07:59 AM EDT, 05/16/2025 (MT Newswires) -- Nationally, it's an unsettled economic environment and Ontario finds itself at the heart of the uncertainty as one of Canada's provinces most exposed to the protectionist shift in United States trade policy, said National Bank of Canada.

The 2025 provincial budget of Thursday leans into the threat posed by U.S. tariffs, promising to protect the province by helping workers and businesses weather the storm, unleashing the economy and placing an even greater focus on building infrastructure, noted the bank.

Looking back, the 2024-25 deficit of $6.0 billion was smaller than outlined in Budget 2024. However, the deficit will grow meaningfully in 2025-26 with the province planning for a $14.6 billion shortfall -- the largest since 2020-21.

Key spending initiatives include but aren't limited to a over $200 billion infrastructure plan centered on transportation, healthcare, and education, and a series of measures providing relief to and support for businesses, families, workers and communities.

With sky-high uncertainty, Ontario's alternative fiscal scenarios are particularly informative, and these imply the 2025-26 deficit could conceivably land between $12.3 billion and $17.3 billion. While protecting Ontario will be costly this year, the province has outlined a plan to quickly tackle the deficit over the next two years, stated National Bank.

This involves a $7.8 billion shortfall in 2026-27 and a return to balance in 2027-28 but will require restrained spending of over 1% growth per year. Notably, considerable prudence is built into the fiscal plan between sub-consensus gross domestic product growth assumptions, a $2 billion/year reserve and a $3 billion contingency fund.

Given the larger deficit, it's not surprising there will be marginal net debt this year, and the extra $32.6 billion added in 2025-26 would see Ontario's relative indebtedness measures deteriorate. Nonetheless, the province's net debt load scaled to GDP will remain below its 40% anchor throughout the plan horizon, added the bank.

The net debt-to-operating revenue ratio will breach its 200% target in each year of the three-year fiscal plan, and it's not expected to fall below the threshold until 2031-32. Even as borrowing rates rise, Ontario's main core debt affordability metric will remain onside, though.

Finally, Ontario's long-term borrowing program has been set at $42.8 billion for 2025-26, a "manageable" tally and aided by pre-funding secured in the prior fiscal year, according to National Bank. The province has adjusted the domestic target share of its borrowing to 70%-85% (from 75%-90%), given demonstrated demand for Canadian issuers in international markets.

The bank looks, for Ontario to quickly return to the domestic market, with international funding opportunities to be considered following due diligence and, as always, being calibrated to underlying market conditions and relative funding costs.