What economists are saying about Ontario's projected $14.6 billion budget deficit

Yahoo

18-05-2025

Ontario's fiscal outlook took a hit this week as the province unveiled a budget designed to protect workers and industry in the face of the economic threats posed by U.S. tariffs.
Minister of Finance Peter Bethlenfalvy's budget projects the deficit for the fiscal year 2025-2026 will rise to $14.6 billion from a previously estimated $4.6 billion. The deficit will also come in steeper at $7.8 billion in 2026-2027, undercutting a previously expected surplus of $500 million.
The province now expects to arrive in surplus territory in 2027-2028.
Here's what economists had to say about the budget of Canada's largest province.
'It is worth noting that Ontario came out of 2024-25 in better shape than expected with an upside revenue surprise,' Rachel Battaglia, an economist at RBC Economics, said in an analysis of the budget, with the deficit coming in at $6 billion instead of the $9.3 billion previously forecasted.
But the good news ends there, as U.S. tariffs have forced the province to chart a new and more costly course.
That means the province had to postpone the return to surplus by another year, while revenues are forecasted to drop by 0.8 per cent in the 2025-2026 fiscal year 'as U.S. trade policy takes a toll on the economy and prompts tax relief measures.'
RBC highlighted infrastructure as the 'cornerstone' of the budget, with plans to spend $200 billion over the next decade to build highways, public transit and hospitals, with the biggest share of the total intended for public transit.
The bank noted that the province will only meet two of its three fiscal anchors in 2025-2026. Net debt-to-GDP and interest on debt-to-revenue ratios of less than 40 per cent and less than 7.5 per cent, respectively, are projected to increase but stay within the province's self-imposed limits. However, net debt-to-revenue, will blow past the 200 per cent threshold to 211 per cent in 2025-2026.
The bank also said that in 2026-2027, net debt-to-GDP will come perilously close to breaching its threshold.
'The constrained position leaves less fiscal flexibility and could put a second fiscal anchor at risk,' RBC said.
'Revenues are expected to decline this year amid a weak economy,' Rishi Sondhi, an economist at Toronto-Dominion Bank, said in an analysis, adding that the projected deficit of $14.6 billion or 1.2 per cent GDP put the province 'around the midpoint of what other provinces are expecting.'
Ontario is facing a highly 'uncertain backdrop' due to being overly exposed to the threat of tariffs and to the economic fallout from cuts to the federal government's immigration plan, Sondhi said.
Reflecting those uncertainties, the budget developed different economic scenarios, one where tariff negotiations succeed and growth comes in 0.8 percentage points higher than the baseline and another where tariffs of 25 per cent persist and are answered with retaliation. In that scenario GDP declines slightly over the next two years.
For this year, revenues are likely to drop as the government takes less money in on weak growth, with corporate tax revenue taking a hit.
The gas tax break will cost Ontario about $900 million this year and the manufacturing tax credit about $335 million.
Interest payments will come in at $16.2 billion or 7.4 per cent as a share of revenues and up from last fiscal year.
The government is also setting up a $5 billion fund for business to provide liquidity and new programs to deflect the effects of tariffs.
'The province still envisions balancing the budget by (fiscal year) 2027/28, although this comes on the back of almost no program spending growth after this year, which will be a challenging proposition,' Sondhi said. 'Ontario's elevated debt burden could also compromise its ability to respond to downside growth risks in the future.'
'The 2025 budget leans into the threat posed by U.S. tariffs, promising to protect the province by helping workers and businesses weather the storm,' a team of economists at National Bank of Canada said in a budget analysis.
Under the budget's various economic scenarios, the economists, led Warren Lovely, said that the deficit for 2025-2026 could come in anywhere between $12.3 billion and $17.6 billion.
'While protecting Ontario will be costly this year, the province has outlined a plan to quickly tackle the deficit over the next two years,' the economists said, though that will require spending to grow by less than one per cent per year.
But the team said Ontario's number-crunchers have taken the conservative route in their estimates opting for GDP estimates that come in shy of those of Bay Street and buffered by a $2 billion reserve and $3 billion contingency fund.
'Ontario plans to play offence and defence,' when it comes to the trade war with the United States, the National Bank economists said.
Besides the massive infrastructure plans laid out in the budget, the analysis also highlighted Ontario's plans to 'provide relief and support for businesses' including spending $1.3 billion to lower the input costs for manufacturing over the next three years and defer some provincial taxes during the firsts six months of the fiscal year bolstering province-wide cash flows by approximately $9 billion a year.
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That 'should allow businesses to keep their workers employed in the face of widespread economic/labour market weakness,' the economists said.
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