Highlights

  • Ontario is projected a higher deficit of $19.9 billion in FY 2022-23, as spending ramps up
  • Sustained economic growth to drive revenues higher to $180 billion
  • Expenses to more than offset growth in revenues, reaching $199 billion
  • Ontario’s net debt-to-GDP to settle below 42% over the medium-term

  • On April 28th, Ontario Minister of Finance, Peter Bethlenfalvy, delivered his last provincial budget before Ontarians go to the polls on June 2nd. While previous pandemic budgets focused on pandemic recovery, Budget 2022 adopts a different tone, shifting to “rebuilding.” Despite the fading impact of the pandemic, Ontario is ramping up spending in a big way. The province’s deficit is expected to grow to $19.9 billion by FY 2022-23 from $13.5 billion in FY 2021-22, largely due to a myriad of new spending measures.

    The government plans to boost expenditures by $11.5 billion this year, or nearly double the $6.2-billion forecasted rise in revenues. The majority of new measures are geared towards hospitals, highways, and housing, including record investments in infrastructure, and tax and fee reductions intended to lower the cost of living for Ontarians. In the base case scenario, Ontario will balance the budget by FY 2027-28, two years ahead of the previous timeline. Of course, in a faster growth scenario, the books could be balanced as soon as FY 2024-25.

    Stronger-than-expected nominal economic growth last year will contain the weight of a rising provincial debt. Ontario’s net debt-to-GDP ratio is expected to stay below 42% through the six-year fiscal plan, representing a significant improvement compared to what was expected in Budget 2021.

    While it’ll be ultimately up to Ontarians to pass judgment on June 2nd, we’d caution that running a larger deficit, ramping up spending and cutting license plate fees at a time when the economy is bumping against capacity limits may just add fuel to the inflation fire. It also risks being a lost opportunity to repair the province’s finances more quickly while the economic environment is favourable. Depending on the election outcome, though, this budget may potentially not be the final one for 2022.

    Revenues trend higher with plenty of upside risk

    Ontario’s revenues are expected to grow by $6.2 billion (+3.6%) in FY 2022-23 to $180 billion. The majority of this increase can be attributed to higher income tax revenues and sales tax receipts. Both own-source revenues and federal transfers are projected to grow this year. Federal transfers will in fact increase at an average annual rate of 4% over the entire fiscal horizon. Though one-time funding related to COVID-19 is set to decline in FY 2022-23, the federal government will transfer $7.7 billion to the province over the next three fiscal years, the majority of which will be allocated to the Canada-Ontario Early Years and Child Care Agreement.

    Other non-tax revenue will fall by $3.3 billion, largely reflecting an expected $1.8-billion drop in fee revenues arising from the elimination of (and retroactive rebate on) motor vehicle license plate renewal fees. Interestingly, Ontario’s earlier announced temporary cut in gasoline and fuel taxes isn’t expected to have much of an impact on revenues (down only $78 million) because higher gasoline and fuel prices will provide a significant offset. The government pitches this temporary tax cut as a measure to ease rising cost of living. It would reduce the gas tax by 5.7 cents per litre and the fuel tax by 5.3 cents per litre for six months, effective July 1st—a month after the election.

    Budget 2022 maintains the practice during the pandemic of including multiple economic scenarios which pose varying upside and downside risk to the province’s fiscal balance. A slower growth scenario (with real GDP growth of 3.0% in 2022) would raise this year’s deficit to $23.2 billion, while a high growth scenario (real GDP grows at 5.2%) would result in a $15 billion deficit with tax revenues $4.8 billion higher. Of course, the base case growth scenario defines a middle ground, with expected real GDP growth of 3.7%, slightly below our RBC Economics forecast of 4.2%.

    Growth in expenses will eclipse higher revenues

    Budget 2022 is big on spending. It has total expenditures surging $11.5 billion (6.1%) this year to $199 billion. This despite a $5.1-billion (43%) drop in COVID-19 time-limited funding. Health and education account for the lion’s share of base program expenditures (60%), together rising $8 billion from FY 2021-22. New initiatives include retention bonuses for nurses and allocations to long-term care staffing, and an extension of the college and university tuition freeze.

    Following up on a prior announcement in March, Budget 2022 also includes a commitment to pass legislation to speed up housing approvals.

    Notably, Ontario plans to spend nearly $159 billion on infrastructure over the next decade (including $25 billion on highways). The province has announced $40 billion geared towards hospital infrastructure to increase capacity and an additional $4.7 billion for other health priorities including developing new long-term care homes.

    Debt-servicing costs, at $13.5 billion this year, represent 6.8% of total spending. The government expects this share to stay relatively flat throughout the fiscal plan though rising interest rates could pose an upside risk.

    Net debt-to-GDP to stay below 42%

    Ontario’s net debt is projected to grow 8.5% to $429 billion in FY 2022-23. The net debt-to-GDP ratio is forecasted to rise slightly from 40.7% in FY 2021-22 to 41.4% this year, and gradually ease to 39.1% by FY 2027-28. This profile is vastly improved from the projection in Budget 2021 that had the ratio crossing the 50% mark.

    Importantly, Budget 2022 provides an updated debt burden reduction strategy (aka the province’s fiscal anchors). The government commits to keeping the province’s net debt-to-GDP ratio below 42%; the net debt-to-revenue ratio below 250%; interest on debt-to-revenue ratio below 8%; and debt maturities-to-net debt ratio below 10%. While none is particularly constraining for the government, we believe these fiscal anchors will be a valuable tool to maintain fiscal discipline in the future.

    This year, Ontario’s long-term borrowing requirement is projected to be slightly higher at $41.5 billion with short-term borrowing decreasing by $3 billion. Since the majority of Ontario’s borrowing is conducted over the long-term (the average term of Ontario’s debt is 10.9 years), Ontario is less exposed to near-term risks associated with higher interest rates.


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    Carrie Freestone is an economist at RBC. She holds a Bachelor of Arts (honours) in Economics from Queen’s University and a Master of Arts in Economics from the University of Ottawa.

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