Provincial governments in Canada released their 2026 budgets with somewhat less uncertainty from trade issues, but in the midst of a new conflict in the Middle East, said Scotiabank.
The budgets showed the provinces generally expect another year of relatively modest revenue growth and continuing spending pressures from health and other core services, noted the bank.
Some governments announced new affordability measures, but these were generally quite narrow in scope, helping keep incremental costs low, stated Scotiabank.
Taken together, the provincial budgets' baseline scenarios project a slight increase in the aggregate provincial deficit from $40.3 billion, or 1.3% of nominal gross domestic product, in FY26 to $47.8 billion, or 1.4% of GDP, in FY27.
Despite the increase in the aggregate provincial deficit, as a share of GDP, it remains lower than recessionary periods, and less than half the level of the fiscal stress period of the early 1990s, pointed out the bank.
Provinces' borrowing requirements are expected to remain elevated at $151 billion in FY27, a bit lower than the $162 billion raised in FY26 but still substantially more than most years. This reflects the ongoing operational deficits and elevated capital spending in most provinces.
Aggregate net debt as a share of GDP is projected to increase from 30.6% in FY26 to 32.2% in FY27, with the largest increases expected in British Columbia, Nova Scotia and Prince Edward Island, added Scotiabank. Aggregate debt service as a share of revenues will rise from 6.3% to 6.8% in FY26.
All of Canada continues to face headwinds from the United States tariffs and related uncertainty, but perhaps less than at this time last year, according to the bank. In addition, the oil-producing provinces could see their revenues overperform their budget projections, especially Alberta.
As impacts from the trade war and associated uncertainty gradually subside in the medium term, fiscal outlooks should improve, especially if provinces can deliver on promised spending restraint over the medium-term, stated Scotiabank. However, health care costs continue to climb, challenging provinces' desires to slow spending growth.