Canada's Ontario plots long-term path to balanced budget as economy rebounds

TORONTO (Reuters) – Ontario, Canada’s most populous province, outlined on Wednesday a long-term plan to balance its budget as the economy recovers from the coronavirus crisis, forecasting a narrower deficit in 2021-22 and further gradual declines in subsequent years.

The budget deficit remains historically wide, with additional pandemic-related spending announced, but a path back to balance could be welcomed by bond investors and credit rating agencies. The province is one of the world’s largest sub-sovereign borrowers.

The longer-term outlook gave investors a sense of how Ontario intends to tackle their high deficits, said Robert Hogue, a senior economist at Royal Bank of Canada.

“I think that will be viewed positively,” Hogue added.

The deficit is seen narrowing to C$33.1 billion ($26.4 billion) in 2021-22, matching a November projection, but lower than the record C$38.5 billion deficit forecast for 2020-21, a budget document showed. The fiscal year begins on April 1.

The deficit is then seen shrinking further in future years before swinging to a modest surplus in 2029-30.

The deficit is “neither sustainable nor desirable forever” but is necessary to get through the pandemic and to recover stronger, said Ontario Finance Minister Peter Bethlenfalvy, in prepared remarks.

The economy is expected to grow by 4% in 2021 and 4.3% in 2022, with the pace then moderating in subsequent years. It contracted by an estimated 5.7% in 2020.

The 2021 growth forecast for the province, which is home to manufacturers and Canada’s major financial center, was less than the 4.9% pace seen in November and slightly below the average of private-sector forecasts.

With economic activity recovering, revenue is forecast to rise 1.4% to C$154 billion in the upcoming fiscal year, while expenses are seen falling to C$173 billion, a drop of 2.7%, as funding of COVID-19 programs dials back.

Still, the province announced new support measures for health and the economy. It includes C$2.3 billion more for COVID-19 testing and contact tracing in 2021-22, as well as additional money for parents and small businesses.

Pandemic-related spending was projected at C$51 billion over a four-year period, up from C$45 billion in November.

The province forecast net-debt-to-GDP rising to 48.8% in 2021-22 from 47.1% in 2020-21. It is seen peaking at 50.5% in 2024-25 before gradually declining to 46.4% in 2029-30.

The yield on Ontario’s 10-year bond was at 2.05% on Wednesday, down 2.1 basis points, in line with moves on other provincial bonds.

($1 = 1.2553 Canadian dollars)

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