Ontario's projected deficit for 2012-13 has fallen from $14.8 billion to $11.9 billion.
Finance Minister Dwight Duncan says the nearly $3-billion drop from last spring's budget projection is due to higher than expected revenues and lower expenses.
Corporate taxes were more than $1 billion above the budget forecast, while revenues were also up from the sales tax and the land transfer tax.
The government expects to spend $1.2 billion less than budgeted mainly because of lower interest on debt, and savings from reducing the ability of teachers to bank sick days and cash them out at retirement.
Duncan says the government will not need to use the $1-billion reserve in the budget, so will use half of that to reduce the deficit and the rest will be kept for any unforeseen events this year.
Despite the lower deficit, Duncan says the weakened global economy, especially in the U.S. and Europe, will require "continued strong action" if Ontario wants to balance its books on schedule by 2017-18.
"Ontario continues to beat its deficit targets, a direct result of managing expenses while also protecting health care and education," Duncan said in a speech to the Canadian Club in Toronto.
"Ontarians don't want deep, across-the-board cuts that would hurt their valued public services."
The lower deficit projection was Duncan's last official announcement as finance minister.
The Liberals will pick a new leader this weekend, and Duncan has already offered to resign his Windsor-Tecumseh seat for Sandra Pupatello if the former Windsor-West MPP emerges as Ontario's new premier.
The Opposition wasn't impressed, however, saying Ontario's economy has a "history of mismanagement" under the Liberal government.
"This is Minister Duncan playing clean up, his swan song," said Progressive Conservative critic Vic Fedeli.
"When you look at the experiences of the last nine years, you would see that this is a completely mismanaged economy."