Posthaste: Deficits are climbing across Canada, but this province is awash in red ink

All of the provinces posted higher deficits, except Quebec, with the combined provincial deficit according to some forecasts, expected to grow to as much as 1.4 per cent of gross domestic product. Photo by Getty Images

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Sharpen your pencils Canadians, because tomorrow Ottawa provides one of the last remaining pieces of a fiscal outlook for the country that so far has been heavier on debt and lighter on growth.

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Nine out of 10 provinces will have tabled their budgets when Finance Minister François-Philippe Champagne presents the federal update Tuesday — and according to economists, their fiscal position has “eroded,” with some provinces showing “marked deterioration.”

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All of the provinces posted higher deficits, except Quebec, with the combined shortfall, according to some forecasts, expected to grow to as much as 1.4 per cent of gross domestic product.

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Net debt to GDP is seen jumping by nearly a percentage point to 31.5 per cent by 2027/28 which would be near the highs of 2012-2015 when the economy was on shaky ground.

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Debt servicing costs are also going up, with interest climbing from 6.4 per cent this fiscal year to 6.7 per cent by 2028/2027.

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“While still below the elevated levels of the 1990s and early 2000s, this rising ‘interest bite’ will further constrain fiscal flexibility and leave provinces modestly more exposed to rate shocks,” said Toronto Dominion economists Rishi Sondhi and Marc Ercolao.

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Shortfalls are especially acute in British Columbia, New Brunswick and Prince Edward Island where they are expected to average over 2.5 per cent of GDP over the next three years — “lofty by historical standards,” said the TD economists.

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PEI, in particular, stands out. Its budget this year projects a deficit of $450 million, or four per cent of GDP — not only the highest in its history, but the largest in Canada as a percentage of the economy, said Cynthia Leach, assistant chief economist at Royal Bank of Canada. 

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“Budget 2026 sees significant red ink across the forecast period with no path to balance,” said Leach.

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The higher deficits significantly increase the province’s debt burden which by 2028-29 is expected to hit 39.9 per cent of GDP, just short of the 40 per cent ceiling in its fiscal anchor.

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PEI isn’t the only one. The numbers for other Atlantic provinces, New Brunswick and Nova Scotia, show “marked fiscal deterioration,” said Leach. Newfoundland and Labrador tables its budget Wednesday.

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Both posted some of the biggest deficit jumps in the country as a share of the economy, and their debt burdens, which were already higher than average, will see “very significant increases.”

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Across all provinces rising healthcare spending is a big reason for the erosion in fiscal balances, said Leach. These costs contributed more than 100 per cent of the combined deficit increase for the four biggest provinces, led by Alberta and Ontario.

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There is some good news on the fiscal front. High oil prices from the Iran war are expected to boost the budgets of crude-producing provinces such as Alberta, Saskatchewan and Newfoundland and Labrador.