Ontario Budget 2026: Another Province with Bigger-than-expected Deficits
Persistent trade tensions with the United States and global economic uncertainty have once again disrupted Ontario’s fiscal outlook, leading to an expected deficit of $13.8 billion for fiscal year 2026–27, a considerable downgrade from the deficit of $7.8 billion projected in Budget 2025 last spring.
- As the province continues to navigate turbulent economic waters, the government expects deficits to linger a little longer. In fiscal years 2026–27 and 2027–28 combined, the deficit is expected to be $12.3 billion higher compared to last budget, climbing from $7.6 billion to $19.9 billion. These deficits include contingencies of $1.5 billion and $2.0 billion in fiscal years 2026–27 and 2027–28, respectively.
- Amid this projected increased in the deficit, the province has delayed its return to balance. Originally projecting a slight surplus of $0.2 billion for fiscal year 2027–28 in last year’s budget, the government now expects to return to the black in fiscal year 2028–2029 with a similarly modest surplus of $0.6 billion.
- In line with the downgraded fiscal outlook, the net debt-to-GDP ratio is projected to rise from 36.8 per cent in fiscal year 2025–26 to 37.7 per cent in fiscal year 2026–27. On the upside, the ratio is low compared to much of the last decade, which is a good sign for the resiliency of the province’s near-term finances, even if net debt-to-GDP is expected to sit slightly higher over the next two years.
- Spending growth is anticipated to marginally outpace revenue growth to widen the deficit this year. Although program spending is only expected to increase by 2.1 per cent, interest and debt servicing charges are anticipated to rise by 7.5 per cent and lead to total overall spending growth of 2.4 per cent—0.1 percentage points higher than the projected 2.3 per cent increase in revenues.
- The government is tightening its purse strings beyond this year on its path to balance the budget, with the province expected to expand program spending by an average of only 0.9 per cent annually in fiscal years 2027–28 and 2028–29. At the same time, interest and debt servicing costs are anticipated to increase by an average of 7.0 per cent per year to drive total average spending growth of 1.4 per cent.
- Stimulating investment was a key focus in Budget 2026. The government is planning to let businesses immediately write off 100 per cent of many manufacturing and processing investments, R&D spending, and other productivity-enhancing assets, while providing accelerated depreciation for LNG equipment and rental housing. Together, these measures will cost $3.5 billion over four years.
- The province is also creating a new Protect Ontario Account Investment Fund, investing up to $4 billion and choosing a top private investment manager to run it. The fund will invest in projects that support Ontario’s long-term economic goals.
- Ontario plans to cut the small business corporate income tax rate from 3.2 per cent to 2.2 per cent starting in July, equivalent to $1.1 billion in tax relief over three years.
- The province reiterated its ambitious capital plan of $210 billion over ten years, including $37 billion in 2026-27 to build highways, hospitals, transit, and other infrastructure.
- On the housing front, Ontario plans to remove the full 13 per cent HST on new homes priced up to $1 million, with partial relief maintained up to $1.5 million, for one year. The federal government has agreed to cover the 5 per cent federal portion of the tax, and together the measure is expected to provide about $2.2 billion in joint tax relief for Ontario new home purchases.
- The province’s baseline forecast assumes real GDP growth of 1.0 per cent in 2026, 1.7 per cent in 2027 and 1.8 per cent in 2028. The forecast was completed before the conflict in the Middle East escalated at the end of February, however we still see these figures as reasonable with near term risks tilted to the downside.
- The budget also presented two alternative scenarios, one with stronger GDP growth and one with weaker. Under both scenarios, deficits persist over the next two years, with the higher growth scenario posting a robust surplus in 2028–29 compared to another year of deficits in the low growth scenario.
- Under the low growth scenario, real GDP growth of only 0.3 per cent in 2026 and 0.6 per cent in 2027 leads to a projected total increase in the budget deficit of $18.3 billion over the next three fiscal years. Although very much a downside outlook, a further deterioration of Canada’s trade relationship with the U.S. or a prolonged conflict in the Middle East could set Ontario’s economy down this path.
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Key insights
Tough economic times warrant fiscal support and Ontario’s budget reflects this reality with a sizeable near-term deficit. However, the fiscal plan rests on an economic outlook that is already strained due to the war in Iran. The shock to energy prices has dampened already weak prospects for global growth. Ontario could face weaker demand for its exports, higher inflation and tighter monetary conditions than assumed in the budget. If the conflict persists, the economic fallout will add further pressure to the province’s fiscal situation.
Investment was front and centre. Ontario’s strategy parallels that of the federal government, with several measures announced to reduce the corporate tax burden and stimulate private investment across the province. We broadly agree with this approach, as boosting investment and productivity is one of the biggest challenges facing the Canadian and provincial economies today. The extent of their impact will ultimately come down to whether firms respond by significantly increasing capital spending in the face of ongoing economic uncertainty and weaker growth expectations.
Affordability measures beyond reach. Budget 2026 included few measures aimed directly at supporting households. Lower income families, who are likely to feel the most pressure from recent inflation driven by the conflict in the Middle East, will not generally benefit from the one-year HST relief on new homes. Given how recently these global events have unfolded, the absence of new targeted support is not entirely unexpected, though relief more directly targeted at lower income households facing sharply rising costs would have been helpful.
Healthcare pressures likely to be a persistent factor. Looking ahead, healthcare is likely to play a larger role in government budgeting as the number of seniors rises quickly across the province. The government is planning for average annual growth of 4 per cent in healthcare program spending between fiscal years 2024-25 and 2028-29, though our own demand-driven estimates of healthcare indicate that cost growth may exceed this. Given that healthcare accounts for over 40 per cent of program expenditures, even modest cost pressures can have significant fiscal implications, highlighting the importance of careful planning to maintain long-term budget sustainability.
The Provincial Fiscal Outlook provides an independent five‑year forecast of each province’s finances, offering an objective evaluation of government budget projections and the economic trends and risk factors that could challenge them.
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