Before the Ontario government adjusts its future spending, the province is on track to run its first surplus in a decade and a half next year, according to calculations by the province's budget watchdog.

The Financial Accountability Office of Ontario (FAO), led by financial accountability officer Peter Weltman, made that forecast in its spring economic and budget outlook report, which it released Tuesday. Its report is based on current government revenue and spending, the estimated economic and fiscal impact of COVID-19's Omicron wave, and spending commitments made before March 28 of this year.

Based on these, the FAO calculated that Ontario's deficit in 2021-22, the fiscal year that ended March 31, will be $8.7 billion, followed by $1.7 billion in 2022-23. It then projects yearly surpluses, starting at $1.2 billion in 2023-24 and reaching $7.1 billion in 2026-27.

These projected deficits and surpluses are unlikely to be Ontario's bottom line each year. As QP Briefing has previously reported, the government's 2022-23 budget is unlikely to be passed before the June election. Whichever party takes power, the government is likely to alter the current spending plans in some way.

The three major parties have all promised to make major fiscal changes that were unaccounted for in the FAO's new report. The PCs' temporary gas tax cut — which passed Tuesday — would cost $625 million this year, while the middle-income tax cut it promised in 2018 would have billion-dollar ramifications each year. The Liberals' "economic dignity plan" — the first major piece of its platform that the party released — would cost $1.6 billion to implement and $264 million to sustain each year. And the NDP's pledges on mental health care, climate-change mitigation, housing and long-term care reform would cost billions of dollars every year.

Nevertheless, Ontario's financial position has significantly improved since last year, when the FAO forecasted that Ontario would be running deficits until at least the end of the decade.

The FAO attributes its 180-turn to improved economic growth forecasts and "strong" revenue growth for the province, driven by increased tax revenues and federal transfers, which spending hasn't kept pace with.

Government revenues are projected to increase 4.8 per cent per year on average through 2026-27, while spending will only increase 3.6 per cent, according to the FAO.

With current policies, the FAO projects tax revenues will increase 4.9 per cent per year, on average, through 2026-27.

The budget watchdog also projects strong GDP growth over those years, growing the government's tax base.

A temporary bump to what Ontario receives through the Canada Health Transfer, plus Ottawa's financing of its child-care agreement, will amount to transfer payments increasing by an average of six per cent per year through 2026-27, the FAO forecasts.

The report also says Ontario's "other revenues" — which includes rent and natural resource incomes, social security contributions, fines, fees, interests and dividends — will also increase at a faster rate than in the last several years. (Ontario collects less of these kinds of revenues per capita than any other province, which is largely because its economy is far less reliant on natural resources than many others.)

In terms of spending, the FAO's projections find Ontario's government's health-care spending will increase an average of 4.8 per cent per year until 2026-27, about one-and-a-half times how much health-care spending increased annually from 2013-14 to 2019-20. Other high-cost spending areas for the government — including education, post-secondary education, children's and social services, and justice — will all increase too, but at slower rates than they did from 2013-14 to 2019-20. The remainder of spending also won't increase at as high a rate as over that seven-year span.

The FAO highlighted several caveats to its projections. Foreseeable factors that could throw them off include escalated conflict in Ukraine, worse supply-chain challenges, higher inflation, repeated COVID-19 waves and faster interest rate increases — all of which could weaken economic growth.

The budget watchdog said in its report that by running budget surpluses, Ontario's fiscal sustainability would be improved, as key indicators like a decreased debt-to-GDP ratio and percentage of interest on debt as a share of revenue would illustrate.

Before new spending, Ontario on track for budget surplus next year: FAO

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