Provincial Budgets and Economic Statements

• The deficit is expected to deepen to $14.6 billion in 2025-26—marking a $10 billion deterioration from the $4.6 billion deficit anticipated in Budget 2024. 

• A return to balance has been delayed another year to 2027-28.

• Revenues are expected to contract by 0.8% in 2025-26 as U.S. trade policy takes a toll on the economy and prompts tax relief measures.

• Infrastructure remains a cornerstone of the budget with $200 billion planned over 10 years.

• The province is projected to meet two out of three self-imposed fiscal anchors in 2025-26.

• The net debt-to-gross domestic product ratio is expected to increase to 37.9% in 2025-26, reversing progress made after hitting a 14-year low in 2024-25

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Ontario’s 2025 budget showed a significant deterioration in the deficit compared to projections from a year ago. The deficit for 2025-26 is now forecast to reach $14.6 billion—$10 billion deeper than forecast in Budget 2024. Promises to balance the budget have also been pushed out another year to 2027-28 with notable downside risk to the future bottom line. 

The shift is largely driven by a weaker economic outlook due to the negative impact from U.S. tariffs. Increased spending to support businesses struggling with trade uncertainty and new tax relief measures are weighing on the bottom line as well.

Like other provinces, the budget included an increase in the contingency reserve in the current year to $2 billion a year from 2025-26 to 2027-28 as prudence measures in the face of ongoing trade uncertainty. This is contributing to a drag on the bottom line.

It is worth noting that Ontario came out of 2024-25 in better shape than expected with an upside revenue surprise, lowering the deficit to $6 billion instead of the previously forecast $9.8 billion shortfall. The net debt-to-GDP ratio also dropped to its lowest level in more than a decade while all three fiscal anchors are estimated to have been met for the first time. The improvement was largely thanks to an upside surprise to nominal growth, which will be more than offset by current challenges.

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Trade uncertainty weighs on revenue outlook

Ontario’s outlook has deteriorated considerably from previous fiscal plans. Real and nominal GDP are expected to moderate to 0.8% and 3.1%, respectively in 2025 before improving slightly in 2026.

The province has brought employment growth down to just 0.9% in 2025-26—which would be the weakest year in a decade (outside of the pandemic)—and materially lower from expectations in Budget 2024. This mainly reflects ongoing trade uncertainty as well as reduced population growth assumptions in line with the latest federal immigration targets.

As a result, revenues are expected to contract $1.7 billion (-0.8%) in 2025-26. Soft corporate income tax and business enterprise revenues will be the main drivers restraining government income as business and consumer confidence wavers.

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Infrastructure and business support take centre stage

Infrastructure investment and support to businesses with tariff uncertainty were key themes in Budget 2025. Major highlights include an expansion and enhancement of the Ontario Made Manufacturing Investment Tax Credit ($1.3 billion over three years), alongside the previously announced $9 billion provincial tax deferral and an additional $2 billion worth of Workplace Health and Safety rebates in surplus funds.

Permanent cuts to the gas and fuel tax at 9 cents per litre is set to cost $3.5 billion over three years and account for nearly two-thirds of the new measures announced in Budget 2025.

It’s worth noting the pressure expenditures will be under over the next two years with the government projecting less than 1% expenditure growth in both fiscal 2026-27 and 2027-28—down from 2.2% in the current fiscal year, and 8.5% in 2024-25.

The government’s plan is based on updated population growth projections (which now reflect the tighter 2024 federal immigration targets), but expenditure growth is set below the inflation rate that is expected to remain at 2% beyond 2025. The post-secondary education sector will see cuts, while the social services sector budget will be frozen as part of these constraint measures.

Budget 2025 also includes a $200 billion capital plan over 10 years, $33 billion of which is slated for fiscal 2025-26. The lion’s share will be funneled into public transit ($61 billion), and healthcare infrastructure ($56 billion). Highways ($30 billion) and schools ($30 billion) account for most of the remainder.

Fiscal anchors remain under pressure

The government plans to operate within two of its three fiscal anchors with a limited margin of error. The net debt-to-GDP and interest on debt-to-revenue ratios are projected to increase from fiscal 2024-25, but remain within limits. Net debt-to-revenue, however, will increase more than the 200% threshold after an improvement in 2024-25.

Reversing progress made on indebtedness

Budget 2025 projects a rollback of some of the progress made in reducing the debt burden. Ontario now expects its net debt-to-GDP ratio to increase to 37.9% in 2025-26 after reaching 36.3% in 2024-25—the lowest level in more than a decade—which contributed to a recent credit rating upgrade.

A more favourable starting point is preventing the net debt-to-GDP from rising substantially higher than what was outlined in budget 2024 and the fall fiscal update. Still, the metric will come close to the 40% threshold set in 2026-27 when the net debt-to-GDP ratio is expected to hit 39.8%. The constrained position leaves less fiscal flexibility and could put a second fiscal anchor at risk.

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Rachel Battaglia is an economist at RBC. She is a member of the Macro and Regional Analysis Group, providing analysis for the provincial macroeconomic outlook and budget commentaries.

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