After postponing its budget this spring to deal with the onset of the COVID-19 pandemic, Ontario released its 2020 budget today, coined “Ontario’s Action Plan: Protect, Support, Recover”. The budget contained a large deficit over the next few years, which is no surprise given current economic circumstances. While there were spending increases in this budget, many are short-term initiatives designed to cushion the economic blow and to respond to the health risks associated with the pandemic. The short-term nature of these measures suggest that the government is keenly aware of the need to eventually refocus on the sustainability of its finances. Given that Ontario was dealing with one of the largest debt-to-GDP ratios across the country and faced a structural deficit prior to the onset of the pandemic, this eye to fiscal responsibility remains important.
Economic backdrop and fiscal outlook
The COVID-19 pandemic has triggered the deepest recession in modern history. Underpinning Ontario’s fiscal plan is a stark but realistic view of Ontario’s recovery path. Ontario’s real GDP is expected to decline by 6.5% in 2020 before rebounding by 4.9% in 2021. A full recovery is not expected to occur until 2022 with real GDP projected to grow by a 3.5% in that year. Nominal GDP, a good measure of the governments tax base, is projected to decline by 5% in 2020 before rebounding by 6.6% in 2021. The numbers that form the foundation of the government’s fiscal plan are in line with our own current forecast for Ontario’s economy, where the recovery has been delayed by a resurgence in the virus. However, it is worth noting that we are in a heightened level of uncertainty and it is quite possible for the recovery to stall in the coming quarters.
The current pandemic that is ravaging the Ontario economy is, not surprisingly, taking a toll on Ontario’s tenuous balance sheet. The government projects its own-source revenues to decline by 10% in 2020-21 and not rebound until 2022-23. However, this decline will be cushioned by an $8 billion increase in transfers from the federal government this year. Overall, total revenues are projected to decline 3.2% in fiscal year 2020-21 and remain at that level in 2021-22.
Meanwhile, total program spending is projected to rise by 14.6% this year boosted by the governments measures to respond to COVID-19. Program spending is projected to decline slowly over the next two years as the measures begin to come off. Overall, total program expenditures will grow at an average annual pace of 4.2% over the 2019-20 to 2022-23 timeframe.
The collapse in revenues and increase in expenditures will push Ontario’s deficit to $38.5 billion this year. The deficit will decline slowly over the next two years with shortfalls of $33.1 billion and $28.2 billion projected for 2021-22 and 2022-23 respectively. Despite the large increase in the deficit, interest payments on the debt are expected to remain stable this year. However, beyond this year, the higher debt will begin taking a toll pushing up interest costs by an average of 5.5% per year.
Net debt as a share of GDP is expected to reach 47% this year, up from 39.7% in the previous year. Given the elevated level of uncertainty underpinning the economic and fiscal projections due to the pandemic, the budget did not include a path to return to balance. The government did note the unsustainability of the current deficit and stated that the return to balance plan will be included in the next budget.
Details of new spending measures
Ontario’s budget introduced an extra $15 billion in spending as part of its plan to continue to protect and support citizens during the pandemic and then to aid in the economic recovery. The $15 billion in new spending includes $7.5 billion in the protection plan, $2.4 billion in the support plan and $4.8 billion for the recovery plan.
- Boost funding to protect people’s health and support the fight against COVID-19 by $4 billion in fiscal 2021-22 and $2 billion in 2022-23.
- Over a four-year period, increase the number of hours of contact that patients in long-term care will have with a nurse or personal support worker to four hours a day.
- Opening of the Cortellucci Vaughan Hospital, which is the first new hospital to add net new capacity in the province in 30 years.
- A $1.8 billion boost to the Support for People and Jobs Fund over the next two years to respond to needs as they emerge over the near to medium term.
- $380 million for parents through the Support for Learning Initiative to help with costs associated with online learning. Parents will receive $200 per child for children up to the age of 12 and $250 per special needs child or youth up to the age of 21.
- A Seniors’ Home Safety Tax Credit for tax year 2021 that would offer a 25% tax credit for renovations up to $10,000 that allow seniors to stay in their homes longer.
- An extra $60 million over three years for the Black Youth Action Plan beginning this year.
- The Community Building Fund will get $100 million over two years to support community tourism, cultural and sport organizations which have been hard hit by the pandemic.
- Ontario art institutions will be provided $25 million to cover operating losses brought about by the pandemic.
- An additional $680 million over four years to expand broadband infrastructure.
- A reduction in electricity costs for businesses at a cost of $1.3 billion over the next three years. This will save medium size and larger industrial and commercial business on average about 14 to 16% respectively on their electricity bills.
- Lower the Business Education Tax paid by over 200,000 businesses (94% of business properties) at an annual cost of $450 million.
- Allow municipalities the ability to cut property taxes on small businesses and discuss the possibility of matching those reductions.
- Proposing to make permanent the increase from $490,000 to $1 million in the Employer Health Tax exemption at a cost of $360 million in 2021-22.
- A commitment to providing Ontario residents with up to 20% of eligible tourism expenditures in the province next year as a way to incentivize staycations and support for the local tourism sector.
- Skills training will be allocated $180.5 million over three years to help workers in hardest hit areas, such as hospitality, acquire new skills.
- The Ontario Onwards Acceleration Fund will get $500 million over four years to make government services more reliable, convenient and accessible.
Categories: Economics, Ontario Budget
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