- The Ontario government shaved its budget shortfall projection down to $6.6 billion in fiscal 2024-25—a $3.2 billion improvement from Budget 2024 released this spring.
- It also cut its 2025-26 deficit to $1.5 billion (from $4.6 billion) and expects a slightly larger surplus of $895 million in 2026-27.
- Stronger than anticipated economic growth and higher taxation (partly thanks to the federal government’s changes to the capital gains inclusion rate) have added another $6.9 billion to 2024-25 revenues relative to Budget 2024.
- New signature policy measures included a $200 taxpayer rebate for all eligible adults (costing $3 billion to the government) and an extension of the gas and fuel tax rate cuts (costing $625 million over two years).
- Bottom line: Ontario’s 2024 economic update paints an improved fiscal picture from Budget 2024 as its performance has beat expectations over the first half of the year. However, recent changes to Canada’s immigration plan add significant downside risk and it could take concerted measures to maintain the improved fiscal position.
Ontario’s 2024 Economic Review and Fiscal Update showed an improved fiscal plan from the one put forward this spring. Recent changes to the federal immigration levels plan, however, weren’t accounted for in the underlying economic assumptions, adding downside risk to the fiscal plan.
On the heels of a nearly balanced budget in 2023-24, the province is still projecting a sizable deficit this fiscal year. But, the budget shortfall is set to shrink from a previously estimated $9.8 billion to $6.6 billion in fiscal 2024-25.
Stronger growth, federal tax measures strengthen revenue
The improved fiscal outlook largely reflects a stronger macroeconomic growth backdrop than expected in Budget 2024. Indeed, real and nominal growth projections have undergone notable upward adjustments with real gross domestic product growth tripling from 0.3% to 0.9% in 2024 and nominal GDP growth increasing more than 1 percentage point from 2.7% to 3.8%.
The federal government’s changes to the capital gains inclusion rate have also boosted revenue projections for personal and corporate income tax. Adjustments to revenues generated from income tax account for almost all of the $6.9 billion in additional revenues expected.
There will be a small offset from the $285 million in lost revenue from the Liquor Control Board of Ontario following the expansion of alcohol licensing to convenience stores across the province.
Rebates and compensation adjustments account for majority of new spending
Expenditures are expected to grow $3.8 billion relative to Budget 2024 projections—much less than the $6.9 billion increase in revenues—which narrows the projected deficit this fiscal year.
The spending boost comes largely from a new taxpayer rebate with a total price tag of $3 billion, all of which will be spent this fiscal year. Taxpayers over age 18 can expect a $200 rebate early next year. An additional $200 per child under 18 will be given to families who qualified for the Canada Child Benefit payment in 2024.
The province intends to extend the temporary gas and fuel tax cuts, costing the government another $625 million—half of which will be on the income statement in fiscal 2024-25. The temporary extension would keep the gas and fuel tax cuts at 9 cents per litre until June 2025—a six-month extension from the current December 2024 expiry.
Health sector support—including worker compensation—and wage settlements account for another $1.6 billion in new spending. A top-up of the contingency fund will subtract another $900 million from the province’s bottom line in fiscal 2024-25.
Provincial debt burden gets lighter
Ontario’s net debt burden fell to 37.3% in fiscal 2023-24, the lowest it’s been in more than a decade. Rather than shooting up close to 40% as planned in Budget 2024, the net debt-to-GDP ratio is now expected to remain below 38% over the course of the fiscal outlook—representing a notable improvement.
The lighter debt burden reflects both a shrinking deficit and an upwardly revised nominal GDP forecast.
Lower interest rates will help shave $1.2 billion off debt service charges in 2024-25. A credit rating upgrade earlier this year will also assist.
The improved fiscal picture is setting the provincial government up to meet its fiscal guardrails. We see this sending a positive message to the markets.
Drastic cuts to immigration targets add downside risk to outlook
Cuts to Canada’s immigration targets announced on Oct. 24 add significant downside risk to Ontario’s fiscal plan.
New population control efforts are poised to flatten Ontario’s population growth and materially slow economic growth. But, they didn’t make it into the province’s assumptions in the fall update. The government’s revenue, expense and indebtedness projections may have looked significantly less flattering if the new immigration targets were factored in.
We expect Budget 2025 to reflect the stricter immigration plan, which will add downward pressure to the province’s bottom line. As such, the Ontario government will likely have to work harder to sustain the fiscal improvement delivered in Wednesday’s update.
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 and budget commentaries.
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