• Budget shortfall cut by more than a third this year and nearly eliminated by 2024-25.
  • Last year’s revenue spurt continues to set a more positive base.
  • Provincial government assumes a mild recession in 2023.
  • The province’s net debt-to-GDP ratio is now tracking below pre-pandemic levels.

  • As expected, Ontario’s Fall Economic Statement included sizable downward revisions to budget deficit projections. Revenue windfalls in the 2021-22 fiscal year left most provinces with unexpected surpluses—including Ontario. The dramatic uplift to Ontario’s overall balance has rippled through to future years allowing the provincial government to slash its 2022-23 deficit projections by more than one third from $19.9 billion at budget time to $12.9 billion. The improvement stems almost entirely from a $7-billion upward revision to revenues while the government left this year’s projected expenditures largely unchanged.

    Despite a mild recession forecasted in 2023, the overall budget balance is expected to improve further over the next two years. Ontario is now projecting deficits of $8.1 billion and $0.7 billion projected in 2023-24 and 2024-25, respectively.

    Revenue growth moderates from last year’s spurt

    Following a 15-year high (+12.3%) last year, growth in government revenue is now projected to moderate over the next two years—though remain positive. With interest rates still in restrictive territory and an economic contraction projected early next year, the slowing of business activity and employment is poised to temper revenue gains from personal and corporate taxation over the next few quarters. Nonetheless, revenue growth is projected to continue outpacing expenditure growth to support overall improvements to Ontario’s fiscal balance.

    Expenditure projections largely unchanged from Budget 2022 projections

    Changes from the 2022 Budget projections are marginal on the expenditure side of the ledger. The Ontario government added a mere $8 million (+0.1%) to its expenditure projection over three years and now expects total expenditures to reach $198.8 billion this fiscal year. Revisions come from slightly higher than projected interest on public debt (+$3 million) and program spending (+$4 million).

    A mild recession now baked into Ontario’s economic outlook

    The government now assumes a mild recession in early 2023. Its base-case forecast now calls for real GDP growth to slow significantly to 0.5% in 2023, which represents a material 2.6 percentage-point downgrade from the Budget 2022 forecast. The government also forecasts nominal GDP to slow considerably next year, though remain far more above water at 3.5%. Both economic projections are very close to our September projections (growth of 0.3% and 3.2% for real and nominal GDP, respectively, in 2023).

    While a recession poses clear downside risks to Ontario’s fiscal outlook, the budget’s $1 billion contingency reserve (rising to $1.5 billion in the next two years) and other prudence items embedded in the budget should allow the government to manage most unexpected economic developments without jeopardizing the province’s bottom line.

    Strong nominal GDP, lower deficits push down net debt-to-GDP ratio

    Lower budget deficits and strong nominal GDP expectations have shifted the net debt-to-GDP trajectory down from Budget 2022 expectations. Today’s Fall Economic Statement projects the province’s indebtedness to fall below its pre-pandemic level of 39.6% to 38.4% this fiscal year, and remain close to that level in the following two years. Debt servicing costs as a share of revenues are also projected to moderate below pre-pandemic levels, dipping to around 7.3% over the medium-term instead of rising to 7.6%.

    Lower expected deficits will help reduce borrowing requirements. The government has also cut its long-term public borrowing outlook by $9.3 billion this year to $32.2 billion, and to $38.4 billion in 2023-24 and $32.3 billion in 2024-25.

    Ontario’s fiscal outlook back on track after pandemic-spending

    After a record year for revenue growth, Ontario has seemingly diverted the fiscal catastrophe feared at the onset of the pandemic. Last year’s surge in government income is projected to benefit the province’s fiscal position over the next three years, as its deficit continues to shrink. The sharp cuts to deficit projections and downward revisions to the net debt-to-GDP ratio are clear indications that Ontario’s finances are getting back to a sustainable path.

    Rachel Battaglia is an economist at RBC. She is a member of the macro and regional analysis group, providing analysis for the provincial macroeconomic outlook.

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