Ontario’s reduced deficit hinges on economic uncertainties

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Ontario has driven down its deficit to $4.3-billion, but the fiscal good news hinges on economic circumstances beyond the province's control, extra financial help from the federal Liberal government and a one-time cash injection from privatizing Hydro One.

Finance Minister Charles Sousa, who presented the budget to the legislature on Thursday, acknowledged that cheap gasoline and the falling dollar have buoyed the province's economy and pumped up its tax take by making Ontario's goods more attractive to the United States.

"Right now, uncertain economic winds are currently blowing in the right direction for Ontario," he said. "A low dollar, low oil prices and steady U.S. demand all favour Ontario exports."

Despite the extra revenue – and continuing austerity in health care, education and other social programs – Ontario's net debt will top $308-billion next year, further burdening what is already the most heavily indebted subsovereign jurisdiction in the world.

The budget also creates a major new program to make university tuition free for low-income students and cheaper for middle-income ones. The Ontario Student Grant will replace several current financial-assistance programs, including the tuition tax credit. Students will receive the grant at the start of the academic year – rather than as a retroactive credit – in a bid to encourage more needy students to go to university.

Ontario's optimism comes a day after Alberta painted a bleak picture because of the same economic forces. The collapse of oil prices could drive its economy into the deepest slump since the 1980s and double its deficit to more than $10-billion.

It's a jarring role reversal for the two provinces: Not so long ago, Alberta was riding high on a commodities boom while Ontario was struggling with the slow-motion decline of the manufacturing sector. Now, the diverse economy of Canada's most populous province is suddenly leading the country and giving Mr. Sousa an unexpected boost in his deficit-fighting efforts.

Ontario's deficit for 2015-16 dropped to $5.7-billion from a projected $8.5-billion; the deficit for 2016-17 is projected at $4.3-billion before disappearing completely in 2017-18.

The government projects that tax revenue will jump to $91.8-billion this year from $90.8-billion last year and to $100.2-billion by 2018-19. Some of the increase is due to the province's hot real estate market: the harmonized sales tax from new housing purchases pumped an unexpected $504-million into provincial coffers last year.

The government is also booking one-time cash from selling 15 per cent of Hydro One on the stock market, which added $1.1-billion in revenue.

And Mr. Sousa is projecting that the federal government will jack up transfer payments to the province, leaping to $24.6-billion this year from $22.9-billion last year and to $26.6-billion by 2018. Ontario is further benefiting from low interest rates, which saved the government more than $200-million over expectations last year.

Progressive Conservative finance critic Vic Fedeli argued that this is a false paradise. Once the sale of Hydro One is finished, or if global economic circumstances change, Ontario could find itself with a growing deficit, he said.

"In only a couple of years, after these one-time sales are exhausted and the spending continues, this will leave a massive hole in the budget," he told reporters in the budget lockup. "We have a structural deficit in Ontario being masked over by various one-time supplements."

The new revenue is not the only reason Ontario is moving closer to balance. Mr. Sousa is keeping a tight lid on spending, with overall increases expected to average 2.2 per cent for the next three years, roughly the rate of inflation. The province's three largest spending areas – health care, education and postsecondary education – will be held to average annual increases of 1.8 per cent, 1.2 per cent and 1.1 per cent, respectively.

NDP Leader Andrea Horwath said these modest increases will not be enough to prevent hospitals from slashing nursing jobs or the education system from closing underused schools.

"Patients will continue to wait too long for surgeries. Students across the province will continue to suffer cuts to their education," she said.

The budget also formally put in place Ontario's new cap-and-trade system for carbon emissions. As previously reported by The Globe and Mail, cap-and-trade will set the price of carbon at roughly $18 a tonne, which translates into four cents a litre of gasoline or $9 more a month for home heating. Meanwhile, more than 100 big industrial polluters will receive big breaks.

Mr. Sousa also revealed that the government is mulling a basic annual income. The province will consult experts to design a pilot program and, based on that, decide whether to make it permanent.