Ontario expects budget deficit to more than double in face of US tariffs

By Fergal Smith

TORONTO, May 15 (Reuters) - Ontario, Canada's most populous province and manufacturing powerhouse, on Thursday forecast its widest budget deficit since the height of the pandemic, more than doubling in size, and a slower move into surplus as it increased spending to support the economy in a trade war with the United States.

The province's ruling Progressive Conservative Party retained power in a February election, with Premier Doug Ford calling the vote more than a year early, arguing that he needed a stronger mandate to fight U.S. President Donald Trump's tariffs.

Ontario sends more than three-quarters of its exports to the United States, including autos, steel and aluminum, which are facing hefty U.S. duties.

The province said its deficit would increase to C$14.6 billion ($10.4 billion), or 1.2% of gross domestic product, in the current fiscal year, its widest by far since 2020-21, from an estimated C$6 billion in 2024-25. The fiscal year began on April 1.

A deficit is also expected in 2026-27, of C$7.8 billion, before a shift into surplus in 2027-28, one year later than was projected in a fiscal update in October. A C$2 billion reserve is set aside in each fiscal year.

Economic growth was forecast to slow to 0.8% this year from 1.5% in 2024. Other major provinces, such as Quebec, British Columbia and Alberta, have also projected a deterioration in their finances.

"Our government is delivering on our mandate to protect Ontario and help workers and businesses weather the storm, while creating the long-term foundations for a strong, resilient and competitive economy," Ontario Finance Minister Peter Bethlenfalvy said in a statement.

"We're making the investments in workers, infrastructure and services that will protect Ontario, no matter what," Bethlenfalvy said.

Measures include a C$5 billion emergency backstop for businesses facing significant tariff-related disruptions, expanding a manufacturing investment tax credit at a cost of C$1.3 billion and C$500 million for a new fund to help increase the province's processing capacity in critical minerals.

The province, one of the world's largest sub-sovereign borrowers, is also adding C$5 billion to a fund that partners with Canadian institutional investors to finance infrastructure projects, such as energy, affordable housing, long-term care and transportation.

It forecast that its net debt-to-GDP ratio will rise to 37.9% in the current fiscal year from its lowest in more than a decade of 36.3% in 2024-25. A further increase to 38.9% is expected in 2026-27 before dipping to 38.6% in 2027-28.

Still, long-term borrowing is forecast to decline to C$42.8 billion in 2025-26 from C$49.5 billion in the last fiscal year, which was more than anticipated, with further declines expected in future years.

($1 = 1.3998 Canadian dollars)