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Canada's Federal Deficit Narrows as Tax Revenue Surges, BMO Says

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The Canadian federal budget deficit narrowed sharply in April and May, declining to a combined C$1.4 billion from C$9.9 billion during the same period a year earlier, according to BMO Capital Markets in a Tuesday note.

The improvement was driven by a strong increase in revenues, which rose 15.5% year over year during the first two months of the 2026/27 fiscal year, supported by broad-based growth across tax categories, excluding customs duties, which were added last year to respond to US tariffs, said BMO.

With program expenses increasing only 3.7% year over year, the federal government posted a $9.4 billion surplus before interest costs, added the bank.

However, higher public debt charges, which rose 3.3%, partially offset the improvement and left the overall fiscal balance in deficit. That's "the less-good news," wrote BMO Chief Economist Douglas Porter in the note.

The latest government figures were released on Friday, ahead of a summer-long weekend, and received limited attention despite showing a notable improvement in Canada's early fiscal performance, according to the bank.

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