Ontario's fiscal watchdog said Monday what the provincial government so far has not — the COVID-19 health crisis is pushing the province toward historic levels of deficit and debt.

The Financial Accountability Office issued a report that projected Ontario will run a $41-billion deficit this year, double the deficit forecast by the government in late March, as the pandemic continues to batter the economy. The FAO forecast a 9-per-cent decrease in the province's real GDP this fiscal year, followed by a rebound of 8.5 per cent next year, resulting in a $25-billion deficit projection for 2021-22.

In contrast, the provincial government released a Spring Economic and Fiscal Update in lieu of a budget in late March based on a projection of zero-per-cent GDP growth, which one government official referred to as a merely a “planning assumption” that was made amid economic uncertainty. Its projections were limited to the 2020-21 year and included a $20.5 billion deficit.

The FAO had an extra month of economic information to work with in order to measure the pandemic's effect on the economy and officials cautioned, repeatedly, that there is still a high degree of uncertainty in their forecast. It is based on an assumption that may not come to pass — that the public health measures put in place to contain the spread of the pandemic ease as of next month and the economy begins a gradual recovery.

The FAO also modelled a delayed recovery scenario that estimates the impact of prolonged or successive economic shutdowns put in place if, for instance, there is a second wave of the virus. That would see a $45-billion deficit this year and a $38-billion deficit in 2021-22, due to real GDP decline of 9.3 per cent this year and a weaker rebound of 4.6 per cent the year after.

"The key message from today's report is that the partial shutdown of the economy in Ontario in response to the COVID-19 pandemic will deliver a severe blow to the province's revenues, coupled with increase spending will result in substantially higher deficits and debt," said Financial Accountability Officer Peter Weltman at an online press availability.

Lower revenue due to economic decline is the major contributor to the higher projected deficit, but province's starting fiscal position and increased spending add to it. The 2019-20 deficit was approximately $10 billion and spending is projected to be $8 billion higher this year than last — of that, $4.1 billion is COVID-19-related and $1.2 billion is contingency funds set aside, the FAO found.

The FAO said the deficit projection would be the highest in Ontario history, in both dollar terms and as a share of GDP. The closest runner-up was $19 billion deficit in 2009-10, and this year's projected deficit clocks in at 5 per cent of GDP, surpassing the 4.2 per of 1991-92.

Finance Minister Rod Phillips thanked the FAO for his report, but offered no opinion as to whether he believes its forecasts are on the mark, saying only there remains a high degree of uncertainty.

Phillips touted a "historic level of prudence" built into the spring outlook, which refers to a $1-billion COVID-19 contingency fund for additional health-care costs, as well as additional $1.5 billion in reserve and a contingency fund of $1.3 billion — and does not amount to a buffer large enough to protect province's bottom line from the economic decline forecast by the FAO.

For his part, Premier Doug Ford said he has confidence in the ability of Ontario businesses to rebound.

"I won't spare a penny to protect the health and well being of the people in this province," he said, adding that the government "spent $17 billion," which is inaccurate, as it includes $10 billion in tax deferrals the government expects to recover.

The Ford government came to power in 2018 promising to balance the budget, while delivering significant tax cuts, without affecting service levels or laying off public servants.

The pandemic appears to have shifted the narrative somewhat — asked Monday if he could promise there will be no tax increases, Ford replied that he's learned there are no certainties in government. Meanwhile, Phillips was asked if the government will try to stick to its pre-pandemic plan to balance the budget in 2023-24 and did not directly answer, but said he will provide another fiscal update in the summer and a full budget with a multi-year forecast in November.

The FAO said it is up to the government to decide wether or not to implement taxation or spending measures to meet its balance timeline.

"It won't be easy, especially in light of what's happened, and it was never going to be easy beforehand," said Weltman.

The FAO report included an extended outlook, based on an average revenue growth of 5 per cent per year after next year and "restrained" 2 per cent annual spending increases, which would find Ontario with a $17-billion deficit in 2023-24, when the Ford government had initially planned to reach balance.

The FAO also warned that the fiscal impact of COVID-19 will be long-lasting and add to Ontario's already substantial debt burden, with a net-debt-to-GDP ration of 48.7 per cent next year under the baseline scenario and 52 per cent that year in the delayed recovery scenario.

FAO Chief Economist David West said neither Liberal nor Progressive Conservative governments substantially addressed Ontario's debt burden over the last decade. The debt-to-GDP ratio shot up from around 27 per cent to around 40 per cent in the wake of the global financial crisis and remained at that level until the pandemic. "There (were) challenges before, and this has only made it worse," said West.

Now, the debt-to-GDP is approaching 50 per cent and Weltman said that level is likely to spark a debate about the province's fiscal sustainability. "I think governments have been aware of the debt-to-GDP ratio in Ontario, but for whatever reason have been really unable to do anything significant about it," he said.

However, Weltman said it's not clear how the additional debt burden would impact Ontario's credit rating and ability to borrow money, because the problem is not unique to Ontario — the entire developed world is running increased deficits. "But ultimately, we'll have to wait and see what the credit rating agencies say at the moment, there appears to be a fair bit of liquidity in the market the government of the central bank has been actively ensuring that that would happen," he said, noting the Bank of Canada's announcement it will buy a portion of provincial debt.

Ontario fiscal watchdog projects $41B deficit this year, double government’s March estimate

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