The Ontario government is planning to run deficits for the next four years, adding to a debt-to-GDP burden that now ranks as the second highest among the provinces.
The first budget tabled under Premier Doug Ford takes a gradual approach to balancing the provincial books, with improvements to debt metrics forecast for the tail end of the Progressive Conservatives’ four-year term, and only after assuming a steadily improving economy.
Should Ontario’s economy not prove to be so resilient in the coming years, the province’s rising debt could heighten its vulnerability – the same concern that prompted Moody’s Investors Service to downgrade Ontario’s credit rating to its lowest level in 16 years last December.
And the odds are pretty good that some form of downturn will materialize over the next five years, BMO chief economist Douglas Porter said.
“That will make staying on even this modest deficit track quite difficult,” he said in an interview.
Roughly 10 years into the economic expansion after the global financial crisis, fears of a recession have escalated in recent months, putting indebted households and governments alike under renewed scrutiny.
And yet, the budget documents point to recent indicators suggesting Ontario’s long-underperforming economy has turned a corner. Last year, real GDP rose by 2.2 per cent.
“Looking ahead, the Ontario economy is expected to continue to grow steadily over the 2019 to 2024 period,” the budget said.
The government forecast annual growth rates to range from 1.4 per cent this year to 1.8 per cent to 1.9 per cent by the end of the budget’s five-year forecast period.
A stable economic backdrop is expected to boost revenues by 3 per cent per year, led primarily by personal income taxes amid growth in employee compensation.
On the expense side, the budget focuses on finding administrative efficiencies to limit spending growth to 1 per cent per year.
Notably absent from the budget plan are major cuts to program spending to counteract what the Progressive Conservatives call the “previous government’s legacy of reckless spending.”
Rather, the province is committing to gradually eliminate the $11.7-billion deficit, pushing projected fiscal balance out beyond the government’s current term and after the next provincial election scheduled for 2022.
“It’s a thoughtful and measured approach,” Finance Minister Vic Fedeli said in a news conference on Thursday. “It sends a message to the world that we are serious about fiscal sustainability, about protecting front-line services.”
The government also declined to cut the corporate tax rate in this budget, which some business groups have argued is needed to maintain competitiveness after sweeping U.S. changes slashed business taxes south of the border.
In the provincial election campaign last year, Mr. Ford proposed lowering the business tax rate to 10.5 per cent from 11.5 per cent – a move that would cost the province well over $1-billion a year in lost revenues.
In place of tax cuts, the budget committed to accelerated depreciation for capital investments, which will provide $3.8-billion in corporate tax relief over the next six years. “We’ve done something … a lot better [than tax cuts],” Mr. Fedeli said. “It brings relief immediately.”
Corporate tax revenue, however, is forecast to grow at an average annual rate of 2.4 per cent over the next three years, as corporate earnings rise alongside the broader economy.
The government is also relying on GDP growth to improve the province’s debt metrics. Additional borrowing required to make up for budget shortfalls over the next four years would boost Ontario’s net debt to an estimated $360-billion next year, up from $343-billion last year.
As a proportion of the province’s GDP, Ontario’s debt burden rose last year to 40.2 per cent, surpassing Quebec as the country’s second-most indebted province behind Newfoundland and Labrador.
Under the Progressive Conservatives’ plan, net debt to GDP is forecast to increase to 40.7 per cent for the next two years, before declining to 38.6 per cent by 2023-24.
The province’s pace of debt and deficit reduction will likely come as a surprise to many in the business community, Mr. Porter said. “I suspect this was close to the bare minimum the ratings agencies were hoping for.”