Course Correction: Our Analysis of the Ontario Budget 2025

U.S. policy has pushed Ontario’s budget off course, leading to an expected deficit of $14.6 billion for fiscal year 2025–26, a downgrade compared to its $1.5 billion deficit projected in the mid-year fiscal update last fall.

Deficits are also expected to last longer, with the government’s timeline for reaching balance falling back by one year, to fiscal year 2027–28. The net result means that in fiscal years 2025–26 and 2026–27 combined, deficits are expected to be higher by $18.3 billion compared to the last budget, from $4.1 billion in budget 2024 to $18.3 billion in this budget. These deficits include $2 billion in contingencies in each of the next three fiscal years.
Despite the worse fiscal outlook, Ontario projects a net debt-to-GDP of 37.9 per cent in 2025–26. This is a marginal increase from the 36.3 per cent recorded in 2024–25 but is low compared to much of the last decade.
Weaker revenues and higher costs are each contributing to the deficit. Program spending is expected to increase by 1.8 per cent in fiscal year 2025–26, while revenues are expected to fall by 0.8 per cent.
The government is projecting caution beyond then, with expenses expected to grow by only 0.4 per cent, on average, in fiscal years 2026–27 and 2027–28, while revenues are expected to increase by an average of 4.0 per cent over the same two years, behind a faster economic recovery.
Naturally, fiscal plans are full of uncertainty given the current circumstances. The province’s budget uses a reasonable outlook for its projections, with GDP increasing by 0.8 per cent in 2025, 1.0 per cent in 2026 and 1.9 per cent in 2027.
The budget assessed the impact of two scenarios, one with stronger GDP growth and one with weaker. In all three scenarios, the province would face a budget deficit over the next two fiscal years, with the higher scenario creating a notable surplus in fiscal year 2027–28, while the lower scenario would produce a notable deficit in the same year. The low scenario calls for almost no real economic growth over two years, making it very much a downside outlook.
The budget kept new spending announcements mostly limited to helping businesses navigate potential tariffs and their repercussions through various tax credits.
Budget 2025 confirmed previous announcements that businesses will be able to defer payment of select provincially administered taxes for six months this year, providing $9 billion of extra cashflow to companies to weather economic headwinds.
The province is also creating the Protecting Ontario Account, a $5 billion initiative to provide support to businesses that are facing tariff-related disruptions.
The government also plans to expand the Ontario Made Manufacturing Investment Tax Credit by increasing the tax credit rate for Canadian-controlled private corporations, adding an additional $1.3 billion in support over the next three years.
The government is also providing other smaller programs, such as $20 million to mobilize new worker training centres, $40 million for the new trade-impacted communities program and increasing the LCBO discount rate from 10 to 15 per cent.
New spending not directly related to trade disruptions include $3 billion to triple the maximum amount of loan guarantees through the Indigenous Opportunities Financing Program.
The government is pursuing opportunities to fast-track construction of highways and hospitals. Key projects in the provincial government’s transport infrastructure plans include the construction of Highway 413, the Bradford Bypass, and the Ontario Line.
To improve local infrastructure, an additional $400 million has been allocated to Municipal Infrastructure Programs, bringing total investment to almost $2.3 billion over four years. These programs form part of the province’s overarching strategy to boost housing construction.
Overall, the province’s budget comes with a sense of fiscal discipline at a time of high uncertainty. The change in deficit projections is largely attributed to lower revenues from a weaker outlook, higher expenses meant to mitigate the impact of tariffs, and through contingencies. The result is higher deficits in the near-term, but fiscal projections get back on track by the end of the budget period.

Key Insights

Ontario seeks to stormproof as tariff gales gather. Yesterday’s budget seeks to mitigate the risks to jobs and businesses created by trade tariffs. The manufacturing sector, a cornerstone of Ontario’s economy, shed 30,000 jobs in April and there will likely be more pain ahead. The budget includes several measures aimed at shielding the economy including deferral of select provincial taxes, funding to help laid-off workers transition back into employment, a $1 billion investment in the Skills Development Fund as well as enhancing and expanding access to the Ontario Made Manufacturing Investment Tax Credit. The promise of economic revival in 2025, aided by lower interest rates, has quickly shifted to a mission of damage limitation. The measures announced will offer some protection to manufacturing and exporters but there is no hiding the fact that however the tariff situation evolves over the coming months, business confidence has been substantially harmed, and this will weigh on investment and hiring over the next year.

The government doubled down on its infrastructure plans. Budget 2025 intends to speed up plans to expand infrastructure across the province. Total infrastructure spending will approach $100 billion over the next three years, bringing the 10-year total to $223 billion. Much of the focus will be on improving the province’s transit systems and provincial highways, in addition to healthcare. These investments will aim to get shovels in the ground faster which will ultimately support jobs in the province in this era of uncertainty. Plus, given the province’s record population gains over the past few years, they are likely necessary. Expanding transportation infrastructure, for example, may provide a much-needed boost to housing construction as some areas of the province become accessible.

Last October seems like a distant memory, but the path to balance has only been delayed by one year. In its fall interim update, the Ontario government projected a return to balance by fiscal year 2026–27, announcing plans to distribute $200 cheques to residents thanks to better-than-expected revenue performance. Since then, the upheaval caused by tariffs and tariff threats has clouded the outlook for government finances. This is true even when compared to other provinces, as Ontario’s auto and steel industries have been among the hardest hit of any sectors to date. The good news is that the fiscal outlook is not as bleak as it may seem. New spending was mostly targeted to protect the economy from the impact of the trade dispute and is short term in nature. Meanwhile, the U.S. administration’s softer tone on global tariffs since “Liberation Day” on April 2 provides a shred of hope that the two countries can work out a trade deal soon. Although risks remain elevated, a return to balance by 2027–28 seems feasible based on our own projections for the Ontario economy.