(Bloomberg) -- Tax-driven revenue increases will ease Ontario’s budget deficit, the province said in an economic update, giving the government room to spend ahead of a potential election next spring.
The provincial government’s shortfall is expected to be C$6.6 billion ($4.7 billion) in the fiscal year ending March 31, 2025, down from C$9.8 billion in the budget. Ontario is now expecting a C$1.5 billion deficit for fiscal 2025-26, down from its earlier C$4.6 billion estimate.
Desjardins economist Randall Bartlett called the statement “generally positive, reflecting sustained momentum in revenues and prudent spending plans in the medium term, all supporting a lower debt profile and reduced debt service costs.”
A stronger economic outlook, inflation and the federal government’s hike to the capital gains inclusion rate are expected to raise revenue to C$212.6 billion, nearly C$7 billion more than what was projected in the 2024 budget.
The government attributed this year’s improved outlook to a population boom. That may not last as the federal government dramatically scales back its permanent and temporary resident targets, which is poised to affect employment growth.
Even with those immigrations restrictions in place, there would be a lag before the policy hits the provincial economy, an official at the Ministry of Finance said during a background briefing with reporters.
The government of Premier Doug Ford reiterated its plans to spend on infrastructure like highways and public transit, allocating C$191 billion over 10 years, while chipping away at the deficit.
“In fact, we’ve seen the lowest debt to our economy in over a decade, and our borrowing costs have come down,” Finance Minister Peter Bethlenfalvy said during a press conference. “Many are struggling to pay the bills. So, this is a time when we can step in and help them at a time where we also are in a good, strong fiscal position.”
Ontario’s borrowing costs as a percentage of revenue are at their lowest since at least 1990, according to Bartlett’s calculations. “That is very positive news from a fiscal sustainability perspective, and should make rating agencies very happy,” he said.
Morningstar DBRS upgraded Ontario’s credit rating in June to AA with a stable trend.
On Tuesday, Ford announced the province plans to issue C$200 checks to every Ontario resident who filed taxes in 2023, as well as to every child eligible for the Canada Child Benefit. The program is expected to cost C$3 billion, which Bethlenfalvy said the province can afford because of higher-than-expected revenues.
Bonnie Crombie, leader of the Ontario Liberal Party, previously criticized the move as a “gimmick” ahead of a possible spring election. Ford hasn’t ruled out calling an election next year, rather than waiting until 2026.
“Ontario has gone from a tough news fiscal story to one of the good news fiscal stories on the provincial landscape,” Robert Kavcic, senior economist with BMO Capital Markets, wrote in a client note. “That doesn’t change in this fiscal update despite chunky one-time spending bill.”
(Updates with quote from press conference and more details beginning in the eight paragraph.)
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