The deficit is expected to come in at $9.8 billion in 2012-13, down from $11.9 projected four months ago and $14.8 billion projected in last year's budget.
But that had a lot to do with one-time savings from reducing teachers' benefits, revenue windfalls from tax assessment revisions and drawing down on its $1-billion rainy day reserve.
For 2013-14, however, the deficit projection climbs to $11.7 billion.
The increase essentially reflects that the government doesn't expect the one-time windfalls will happen again, RBC Economics said in a note following the budget's release Thursday.
"Beating last year's projected deficit highlights another trait of the Ontario government's approach to budgeting," it said.
"The 'Ontario Way' appears to be setting modest deficit reduction goals and striving to do better than planned."
But if the governing Liberals want to meet their target to rebalance the books in 2017-18, they'll have to cut program spending growth to less than one per cent a year from now until then, TD Economics said in its note.
"Clamping down program spending growth to this extent for such an extended period has not been done by a Canadian government in the post-war era," it said.
The last few years before Ontario is expected to eliminate the red ink will be critical, said Robert Hogue, chief economist with RBC.
The government will have to "aggressively" restrain spending to meet the 2017-18 target, he said. But the Liberals haven't provided many details so far.
"Having numbers out there in the budget is one thing, but actually delivering on those is something different," he said.
Thursday's $127.6-billion budget promised to limit spending growth to 1.8 per cent a year over the next three years.
Economic growth will be slower than previously anticipated, said Finance Minister Charles Sousa.
"So we have to take proper measures to ensure that we're being realistic in our forecast going forward, and that we've got to be determined and disciplined in our spending," he said.
"That's what we're doing, and that's why we're still on target to be able to balance the books by 2017-18."
It's a delicate balance, said Helmut Pastrik, chief economist with Central 1 Credit Union.
"When the economy is growing at a modest pace, it's probably reasonable to continue with government spending to provide some support," he said.
"To have substantial cutbacks at the time when the economy's growing at a more modest pace would probably hurt the economy."
The lower-than-projected deficit forecasts last year and this year is "good news and should be welcomed by markets," the bank said in the note.
"That said, much of the heavy lifting on fiscal restoration remains," it said.
It will be difficult to hold the line on spending, given the pressure of an aging population on the health-care system, the bank added.
The net debt is expected to climb from $252.8 billion in the year that just ended to $303.9 billion in 2015-16.
"With its net debt set to climb by another 20 per cent in the next three years — after ballooning by 30 per cent in the past three — Ontario's indebtedness position will continue to erode for a few more years," RBC said.