Under Pressure: Analysis of the Ontario Fall Economic and Fiscal Outlook 2023

Canadian Economics

By: CBoC Economics Team

Like many household balance sheets across the country, the Ontario government’s Fall Economic and Fiscal Outlook 2023 showed higher spending pressures against a backdrop of under-performing revenues. The government’s projected deficit more than quadrupled to $5.6 billion, up from $1.3 billion in the current fiscal year—and instead of a $200 million surplus next year, the government now finds itself with a $5.3 billion negative balance.

Stalled Economy Downgrades Outlook

  • The slowdown in economic growth expected next year has led to a more pessimistic outlook compared to what was anticipated in the 2023 spring budget. GDP and employment estimates for 2023 have been revised upward since the budget but 2024 estimates have been downgraded to reflect stagnant growth.
  • The province’s updated estimates for real GDP growth are 1.1 per cent in 2023, 0.5 per cent in 2024, 2.0 per cent in 2025 and 2.8 per cent in 2026.
  • Our forecast calls for slightly slower growth in Ontario this year compared to the province’s outlook and a stronger rebound in the outer years. We expect real GDP growth of 0.8 per cent in 2023, 0.3 per cent in 2024, and 2.8 per cent in 2025 and 2026.
  • The province’s employment projections have been adjusted to reflect revisions in the economic outlook. The labour market has remained resilient so far through 2023, but that should not last. Job gains will ease to 0.8 per cent in 2024 before recovering with 1.5 per cent growth in 2025. Both these estimates are slightly more pessimistic than the original budget projections of 1.0 per cent in 2024 and 1.7 per cent in 2025.
  • Our call is for a slightly more positive employment outlook for Ontario over the near-term but the anticipated weakening in 2024 followed by a rebound in 2025 is consistent. We forecast employment growth of 2.4 per cent in 2023, 1.1 per cent in 2024 and 1.8 per cent in 2025.
  • The weaker economic and employment outlooks for 2024 and 2025, and associated slowdown in demand, will hurt tax revenues.
  • The Ontario government has set a target of 1.5 million new homes by 2031 which will require more than 150,000 housing starts per year. Their outlook for the next three years, however, comes nowhere close to those goals, with only 94,000 units predicted in 2026. Our forecast calls for just under 100,000 housing starts on average per year, but it underscores how far government policy and economic forces have to move on this issue.

Weaker Revenues Create Deficits, as Government Continues to Rein in Spending

  • After its previous budget showed a quick path to surplus, Ontario’s Fall Economic Statement highlights the challenges that a slower economy is putting on the province’s finances.
  • Expected tax revenues are down $3.5 billion to $141.2 billion this fiscal year and remain more pessimistic through the entire forecast period.
  • Some revenue categories are expected to be hit especially hard. For example, personal income tax is projected to be nearly 12 per cent below the budget estimates, with the weakness carrying over into fiscal year 25–26. This is notable given that Ontario’s labour market has been relatively strong—though softening—with immigration levels set to remain high.
  • The government expects stronger sales tax revenues than previously projected, though that could be challenged if consumer confidence falters further and households ramp up savings efforts.
  • Medium-term program spending plans are similar to those presented in the spring, but this fiscal year’s estimates are $2.4 billion higher.
  • Total expenditures (including debt payments) are set to be $206.4 billion in fiscal year 2023–24, $210.5 billion in 2024–25 and $217.5 billion in 2025–26. These numbers are in-line with the budget’s estimates of $204.7 billion in 2023–24, $210.8 billion in 2024–25 and $217.5 billion in 2025–26.
  • The government currently plans for a deficit of $5.6 billion in the current year, up from $1.3 billion in the budget and expects a $5.3 billion deficit in fiscal year 2024–25, compared to the $0.2 billion surplus that was expected in the budget.
  • The province now expects to post its first surplus of $0.5 billion in 2025–26, a year behind the 2023 budget schedule.
  • In all, over the next three years, the Ontario government plans for a cumulative deficit (including reserves) that is more than $10.4 billion higher than in the spring budget (a deficit of $13.7 billion compared to a surplus of $3.3 billion).
  • With the higher-than-expected deficit this year, the net debt-to-GDP ratio will rise to 38.2 per cent in 2023–24 compared to 37.8 per cent in the budget.
  • Ontario maintains a net debt/GDP target of under 40 per cent, but that is where it has hovered for the past 10 years. The ratio climbs to 41.5 per cent under their slow-growth scenario.
  • As a precautionary measure against downside risks to the outlook, the 2023 Ontario Budget included a $1 billion reserve to cover any unexpected changes in revenue and expenses. The reserve increases to $1.5 billion next fiscal year and $2 billion in 2025–26, highlighting the uncertain economic trajectory.

Major Policy Announcements or Shifts

  • Among the few new policy announcements, the province is launching an Ontario Infrastructure Bank with an initial $3 billion investment. The federal government has had a similar institution in place since 2017 that, even now, has not fully ramped up. It is an open question on how these organizations would overlap. Although both are said to be arms-length, it may reflect a desire to promote certain types of investments in Ontario that the federal government is less willing to consider.
  • The update reiterated and devoted pages of detail on already-announced plans for major infrastructure spending on highways, public transit, schools, and hospitals.
  • Other previously announced tax measures included extending the 5.7 cent/ cut to the gas tax through 2024–25 at a cost of $645 million in reduced revenues.
  • The province is also proceeding with eliminating their HST portion on purpose-built rentals, aligning with the same measure at the federal level. It will not have a large impact in the short term, but by 2025–26 it will cut provincial HST revenues by $150 million per year.

Pressures Bear Down on the Economy and on Finances

As high interest rates bite into consumer and business spending plans, the Ontario government is faced with a deteriorating fiscal foundation. These conditions are more apparent now than they were at the time of the 2023 budget in the spring. We foresee this period of weakness persisting into 2024. By then, the government will be in a better position to assess how quickly private sector spending and investment plans firm up. For now, it is best the government sticks to modest expectations.

That said, despite touting their long-range infrastructure investment plans, the government only gives us a narrow two-and-a-half-year window on its overall finances. The federal government and Quebec both extend their plans out to 2027–28, helping provide a much clearer sense of policy strategy. Although any outlook has its assumption risks, it would be helpful if Ontario’s 2024 Budget could prove more long-term perspectives.

2023 Budget Analyses