Ontario’s deficit to hit record $38.5-billion in 2021, as Finance Minister declares recession

Ontario’s deficit will balloon to a record $38.5-billion in 2021, almost double the size predicted in March, and Finance Minister Rod Phillips declared the province is in a recession as a result of the COVID-19 pandemic.

The Progressive Conservative government released its first-quarter financial report on Wednesday, which revealed it will now spend $30-billion on its economic recovery plan, up from $17-billion announced in March.

The document says the province’s gross domestic product declined by 2 per cent in the first quarter, with economists predicting it will fall by 6.6 per cent by the end of the year.

“We are in a recession today in Ontario and I would argue across Canada,” the Finance Minister said. “We are in for a difficult economic time.”

The province shed nearly 1.2 million jobs between February and May, “significantly larger than the declines recorded in past recessions,” the report said. Mr. Phillips warned that some economic downturns in the province have lasted more than seven years.

While Mr. Phillips said the current level of government spending and deficits are not sustainable over the long term, he expressed “cautious optimism” as Ontario gradually reopens its economy. While jobs numbers fell in the early part of the year, the province gained 528,600 in June and July combined, pushing the unemployment rate down to 11.3 per cent at the end of July.

“I’m very encouraged by the progress that we’re making, in terms of both the economy and the health situation,” he said.

With Ontario facing a potential second wave of the coronavirus in the fall, Mr. Phillips said the government is focused on the health of residents above all else. He acknowledged the restaurant, tourism and travel industries will be hard-hit as consumer habits change.

But he said the government is not looking to raise taxes on residents to pay for programs: “This is a government … that believes that reducing taxes is actually important.”

The government predicted a $20.5-billion deficit in March, already more than double its $9-billion deficit last year. It had previously planned to balance its books by 2023, a year after the next election. Premier Doug Ford acknowledged Wednesday that will be made very difficult.

“I am going to be very frank. [It was] a whole different situation six months ago, compared to now, but we’re going to continue being very fiscally conservative, responsible,” he said.

Economists said Wednesday they were not surprised by Ontario’s deficit figure, or its spending plan to revive the economy, saying every country is facing similar challenges as a result of COVID-19.

“The coronavirus has severely impacted most revenue streams, although Ontario’s unprecedented budgetary shortfall also incorporates a serious action plan designed to support the health care sector and restart the province’s economic engine,” National Bank economist Warren Lovely said in a client note on Wednesday.

Craig Alexander, chief economist of Deloitte Canada, called Ontario’s recession “very deep” and said it looks worse than the one in 2008-09.

“Even if you are a fiscal conservative, you would still say that this was a period when governments needed to run very large deficits,” he said in an interview.

“We are so early in the economic recovery, and there is still so much uncertainty out there, this is not the time that you would talk about how you are going to rebalance your finances. If anything, governments ... might actually be thinking about things they can do to actually help stimulate the economic recovery,” he said, adding it could mean measures such as temporary sales tax exemptions.

New spending in Ontario’s outlook includes an increase in $4.4-billion for a total of $7.7-billion for health care, including for long-term care homes, and ramping up testing and spending on personal protective equipment. It also contains an increase of $7.3-billion for a total of $11-billion for job initiatives, such as the province’s temporary pandemic pay program, and a $4-billion investment in municipalities and transit.

Revenue fell by $5.7-billion, partly offset by federal government transfers, and spending was projected to be $13.1-billion higher than the amount forecast in the March economic update, largely because of COVID-related expenses.

The financial update also increases a contingency fund by $4.3-billion to $9.6-billion, “to ensure the province is prepared for future scenarios stemming from the ongoing uncertainty of COVID-19.”

Ontario will also be affected by the health crisis occurring with Canada’s major trading partner to the south.

“Many countries, including the United States, continue to face high numbers of infections and significant economic disruptions, which could impact Ontario’s economy,” the report said.

Mr. Phillips will release a full budget, with multiyear projections, by Nov. 15.

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