Pandemic economic damage deepened Ontario's structural deficit to $16B: Watchdog

Ontario will have a $16 billion fiscal hole to climb out of after the pandemic, according to a report from the province's Financial Accountability Office (FAO).

The province's recent third-quarter fiscal update, released Wednesday, projects a deficit of $38.5 billion this year, a figure the FAO analysis aligns with. The FAO's projections for the following years show a $30.7 billion deficit next year and a $24 billion deficit the year after.

By 2023-24, the province would begin to reach a deficit plateau, absent any policy changes that change the bottom line, with a budget deficit of $17 billion that year and $16.1 billion the two years after, according to the FAO.

The FAO increased that figure from $14 billion in a fall report because of increased program expenses and further economic damage from the pandemic's second wave in the interim.

"We're going to be pretty much stuck at a $16 billion ongoing deficit, once we get through the pandemic and are getting back to a semblance of normal," said FAO head Peter Weltman, adding that forecast would change if the government makes significant revenue or spending decisions.

Ontario had an $8.7 billion deficit in 2019-20, before COVID-19, and the deterioration to a plateau of $16 billion comes both from lasting effects of the economic damage wrought by the pandemic and the increasing fiscal pressure caused by the province’s ageing population, according to the FAO.

The FAO also examined Ontario's budgeted spending for this year and identified $16.5 billion in one-time COVID-19 spending, as of the November budget.

The largest component is $8.3 billion in health-care spending. After that, $7.3 billion on other initiatives, including those from the Support for People and Jobs pandemic contingency fund as well as those related to the federal-provincial Safe Restart agreement for transportation and municipalities. The FAO calculated $800 million in pandemic spending in education, $100 million in children's and social services and $25 million in the justice sector.

Excluding COVID-19 funds, planned program spending in health and education will not keep pace with the underlying demand for public services over the next two years, according to the FAO, making it hard for the province to cut its way out of the budget hole.

The FAO outlined a potential scenario for the province to balance the budget by 2025-26 and outlined policies that could achieve it.

"If the government were to permanently increase personal income tax revenue by 10 per cent or around $500 per tax filer, starting in 2021-22, the budget deficit would improve by $3.7 billion in the first year and by $4.9 billion by 2025-26," the report says. "For expenditure policy, if the government were to decrease the growth rate of program spending by 0.5 percentage points in each year beginning in 2021-22, the budget deficit would decrease by $4.7 billion by 2025-26."

The Ford government hasn't clearly indicated how it plans to tackle Ontario's deficit but acknowledged its plan to balance the budget by 2023 has changed.

Asked if his government will have to raise revenues or further cut spending to handle the deficit, Finance Minister Peter Bethlenflavy said Wednesday high deficits are not sustainable in the long run, but didn't offer specifics.

"I'm a big believer in the people of Ontario," he said. "I'm a big believer in the entrepreneurial spirit, the innovation of this province, our academic system, and I think we have the opportunity to come back and come out stronger from an economic point of view."

"And so we'll continue to look at ways to put in the conditions for Ontario to lead the country again, as it was before the pandemic, in terms of job creation, and the jobs of tomorrow, and go to where the puck is," he continued.