Ontario’s budget deficits will continue indefinitely without new policy measures, the province’s independent fiscal watchdog projected Tuesday, contradicting the government’s forecast of a balanced budget by 2027-28.
The Financial Accountability Office projected an $11.1 billion deficit for 2025-26, worsening to $11.8 billion in 2026-27 before gradually declining to $6.3 billion by 2029-30. The analysis marks a sharp departure from the government’s outlook, which forecasts deficits narrowing to a surplus of $200 million in 2027-28.
The divergence stems from conflicting projections on health spending and tax revenues. The FAO expects health sector spending to grow 4.6% annually through 2027-28, while the government’s fall economic statement forecasts just 1.0% annual growth. This creates a projected health funding shortfall of $10.7 billion by 2027-28.
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Personal income tax revenues also drive the gap between projections. The government expects tax collections to grow twice as fast as labour income over the next three years, well above the historical relationship of 1.2 times faster. The FAO’s analysis using the historical ratio projects $4.2 billion less tax revenue in 2027-28 than the government forecast.
Ontario reported this week that its 2025-26 deficit improved to $13.4 billion, down from the $14.6 billion projected in the May 2025 budget. Real GDP grew 1.2% in 2025, exceeding the 0.8% forecast in the fall statement, as the economy proved more resilient than anticipated despite US tariff implementation.
The FAO projects Ontario’s real GDP will grow 1.3% in 2025 and 1.4% in 2026, slightly stronger than the government’s economic outlook. However, the watchdog expects slower revenue growth to combine with higher program spending to prevent a return to balanced budgets.
Net debt will rise from $427.1 billion in 2024-25 to $547.9 billion by 2029-30 under the FAO’s projection, driven by ongoing deficits and infrastructure investments. The net debt-to-operating revenue ratio will reach 215.0% by 2029-30, exceeding the government’s 200% target, though other fiscal sustainability indicators remain within government targets.
The FAO developed alternative scenarios showing deficits could range from $2.3 billion to $10.1 billion by 2029-30, depending on economic conditions. The analysis noted that rising geopolitical tensions, US trade policy uncertainty, and volatile global supply chains pose significant risks to the outlook.
Finance officials maintained the government’s path to balance remains achievable through continued fiscal discipline. The 2025 budget allocated $20.6 billion in additional spending over three years, including $10 billion for health and $4.5 billion for education, while tariff impacts reduced revenue projections.
Provincial law requires Ontario to plan for balanced budgets unless extraordinary circumstances justify deficits. The government has cited US tariff uncertainty and elevated geopolitical risks as extraordinary circumstances warranting temporary deficits.
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