Our Analysis of the Ontario Budget 2022
Seemingly taking a page from the federal budget’s playbook, this provincial fiscal plan echoed the increased spending and infrastructure themes of its federal counterparts (see our analysis in Big Returns, Big Spend). Similarly, both the federal and provincial governments are targeting decreasing net-debt to GDP ratios as their near-term fiscal targets. This de-emphasis on a balanced budget as the critical fiscal target over the next few years allows the province the flexibility to present a more realistic–though still challenging–spending plan that will not detract from the economic recovery.
Modest Sums to Address Roaring Inflation
Much like the federal budget released earlier this month, the cost of living was center stage of Budget 2022 as consumer price index (CPI) inflation in Ontario set another 30-year high this March.
Many programs highlighted in Budget 2022 were already announced, including the federal child-care deal, which plans to gradually decrease the cost of child-care toward an average of $10 per day by 2025. Our view is that the reduction of child-care costs will help to boost labour force participation rates among Ontario women over the long haul, benefitting Ontario’s economy as the province continues to deal with severe labour shortages across all sectors.
“This de-emphasis on a balanced budget as the critical fiscal target over the next few years allows the province the flexibility to present a more realistic–though still challenging–spending plan that will not detract from the economic recovery.”
The budget includes two key measures targeted toward low-income residents. An enhancement to the Low-income Individuals and Families Tax Credit will provide an additional $320 million in personal income tax relief per year to 1.1 million taxpayers. An increase of the minimum wage from $15 per hour to $15.50 per hour is also on its way for October 1, 2022. These two policies will be welcomed by many residents on the lower end of the pay scale who normally spend a greater share of their income on essentials such as food and gasoline—goods that have seen some of the largest price hikes in recent months.
The housing market’s woeful affordability is also potentially a central election issue. The budget cited the government’s plan to build 1.5 million new homes in the next decade. Although Ontario’s government is ratcheting up and extending the tax on foreign buyers, the focus on housing’s supply side faces several challenges, not least that while plans to accelerate residential construction may eventually improve housing affordability, they will have little immediate impact. Developers’ ability to deliver housing starts averaging twice Ontario’s 20-year average is also daunting for an industry facing supply chain issues and a wave of worker retirements.
Life is a Highway: Infrastructure Investments Gear up
In addition to affordability, Budget 2022 reiterated the government’s plan to invest heavily in transportation infrastructure. Over the next decade, the government will invest $25.1 billion to support the planning and construction of highway expansion, and an additional $61.6 billion in public transit, highlighted by Ontario’s new subway transit plan for the Greater Toronto Area.
On the health care front, the province will invest more than $40 billion over the next 10 years in hospital infrastructure, an increase of $10 billion compared to the commitment in Budget 2021.
Critical Minerals: Electrifying the Automotive Sector
The Critical Minerals Strategy highlighted in Budget 2022 aims to strengthen Ontario’s supply of minerals used in the production of electric vehicles. The initiative reaffirms the province’s commitment to the auto industry as vehicle production pivots to electric vehicles, joining recent funding announcements such as support for the $4.9 billion battery plant that will be constructed in Windsor by 2024.
Similar Target, Smoother Path to get There
Last year, Budget 2021 set out a detailed fiscal plan to 2029–30, the same year the province expected to balance the budget. The ambitious plan relied on restraining growth considerably, keeping program spending at an average annual pace of 1 per cent. What a difference a year can make. While the overall balance target is similar—now moved forward by two years to 2027–28—the spending path to get there is much less stringent (and more realistic) at an average annual rate of 2.5 per cent. It is clear the provincial government is taking pointers from its national counterpart by putting the recent influx of higher revenues towards increased spending and avoiding harming a nascent recovery with overly-strict budget frugality. The budget also prudently planned for multiple economic scenarios, fast and slow, whereby the balance could be achieved as early as 2024–25 or as late as 2030–31.
“It is clear the provincial government is taking pointers from its national counterpart by putting the recent influx of higher revenues towards increased spending and avoiding harming a nascent recovery with overly-strict budget frugality.”
Ontario is not out of the woods yet, however. The spending targets, while certainly less restrictive than last year’s plan, will still be a challenge to achieve. The biggest ticket item, health care, will be the most difficult line item to contain. Although it is true that nearly $37 billion was added to health care over 2022–23 to 2027–28 relative to last year’s budget plan, the average annual growth rate of 2.3 per cent is still well below The Conference Board of Canada’s expectations for demand in the sector. Projections from our heath care model suggest that spending would need to increase by an annual average of 5.1 per cent over the forecast period to meet the demands of a growing and aging population. If spending were to fall in line with our health care model projections between 2022–23 and 2027–28, the average annual difference between our model and Ontario’s Budget 2022 would be over $10 billion.
If the government can meet its ambitious spending targets and revenues continue to do well in the recovery period, the province should be able to achieve its deficit target. As the deficit gradually shrinks, net-debt-to-GDP is expected to fall from 41.4 per cent this fiscal year to 39.1 per cent at the end of the forecast. Interestingly, despite recent hikes from the Bank of Canada, the government looks to have locked in their debt at favourable interest rates as debt charges as a share of revenues impressively remain flat over the forecast period.