Ontario raises deficit forecast, plans infrastructure bank launch

By Fergal Smith

TORONTO (Reuters) - Ontario on Thursday projected a wider budget deficit for the current fiscal year than previously expected and said it would launch an infrastructure bank to fund projects in Canada's most populous province, a fiscal update showed.

The province, one of the world's biggest sub-sovereign borrowers, said it expected a budget deficit of C$5.6 billion ($4.1 billion) for the 2023-24 fiscal year, compared to the C$1.3 billion deficit forecast in March's budget. The fiscal year ends on March 31.

The wider deficit was down to lower than expected taxation revenues as well as a C$2.5 billion increase in the contingency fund, the province said.

"We are not immune to the risk of an economic slowdown," Ontario Finance Minister Peter Bethlenfalvy said in a statement. "The impacts of high inflation and the Bank of Canada's rapid interest rate increases are weighing on Ontario's economic outlook for the remainder of this year, and into next."

Growth is projected to slow to 1.1% in 2023 from 3.7% in 2022 and then to 0.5% in 2024. Canada's economy likely slipped into a shallow recession in the third quarter, data on Tuesday showed.

A C$5.3 billion deficit is projected in 2024-25 before a return to surplus in 2025-26, one year later than previous expected.

The province proposes investing C$3 billion in a new infrastructure bank which would be responsible for attracting institutional investors for large-scale infrastructure projects, including in energy, transportation and affordable housing.

Like the rest of Canada, Ontario's population is growing rapidly due to high immigration, raising the need for more infrastructure.

Other measures include steps to remove the 8% provincial portion of the sales tax on rental housing construction projects and extending gas and fuel tax rate cuts through to June 30, 2024.

On Wednesday, Bank of Canada Governor Tiff Macklem said federal and provincial government spending will start feeding into inflation next year if current spending plans are maintained.

The net debt-to-GDP ratio is projected to edge up to 38.4% in the current fiscal year from 38.3% in 2022-23 and then climb to 39.1% in 2024-25.

Long-term borrowing by the province is expected to be C$34.7 billion in 2023-24, C$7.2 billion more than expected in March.

($1 = 1.3794 Canadian dollars)

(Reporting by Fergal Smith; Editing by Josie Kao)