Wynne Sends Ontario Back Into Deficits With Pre-Election BudgetBy
Budget gap will soar to a total of $25 billion over six years
Moody’s says plan is credit negative, sees structural deficit
Ontario plans to run budget deficits for the next six years, breaking a pledge to keep its books balanced as it boosts spending on everything from child care to mental health ahead of a provincial election in June.
After generating a surplus of C$642 million ($497 million) in 2017-18 -- the first in a decade -- the government of Canada’s most populous province is forecasting a budget gap of C$6.7 billion in the fiscal year starting April 1. Deficits will soar to a combined C$32 billion over six years, before reaching balance again in 2024-25, according to the budget released in Toronto on Wednesday.
“We are choosing to put our strengthened fiscal position to work,” Finance Minister Charles Sousa said in the provincial legislature. “This budget makes the choice to help the people of Ontario better manage the pressures of everyday life.”
Ontario Premier Kathleen Wynne’s Liberals are facing a tough election in June after 15 years in power with businesses frustrated by rising minimum wages and residents facing mounting costs in a rapidly urbanizing province. With C$20.3 billion in new spending over three years, Wynne’s “Care and Opportunity’’ budget aims to make life easier, yet it also comes at a cost.
Ontario’s ratio of net debt to gross domestic product will rise from 37.1 percent in 2017-18 to a peak of 38.9 percent in 2021- 22, instead of falling steadily as projected in the government’s fiscal update from November.
Program spending will increase by 6.1 percent to C$145.9 billion in the year beginning April 1, compared with a 5.8 percent increase in fiscal 2017-18. Over the next three years the government plans to spend C$2.2 billion on childcare, including free preschool for children aged two-and-a-half starting in 2020, C$1.2 billion on mental health and about C$800 million to reduce prescription drug and dental costs.
Moody’s Investors Service said it views the return to deficits as credit negative and would monitor its impact on the province’s Aa2 rating. “The inability to accommodate new spending within a framework of maintaining or quickly returning to balanced budgets, at a time when the province’s economy is performing well, suggests the province is facing a structural deficit,” Michael Yake, a senior analyst at Moody’s, said in a statement Thursday.
Fitch Ratings said earlier in March the province’s return to budget deficits may pressure its long-term AA- rating.
The government also plans new spending of about C$1 billion in the next three years aimed at creating jobs by supporting innovation, startups and business subsidies.
“This budget extends and expands the social policies the Liberals under Kathleen Wynne have put in place,” said Mary Webb, director of economic and fiscal policy at Bank of Nova Scotia. “Many of them are not one-off policies, they will reshape the economy.”
Government spending has helped support growth and jobs, the government argues. Economic growth has averaged an annual 2.7 percent from 2014 to 2017, faster than the Group of Seven and the unemployment rate hit a 17-year low of 5.5 percent in February. Growth however, is forecast to slow to 2.2 percent this year and 1.8 percent in 2019, according to the budget.
Ontario’s budget stands in stark contrast to that presented in Quebec yesterday to balance its books for the fourth straight year. That allows the province to pay down debt and lower taxes for small businesses and home buyers.
“For the foreseeable future we are not seeing any commitment in Ontario to balance the budget or curtail the deficit in a meaningful way,” Kamyar Hazaveh, vice president of fixed income at CI Investments Inc. in Toronto, said ahead of the budget. He heads a team overseeing C$8.5 billion in bonds, including those of Quebec and Ontario. “The debt dynamic under any of the platforms in Ontario is going to continue to be based on deficits for the foreseeable future.”
Ontario’s swing back into the red comes with the Liberal Party trailing in election polls, even though voters are wary of Doug Ford, the leader of the Progressive Conservative opposition party. Ford, who’s campaigning to “take back” the province with an agenda to shrink government and reduce spending, is the brother of the late scandal-plagued Toronto mayor Rob Ford.
“You will be stuck with the bill for Kathleen Wynne’s election promises,” Ford said at press conference in the budget lockup. “All they do is tax, tax, tax, and spend, spend, spend.”
The province plans to borrow C$31.7 billion in the bond market in the next fiscal year, growing to C$36.7 billion in 2019-2020 and C$41.3 billion in 2020-2021. It will maintain its Canadian dollar borrowing target at two thirds of total borrowing in 2018-2019.
Ontario bonds returned 2.6 percent in the 12 months through Wednesday, compared with a Bloomberg Barclays provincial and municipal bond index which returned 3 percent. Quebec returned 2.9 percent over the same period. Ontario’s 2.6 percent bonds coming due in 2027 traded to yield 2.75 percent, or about 67 basis points over similar-maturity federal government bonds, according to data compiled by Bloomberg.
Among other budget measures:
- Ontario plans to eliminate a surtax and create seven personal income tax brackets, boosting the tax bill for about 1.8 million people by about C$200 and reducing it by about C$130 for 680,000
- Including the changes to the personal brackets, tax measures will see about an additional C$2 billion flow into government coffers.
- The government expects to receive about C$35 million for its share of cannabis taxes from the federal government next fiscal year while setting up its pot retail system will cost about C$40 million.
- As governments around the world look for ways to safeguard personal data in the age of Facebook, Ontario is exploring ways to leverage data generated by social media and business information platforms to boost growth and support businesses - while protecting the public interest.
— With assistance by Frederic Tomesco