Ontario deficit narrows as economy strengthens, receives $1.9-billion in federal COVID-19 relief

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Ontario’s deficit is narrowing, as a strengthening economy – including a sizzling real estate market – and a bump in federal transfers deliver an extra $2.9-billion to the province’s coffers.

In its first-quarter fiscal update issued Thursday, the province’s Finance Ministry said it projects an additional $550-million in corporate tax revenues, $400-million more from land transfer taxes and $1.9-billion in one-time funding from the federal government for pandemic recovery efforts.

Ontario is now forecasting that the provincial deficit will decline slightly, to $32.4-billion in the current fiscal year, from the $33.1-billion forecast in its March budget. That projection includes $2.2-billion being set aside for COVID-related spending.

But the projections are conservative on several fronts, so it is possible that the deficit could shrink by billions of dollars more by the end of the fiscal year.

In a conference call with reporters, Finance Minister Peter Bethlenfalvy said the $2.2-billion could be used to bolster public-health measures and economic supports. The funds have yet to be allocated – they are being held in reserve to see what needs arise as the Delta variant spreads. “I don’t know where the fire will be,” Mr. Bethlenfalvy said.

The province is also boosting its economic forecasts, with real gross domestic product projected to increase 5 per cent in 2021, up from its 4-per-cent forecast in the March budget. With that faster growth, Ontario says its net debt-to-GDP ratio will rise to 48.1 per cent in the current fiscal year from 47.1 per cent in 2020-21, lower than the previous projection of 48.8 per cent.

Despite that brightening economic outlook, the province is not yet forecasting any new increases to personal income tax revenue or sales tax revenue, both of which are closely tied to the strength of the economy. The government says it is too early to amend those estimates, in part because it needs income tax information from the federal government.

Marc Desormeaux, senior economist at Scotiabank, said the fiscal update reflects both the upside, from an improving economy, and the potential fiscal risks from a fourth wave of the pandemic.

Scotiabank is forecasting real GDP growth of 5.9 per cent for Ontario this year, in line with others in the private sector but almost a full percentage point higher than the revised outlook from the provincial government. Mr. Desormeaux said Ontario could see significantly higher revenue if those private-sector forecasts hold true – as much as $4-billion more than indicated in the March budget. “We do see upside in growth for revenue,” he said.

The deficit could shrink further if contingency funds are not spent. The provincial budget still has a $1-billion reserve, plus another $1.5-billion in its contingency fund. With the money set aside for COVID-related expenses, the three funds add up to $4.7-billion.

All told, that represents a potential $8.7-billion improvement over the $33.1-billion deficit forecast in the March budget.

The fiscal update issued Thursday also outlined $546-million in program spending on top of the amounts in the March budget, including $216-million for the temporary sick leave program that Ontario introduced in April. There’s also an additional $235-million for property tax and energy rebates for businesses adversely affected by provincial public-health measures. The remaining $95-million is largely allocated to other pandemic relief measures. The Finance Ministry accounted for that spending by drawing down its contingency fund, originally set at $2.1-billion.

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