-- Despite a better-than-anticipated macroeconomic backdrop as compared with a year ago, Canadian provinces experienced varying degrees of deterioration in their bottom lines, said Desjardins.
Collectively, the nine provinces that have released budgets are projecting a larger combined deficit of $47 billion in FY2026-2027 (FY2027), following a slightly smaller $40 billion shortfall in FY2026, noted the bank.
Upward historical revisions and growth outperformance prompted higher nominal gross domestic product estimates for 2025, boosting provinces' fiscal starting positions and improving overall debt metrics despite larger deficits and higher debt levels, stated Desjardins.
Forecasts continue to point to an economic slowdown in 2026 amid persistent trade risks, with limited revenue upside and material downside risks if the Canada-United States-Mexico Agreement (CUSMA) trade deal review sours, pointed out the bank.
Fiscal positions of energy-producing provinces are likely stronger than current projections, given the geopolitical-driven oil price surge, added Desjardins.
Higher planned spending accounts for the bulk of the fiscal strain, with spending pressure expected to persist. Provinces collectively added $20 billion in planned spending in FY2027, concentrated in healthcare.
Past gains in economic momentum provide some near-term support, and the fiscal picture should prove less bleak as the year progresses, supported by surging oil prices, according to the bank.
Beyond that, provinces face more challenging conditions, with weak productivity growth compounded by constrained investment under trade uncertainty, leaving provinces with limited fiscal room at a time when spending pressures remain elevated.