Ontario Budget Highlights
Highlights and analysis of Ontario’s FY17/18 budget
April 27, 2017, 4:00 pm
Happy Days Are Here Again
Robert Kavcic, Senior Economist • [email protected] • 416-359-8329
The Province of Ontario is projecting a balanced budget in FY17/18, ending a
nine-year run of red ink. That follows a $1.5 billion shortfall now expected for
FY16/17, a touch smaller than previously expected and still leaving the door open for
balance a year earlier. The Province also sees balanced budgets persisting through the
forecast horizon, which will help to set net debt on a downward track
as a share of GDP, falling to 37.2% by FY19/20 from 37.8% last year. Table 1
Fiscal Summary
While the long-awaited return to balance comes with much fanfare,
Ontario (C$ blns, except where noted)
and is indeed good news, we’ve been somewhat less enthusiastic for
Est.
— Forecast —
a few reasons. The external economic environment is about as
16/17 17/18 18/19 19/20
good as it’s going to get in Ontario, with growth tracking roughly a
Revenues
133.2 141.7 144.9 149.3
full percentage point above potential for a fourth straight year—
Expenditures
134.8 141.1 144.3 148.4
Ontario has benefited from much of what has hurt other regions of
Programs
123.5 129.5 132.3 135.8
Debt Service
11.3
11.6
12.0
12.6
Canada. Revenues have jumped significantly, and this is an
Budget Balance
environment where the Province could easily be building fiscal
(1.5)
0.6
0.6
0.9
before reserve
capacity and reducing the tax burden, not still raising it. Instead,
Reserve Allowance
—
0.6
0.6
0.9
program spending is eating up all of the revenue upside, tracking Budget Balance
(1.5)
—
—
—
a whopping $9.5 billion higher than where it was projected for this
As a percent of GDP:
year, two years ago. There was even mint and cucumber in the
Budget Balance
(0.1)
—
—
—
Net Debt
37.8
37.5
37.3
37.2
budget-lockup water—the good times are indeed back.
As well, while the operating budget will be balanced, Ontario
continues to borrow heavily to fund capital spending, with the
infrastructure program scaled up again. Ontario is not alone on this
front, and we certainly won’t argue with the need for transit
infrastructure.
As a percent of revenue:
Debt Service
Federal Transfers
Key assumptions:
Real GDP (% chng)
Nominal GDP (% chng)
10-Year GoC (%)
Major Policy Measures
Source: Provincial Budget
( ) = deficit
Note: GDP figures are for calendar year (FY17/18=CY17)
Most significant measures were already announced before the
budget, including housing measures and changes to hydro rates.
Table 2
New measures in this budget are largely centred on spending
priorities in health care and education (+3% each). Overall program
spending jumped by $6 billion (+4.9%).
OHIP+ for children will fully cover all prescription drug costs
under the Ontario Drug Benefit Program for all youth up to age 24.
Infrastructure plan boosted by $30 billion through 2027, with $20
billion to be spent in FY17/18 (after including federal and third-party
contributions). That’s up from $14 billion in FY16/17, with big gains
in transit, education and health. Most of this is dedicated to public
transit, roads, schools and hospitals (i.e., true infrastructure).
Basic income pilot project in select cities.
8.5
18.3
8.2
18.1
8.3
17.5
8.4
16.7
2.7
4.6
1.3
2.3
4.3
1.9
2.1
4.1
2.4
2.0
4.2
3.0
18/19
—
15.4
(6.9)
0.9
21.8
0.1
32.3
—
—
—
—
32.2
19/20
—
17.1
(7.1)
1.2
27.4
0.1
38.7
(0.9)
—
—
—
37.8
Borrowing Requirements
Ontario (C$ blns)
Deficit
Capital Investment
Non-Cash Adjustments
Other Loans/Adjustments
Debt Maturities
Debt Redemptions
Funding Requirement
CPP Borrowing
Dec./(Inc.) in S-T Borrowing
Inc./(Dec.) in Cash
Preborrowing
Long-Term Borrowing
17/18
—
13.1
(6.7)
(0.4)
17.5
0.1
23.7
—
—
6.0
(3.2)
26.4
Source: Provincial Budget
A publication of BMO Capital Markets Economic Research • Douglas Porter, CFA, Chief Economist • economics.bmocapitalmarkets.com • 416-359-6372
Ontario Budget Highlights
Page 2 of 3
Revenues: Economic Momentum Lines Coffers
Total revenue is projected to jump 6.3% to $141.7 billion in FY17/18, helped by
solid growth in personal and corporate income taxes as economic growth remains
strong. Revenues from the cap-and-trade program are also providing a big boost, and
are expected to add nearly $2 billion this fiscal year (revenues excluding cap-andtrade are still up 5%). Note that this follows a $2.6 billion upside revenue surprise in
FY16/17. Longer term, revenue growth is projected to downshift toward 3% as
nominal GDP returns back toward trend, and federal transfers decline.
Real GDP is expected to remain solid this year, growing 2.3% after a 2.7% expansion
in 2016. We see a bit more upside at 2.6%, but agree with the assumption that growth
will then slip back toward 2% thereafter. Ontario is basking in cyclical economic
strength right now, with the weak loonie, firm U.S. demand, strong demographic
trends and an overheating housing market all helping.
Spending: Past Spending Plan Blown Out
Total spending is projected to rise 4.7% to $141.1 billion in FY17/18, including
$11.6 billion in debt service costs, leaving program spending up a strong 4.9%.
Health care and education will each see a roughly 3% boost, while nearly $2 billion
of cap-and-trade revenue will be allocated through various spending channels.
Program spending growth is then expected to settle in around the 2%-to-2.5% range
thereafter. Looking back to this moment two years ago, the big question was, will
Ontario stick to its tough program spending challenge (nearly flat) and balance the
budget in FY17/18? On the former, clearly not— instead, program spending is now a
whopping $9.5 billion higher than projected at that time, for this fiscal year. But,
thanks to a very strong external economic environment and a hefty cap-and-trade
revenue take, the budget is still balanced.
April 27, 2017, 4:00 pm
Chart 1
Back in Balance
Ontario (C$ blns)
Budget Balance
5
0
e
-5
-10
-15
forecast
-20
00/01
05/06
10/11
Source: Provincial Budget
15/16
e = estimate
Chart 2
Debt Declining Gradually
Ontario (% of GDP)
Net Debt
43
40
37
34
31
Net Debt Ratio Declining
28
The government has a $23.7 billion total financial requirement in FY17/18, $17.5
billion of which reflects maturities and redemptions. Long-term public borrowing will
total $26.4 billion. Ontario’s borrowing requirement then ramps up to $32.3 billion in
FY18/19 and $38.7 billion in FY19/20, as capital spending and maturities both increase.
Net debt is expected to weigh in at 37.5% of GDP by the end of this fiscal year, down
3 ticks from the prior year. This ratio has been grinding steadily lower since peaking at
39.1% in FY14/15, thanks in part to solid nominal GDP growth. While clearly good
news from a credit perspective, the concern is what happens to the ratio in the next
economic downturn. Looking ahead, still-lofty borrowing to fund capital spending will
keep the level of net debt rising through FY19/20, but the Province expects that to be
slightly eclipsed by nominal GDP growth. Note also that the Province continues to
lengthen the term to maturity of its long-term borrowing to take advantage of
generationally-low interest rates, and interest costs continue to fly in under expectations.
25
03/04
The Bottom Line: The Province of Ontario will balance the budget this year, as long
promised. The real story is below the surface, where much stronger-than-expected
revenues have been fully offset by higher spending. From a credit perspective, the
picture looks solid. From a policy perspective, the desire to spend has eaten up what
otherwise would have been substantial room for tax relief or reduced borrowing.
000
forecast
07/08
11/12
Source: Provincial Budget
15/16
19/20
Ontario Budget Highlights
Page 3 of 3
April 27, 2017, 4:00 pm
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