% pace in FY22/23, to $199 billion. That comes despite temporary COVID-related funding fading to $6.9 billion from $12.0 billion in FY22/23. Base program spending is expected to grow a hefty 10% this year, with health care, education and some infrastructure funding rising strongly. Standard contingencies remain in place, which include a $1.0 billion reserve allowance this year. In a nutshell, this is a big-spending budget across a wide range of areas.
Total long-term borrowing requirements are estimated at $41.5 billion, edging up from $41.4 billion in FY21/22, after about $10 billion in pre-financing completed last fiscal year. Borrowing remains elevated over the following two years, averaging $42 billion per year through FY24/25, as rising capital-spending requirements offset a declining deficit. Ontario will continue with multiple green bond offerings per year, and will look to expand the envelope of projects that will qualify for the program. Ontario has also built up a large liquidity reserve of $47.2 billion in FY21/22 (versus pre-COVID norms of around $30 billion). There is no indication that the Province will draw this down in the near term.
Overall, that leaves net debt at 41.4% of GDP this year, which will mark the highest ratio outside Newfoundland & Labrador. The ratio will edge down only a tick to 41.3% by FY24/25. The better news is that debt service costs remain well contained as a share of revenue, matching a record low at 7.5% this year. Ontario's "debt burden reduction strategy" sets caps on three indictors: Net debt-to-GDP at 42.0%; net debt-to-revenue at 250%; and debt service-to-revenue at 8.0%. If we're being objective, these metrics look finessed to fit around current budget and spending demands, but all metrics are met in this document.
The Bottom Line: This is a pre-election budget that leans heavy on spending and borrowing. To put it simply, Ontario's budget deficit is widening this year, while most of its peers are narrowing; and the net debt-to-GDP ratio is rising, while most others are falling. We remain confident in Ontario's economic fundamentals, and measures focused on transportation infrastructure and labour supply are well-founded, but fiscal metrics continue to trend at the weaker end of the provincial spectrum.