Sprinting to Surplus: Our Analysis of the Ontario Budget 2023

Despite the Ontario budget having the highest price tag for any provincial budget ever, the province’s revenue windfall means it will be ahead of schedule getting to surplus. The fall fiscal update included various new programs to help fight inflation, but the province has opted to take a more cautious approach with this budget and has kept new spending to a minimum. In all, spending in fiscal year 2023–24 is set to be $5.2 billion higher than November’s fiscal update—pushing the total higher by about 2.5 per cent. Growth in spending will average 2.3 per cent per year over the next three years.

Health care spending is driving much of the new spending, with a planned allocation of $81 billion in fiscal year 2023–24, notably higher than the $77.8 billion the province had set aside for health care in the Fall. Some of this spending is being supported by the new health care deal between the provincial and federal governments, but in fact most of it will be funded using some of the unexpected revenues.

While health care is getting the lion’s share of new spending, the government is planning to invest more in education, social services and “other programs.” Notably, spending is increasing even while the $7.8 billion in COVID-19 funding and the one-time expense of $6.3 billion fall off the books. In that sense, this new budget includes increased program spending of $15.4 billion compared to last fiscal year, a whopping 8.8 per cent increase.

A better deficit outlook, and what appears to be more favorable debt terms, means that the interest expense on debt will hardly move as a share of total expenses compared to what’s planned in the fall. However, given the short-term nature of the fiscal plan, the province’s high debt load, and the higher interest rate environment, are likely to have a bigger impact on the cost of financing beyond the budget’s planning horizon. The risks remain, as the province’s net debt as a proportion of GDP shows only marginal improvement through 2025–26—on par with Quebec’s latest forecast. (See Chart 1.)

Chart 1

Ontario, Quebec’s Debt Load: Crossing Paths

(net debt/GDP, %)

e = estimate
f = forecast
Source: Ontario Ministry of Finance.

Budget 2023 is based on prudent economic assumptions that are below the average of the survey of private sector forecasts and below our economic outlook for Ontario. Planning projections have Ontario’s real GDP growing by just 0.2 per cent in 2023 and 1.3 per cent next year. Growth is expected to pick up to 2.5 per cent range in the outer years of the planning horizon, 2025 and 2026.

The budget does discuss the high degree of risk associated with the economic outlook and presents potential high and low economic scenarios. In the high growth scenario, the government would run a $4.4 billion surplus next fiscal (2023–24) while a low growth scenario would keep it in deficit over the entire planning horizon to 2025–26.

Revenue Cornucopia

Despite no big changes to the tax system, Ontario’s revenues are flowing in at unprecedented rates. The $200.4 billion inflow projected for the 2023–24 fiscal year is more than $20 billion planned for in last year’s budget and almost $14 billion more than what was expected in the Fall Economic Statement. (See Chart 2.) The reasons are evenly spread across a variety of revenue streams. Personal taxation is billions of dollars stronger because of higher-than-expected employment and earnings, sales taxes are higher on stronger consumer spending, and corporate taxes have risen on higher margins. At the same time, the province has seen more money flowing in from federal transfers as well as from non-tax sources.

Chart 2

Rising expectations

(spending and revenue forecasts, $ billions)

e = estimate
f = forecast
Sources: Ontario and Quebec Finance.

The only significant new revenue measure has only minor dollar implications. The phase-out formula for businesses growing past the advantageous small business tax rate threshold will be relaxed in line with what the federal government announced last year. That will let more businesses—with taxable capital of up to $50 million—able to qualify at least partly for the lower tax rate.

With revenues so plump, the government could have opted for tax cuts—like Quebec introduced—or put the pedal to the metal on spending. Instead, they stuck to message and went for budget balance.

Comparative Restraint in Spending

The province has taken an entirely different tone in this budget than it had in the Fall Fiscal Update. In that update, much of the unexpected revenues compared to Budget 2022 were allocated to new programs—with only a minor improvement to the deficit despite much higher revenues. Budget 2023 takes a much more conservative approach—now prioritizing reaching surplus by 2024–25, with a much lower debt path (total deficits were set to total $21.7 billion between fiscal year 22–23 and 24–25 in the fall update and are now set to total only $300 million over that same period).

While this budget aligns with the Doug Ford government’s initial election platform goals of rapidly reaching surplus and working towards reducing the province’s debt load, is the path towards surplus now overly aggressive? The province does face some pressing challenges, which get scant mention in the latest budget. The overall cost of home ownership remains high in Ontario, and rental rates continue to surge, but the province’s budget does little to address housing. Canada welcomed over one million newcomers in 2022, and with many settling in Ontario and Toronto, the housing supply is likely to face increasing pressure. In fact, the budget highlights that the province is having trouble meeting its goal of building 1.5 million new homes over the next ten years.

On the plus side, some programs that were put in place in the past are already making a positive difference. This includes cancelling licenses plate fees, extending gas tax cuts, continuing to provide electricity subsidies, reducing transit fares and expanding coverage of the Guaranteed Annual Income Supplement, which will provide an income boost to seniors who are unable to negotiate higher pay to fight inflation like younger cohorts (as most aren’t working). So, many of the cost reduction promises of the past two years will help Ontarians get through what looks to be a temporary period of high inflation.

Short-term Focus Needs to be Balanced Against Long-range Issues

Although there is some discussion of the long-range issues facing the economy, government plans are far too short-term focused. The federal and provincial governments, for example, had hammered out a 10-year health care funding agreement. The aging population will have a significant impact on the makeup of the working population and the support for seniors that will be required. Yet the Budget outlook only extends fiscal estimates out for three years. Effective planning needs a longer horizon than that and the government should reinstate the five-year outlooks it had supplied in previous budgets.

Overall, Budget 2023 is fiscally prudent and sets the Ontario government on a course for surplus next year, well ahead of schedule. Spending is limited to targeted areas for maximum impact and savings have been generated from a balanced pool of revenue streams.