Ontario Fall 2026 Economic and Fiscal Statement: Is This as Good as it Gets?

 The Ontario provincial government released its fall economic and fiscal update with its projections for the next few years and the results do not look like smooth sailing.  Ontario is of course being hard hit by the ongoing trade and tariff dispute with the United States with its manufacturing sector under a lot of stress. While the Ontario economy is still being forecast to grow over the new few years - demonstrating a surprising amount of resilience - it remains that once inflation and population growth are factored into the analysis, Ontario is looking at continuing anemic per capita income growth.  By 2028, if all goes as laid out in this economic statement, Ontario will have a real per capita GDP approximately where it was in 2019.  In other words, the third decade of the 21st century will represent a lost decade when it comes to per capita income growth for Ontarians.

 

In an effort to deal with the effects of a slow growing economy, Ontario is relying on continued large deficits.  Figure 1 combines data from the Fiscal Reference Tables and yesterday's economic statement to plot total revenues, total expenditures and the deficit since 1990/91 and up to 2028/29.  Needless to say, more often than not, there has been a deficit with the projections calling for a deficit of $16.9 billion in 2026/27 followed by $12.7 billion and $6.7 billion in the two subsequent years.  Even if one accounts for the billions of dollars in spending being set aside in contingency funds ($2.2 billion in 2026/27 and $3.6 billion in 2027/28), there are still substantial deficits coming down the road.  

 

By 2028/29,  the provincial net debt is expected to surpass the $540 billion dollar mark (see Figure 2) but also growing quickly will be the resources required to service the debt.  Annual debt service costs until the 2022-243fiscal year were under $14 billion  but are projected to rise substantially to the point that 2028-29 is expected to see debt charges surpass $20 billion dollars.  That is about $7 billion more than what the province is expected to spend on post-secondary education in 2028/29 ($12.6 billion) and just under what it is expected to spend on children, community and social services ($21.7 billion).  And while we are on the topic of post-secondary education, it should be noted that the economic statement shows spending on the sector at 13.9 billion for 2025-26 meaning that by 2028/29, spending on the sector will have declined by 9.4 percent. 

 

However, the most interesting revelation is for health spending.  Figure 3 plots the total amount the provincial government is spending on health as well as adjusted for both population and inflation. Going forward, increases will be about $3 billion annually in total health spending which after factoring in inflation and population growth will result in increases in real per capita spending of 0.5 percent in 2026/27, -0.2 percent in 2027/28 and 0.7 percent in 2028/29.  By 2028/29, real per capita provincial government health spending will have essentially been flat since the surge of the pandemic. The pandemic itself saw a substantial bump in real per capita spending followed by a decline and then a slow recovery which flattens out going forward over the next three years.  All this in turn comes after a period of essentially flat real per capita health spending since 2008/09. By way of comparison, from 1997/98 to 2008/09, real per capita provincial government health spending growth in Ontario averaged 4.1 percent annually. Since then and projected to 2028/29, the average annual growth rate will be 0.8 percent. 

 

Of course, part of the reason for slow spending growth in important things like health and large deficits at the same time is the anemic performance of the provincial economy and Figure 4  shows where we have been and where it looks like we are going. Much like health spending, projected real per capita GDP by 2028/29 will  be where Ontario was just before the pandemic. A slow economy feeds into revenue growth. The result is that while revenues are projected to increase, they are not rising fast enough to both increase spending on key programs, service the debt and balance the budget.  Between 2025/26 and 2028/29, total revenue is expected to grow by 11 percent.  Program spending is expected to rise by 6 percent.  However, debt service costs are going to rise by 32 percent.  And with interest rates on the way up, it looks like this is going to be as good as it gets.

Global Aftermath: The Economic and Fiscal Effects of COVID in Canada and the World

 

The write-up accompanying my report on COVID in Canada and the world released today by the Fraser Institute.  The full report is available here.

 

— Published on May 11, 2023 Fraser Institute

The economic and fiscal disruption and associated effects of the pandemic in Canada and around the world were severe and unprecedented. The general effects of the pandemic were to disrupt health, social, governmental, and economic systems. While the impact of the pandemic on Canada and the world was similar, variations in demographics, timing of the spread and response, and other characteristics have meant that the effects on health, the response, and the economic and fiscal impacts have varied across countries.

At 103,874 total cases per million population by June 2022, Canada performed remarkably well: incidence was the fourth lowest among the IMF Advanced Economies. Moreover, of the IMF Advanced Economies, Canada was 27^th out of 38 at 1,103 deaths per million population; Japan was the lowest at 248 total COVID-19 deaths per million population. Canada did not fare as well for crude COVID mortality: its rate of 1.1% is the second highest of the IMF Advanced Economies. As for responses to the pandemic, at 227 vaccinations per 100 population, Canada had the 7^th highest vaccine uptake rate of the IMF Advanced Economies and the 3^rd highest level of stringency in its responses to the pandemic as measured by the Oxford University’s COVID19 Government Response Tracker.

Impact on the economy

Canada’s estimated real per-capita GDP growth was negative and the country ranked 29^th out of 40 IMF Advanced Economies and had the second-worst performance of the G7 countries over the period from 2019 to 2022. Canada, during the first pandemic year, had the second worst employment drop of the IMF Advanced Economies at 5.1%, coming in just ahead of the United States. However, during the rebound in 2021, Canada had the second highest employment growth of the IMF Advanced Economies. Canada’s unemployment rate in 2020 of 9.6% was higher than the world average (9.2%), the G7 average (6.6%), and the average for the IMF Advanced Economies (6.3%). According to the International Monetary Fund’s inflation estimates for 2021, Canada was mid-ranked (19^th highest) amongst the IMF advanced economies. However, a particularly high proportion of Canada’s inflation appears to be linked to demand-side rather than supply-side factors. As well, Canada ranked 9^th out of 30 OECD comparator countries for the size of the increase in housing prices.

Overall, Canada’s performance in controlling COVID-19 incidence and vaccine uptake was good but this was accompanied by lower testing rates for COVID as well as higher crude mortality rates. In terms of economic performance, Canada did not fare well in per-capita GDP growth during the pandemic; employment growth was also low, though this did improve in 2021. Canada was also generally mid-ranked for inflation compared to the IMF Advanced Economies, though it appears to have had a higher proportion of its inflation driven by demand-side factors. Canada’s success in some aspects of dealing with COVID appears to have come at an exceptionally high price, particularly from negative short-term employment effects and weaker per-capita GDP growth.

Impact on the fiscal situation

In 2020, of 194 IMF countries, at an increase of government expenditure of 19.7%, Canada ranked 25^th highest in the world for spending. This increase of nearly 20% was well above the world average of approximately 9%, the G7 average of 13%, and the average of the IMF Advanced Economies of nearly 11%. Canada also averaged a 2.2% drop in general government revenue in 2020 according to the IMF, not as severe as the average drops for either the IMF Advanced Economies or the G7.

The world saw its negative fiscal balance widen from 3.6% in 2019 to over 10% in 2020 before starting to decline to under 8% in 2021 and to just over 5% in 2022. According to the IMF, Canada initially saw a negative fiscal balance of about 11% in 2020 from a balance of close to zero in 2019. The fiscal balance for 2020 was later revised to 11.4%, with a revised forecast of 4.7% in 2021 and 2.1% in 2022.

Globally, from 2019 to 2021, the average gross debt-to-GDP ratio rose from 57% to 67%. All together 161 out of 196 countries—nearly 80%—saw an increase in their gross debt-to-GDP ratios from 2019 to 2021. Canada saw its gross debt-to-GDP ratio increase by nearly 25 percentage points from 2019 to 2021, the 15^th largest increase in the world. It is worth noting that, of the increased government debt accumulated in Canada during the pandemic, much was incurred by the federal government rather than the provincial governments.

Canada’s fiscal response was especially large and driven mostly by the federal response. In some respects, the ability of Canada to ramp up its fiscal response in time of need reflects its long-term prudent fiscal management and resulting low debt-to-GDP ratio achieved in the decades after the federal fiscal crisis of the 1990s. At the same time, the size of the deficit and fiscal response during the pandemic should not be allowed to become a long-term feature of the public finances given the recent rise in interest rates, especially as it limits the ability and fiscal flexibility for responses to future events.