Ontario deficit expected to be smaller than projected, financial watchdog says

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Ontario’s budget deficit is much smaller than it appeared in government projections just last fall, the province’s independent financial watchdog says in a report that also suggests unexplained revenue shortfalls in the books could be future tax cuts.

In a report released Tuesday, the Financial Accountability Office (FAO) says it expects this year’s deficit to come in at just $16-billion, compared with the $20.5-billion (excluding a $1-billion reserve) that the government forecast in November’s fall economic statement. Next year, the FAO projects a deficit of $2.8-billion, well below the government’s projection at over $11.4-billion, excluding reserves.

The main reason for the lower deficit forecasts, the FAO says, is the agency’s higher estimates of government tax revenue. But the FAO also says the government’s lower revenue projections contain an unexplained gap that suggests the province could be prepared to announce new tax cuts. Ontario’s Progressive Conservative government is expected to deliver a budget as early as next month, its last before it goes to the polls in June.

Much of the difference between FAO’s numbers and the government’s projections can be explained by different assumptions about the pace of economic recovery and the government’s tendency to lowball predictions to provide a fiscal cushion.

But a substantial portion appears to be “potential unannounced tax cuts” of about $2.5-billion in 2023-24, the FAO says.

During the 2018 election campaign, long before the pandemic, now Premier Doug Ford said he would deliver a large “middle class” income tax cut in 2020-21 that would cost the government $2.3-billion in revenue. His government has brought in business-tax cuts, as well as tax credits for childcare expenses and low-income people. For the past two years it has been preoccupied with COVID-19.

Other numbers in the report suggest the government’s spending plans in 2023-24 would fall $6.3-billion short of the watchdog’s projections for the rising costs of health care, education, postsecondary education, children’s and social services and the justice system. In health care alone, the gap between what the government plans to spend and the FAO’s forecast costs in 2023-24 is $4.49-billion.

But the FAO also says the government’s spending plans include billions in unallocated funds that it could use to plug these gaps, including $6.5-billion in 2023-24. Ontario could also announce new spending in its upcoming budget.

NDP finance critic Catherine Fife said in a statement that now was not the time for a tax cut: “People need more nurses and more teachers and education workers – not tax cuts for wealthy corporations.”

In an e-mail, Ontario Liberal Leader Steven Del Duca said the government’s “poor financial planning has needlessly starved our hospitals and schools at a time when they needed support the most.”

Emily Hogeveen, a spokeswoman for Ontario Finance Minister Peter Bethlenfalvy, said in an e-mail that the government “does not plan to cut healthcare spending.” She noted that the government has used contingency funds throughout the pandemic and that the FAO acknowledges it could spend this unallocated cash. She would not say whether the government planned to cut taxes in its upcoming budget.

On the deficit figure, she noted that the government also presented a range of estimates in November, based on different economic scenarios. (Under the fast-growth scenario, the 2023-24 deficit was pegged at $2.9-billion, excluding reserves.)

The province’s Financial Accountability Officer, Peter Weltman, said in an interview that the economic assumptions behind Tuesday’s figures are more optimistic than those the government relied on last fall, as more recent numbers show the economy recovering more quickly.

Ontario has previously unveiled numbers showing it had oceans less red ink than it anticipated in the pandemic. Its 2020-21 deficit of $16.4-billion was less than half the $38.5-billion it forecast. The FAO says billions from Ottawa for the province’s pandemic response and in direct transfers to workers and businesses propped up Ontario revenues.

The FAO report Tuesday also shows Ontario’s net-debt-to-GDP ratio, and the amount of interest it pays to service its debt, declining to below pre-pandemic levels.

The government is due to present an update on its third-quarter finances no later than Feb. 15.

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