Good economic luck has Ontario tantalizingly close to a balanced budget

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After nearly a decade in the deficit wilderness, the country's most debt-ridden province is tantalizingly close to balancing its budget. But Ontario has needed more than a little good fortune to get there – and could have some hard work on its hands if its luck doesn't hold.

Even Ontario's finance minister, in his budget speech at Queen's Park on Thursday, candidly acknowledged that the economic gods have been smiling on the province – a reality that has made his march to a balanced budget considerably easier.

"Right now, uncertain economic winds are currently blowing in the right direction for Ontario," Charles Sousa said in his budget speech.

While the economies of Canada and much of the rest of the world have wobbled unpredictably, so much of the fallout has landed in Ontario's favour. The plunge in the Canadian dollar has made exports from Ontario's big manufacturing sector more competitive in foreign markets. The huge U.S. economy, the key market for Ontario's exports, just happens to be the one beacon of strength in the global economy. The weaker oil prices have aided the province's consumers and energy-consuming industries. Persistent low interest rates have kept a fire lit under the Toronto area's thriving housing market.

That confluence of factors has helped enormously as the province whittled its deficit down to an estimated $5.7-billion in the current 2015-2016 budget year ending March 31 – reduced by nearly half from the previous year, and $2.8-billion smaller than it had originally projected in last spring's budget. And if the economic luck holds, it's not inconceivable that the government could come very close to balancing its budget in the next budget year. Its deficit target for 2016-2017 – $4.3-billion – is virtually unchanged from the goal set out in last year's budget, despite the much better starting point.

When the Liberal government decided in 2014 to aggressively spend on infrastructure in the face of a struggling economy, while sticking with a pledge to gradually balance the budget by 2018, its critics charged that the promise lacked a concrete plan to achieve it. While Mr. Sousa argued that the investments have been paying dividends, it's clear that a lot of factors that had nothing to do with Ontario policy have delivered the growth it needed to deliver on the pledge.

But even as the balance approaches, one has to wonder whether Ontario's luck, both with its economy and its budget, is already as good as it will get.

The budget is based on an assumption of 2.2-per-cent real gross domestic product growth this year – which is actually a shade below the average private-sector economic estimate cited by the government. But it's notable that economic forecasts for Canada as a whole, and for Ontario by extension, have eroded in the past couple of months; the risks are tilted to the downside. Ditto the 4.0-per-cent projection for nominal gross domestic product – the more important figure for governments, as it speaks directly to the government's revenue-generating capacity.

The opposition Progressive Conservatives, for their part, question whether the Liberals' revenue growth projections are over-optimistic, to put it kindly. But after a multi-year string of handily outperforming its budget deficit targets, the government has earned some benefit of the doubt; but it can't do anything about economic growth disappointments.

Meanwhile, heaping portions of the 2015-2016 deficit improvement came from sources that may not repeat. The government's euphemistically named "asset optimization"plan – the sale of part of Hydro One and other government assets – produced an extra $1.15-billion over the original 2015-2016 budget. The take from sales and land-transfer taxes also came in a combined $800-million over budget, reflecting the relentless boom of the province's (mostly greater Toronto's) housing market. That market can't go on forever, although the relatively strong Ontario economy and continued low interest rates would suggest that the inevitable fall will look more like a slowdown than a crash.

And the revenue doozy looming in a couple of years is the equalization payment from the federal government, which compensates provinces whose revenue-generating capacity is below the national average. The province will reap another $2.3-billion from the equalization program this year, despite having one of the strongest economies in the country, since the equalization formula essentially has a two-year lag. But once the formula catches up to Ontario's success, it will leave a hole in the province's revenues.

But if it all suggests that a balanced budget, if and when achieved, might prove difficult to sustain, Ontario may have a white knight coming to its aid. The federal government's infrastructure pledge could ease some of the pressure the government has placed on itself on the spending side in the next several years. Indeed, to some extent, the province is counting on it.

Ontario's ambitious infrastructure investment plan – $160-billion over 12 years – relies in part on federal contributions to the cause. Ontario's budget includes nearly $1-billion of additional infrastructure funding from Ottawa in 2016-2017.

"We now have a federal partner that believes in the same kind of investment," Mr. Sousa said in a press conference prior to his budget speech. "We're working closely with them. I'm confident that what we have put in this budget reflects what we will see this year."

And frankly, that makes some sense. Ontario's strong economy no longer demands a hefty infrastructure stimulus spend. Rather than heap its own money on top of federal stimulus pledges, and with a federal government now in place that's willing to pull much more of the investment weight than the previous regime, now would be a good time to let Ottawa do more of the heavy lifting.

That would also ease some of the pressure off the Ontario budget in the coming years. It can't count on luck to keep flowing in its favour.