Provincial deficits to narrow in coming years despite trade war: report

The Canadian premiers speak to the media during the 2025 summer meetings of Canada’s Premiers at Deerhurst Resort in Huntsville, Ont., on July 23, 2025. Photo by THE CANADIAN PRESS/Nathan Denette

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OTTAWA — Under pressure from the U.S. trade war and a slowing economy, Canada’s provinces are all expected to run fiscal deficits this year — but a Conference Board of Canada report predicts those deficits will narrow in the coming years.

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Not long after emerging from a pandemic that caused deficits to balloon, Canada’s provinces are now staring down the barrel of a trade war.

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Most provinces have put up contingency funds in this year’s budgets to support workers and critical industries through the tariff dispute.

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Many are also aligning with the federal government to push forward major infrastructure projects in the coming years, putting pressure on capital spending.

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Just as provinces are drawing down their coffers, they’re also bracing for a hit to the economy.

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“When we see a slowdown in economic activity, that leads to less job creation, less spending, less incomes and less corporate profits,” said Richard Forbes, principal economist at the Conference Board.

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“And these are … major drivers of provincial revenues.”

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Also hampering provincial revenues is a slowdown in population growth as Ottawa tamps down on the flow of immigration.

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Many provinces are also facing demographic woes due to an aging population and baby boomers exiting the workforce — another drag on income tax revenue. A growing number of retirees also drives up demand for health-care spending.

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Forbes said that with the federal government’s new immigration caps, population growth is likely to hit a wall in the coming years. That would limit any relief newcomers offer the labour market as older Canadians exit the workforce.

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The Conference Board report cites the example of Newfoundland and Labrador, which it says is expected to see its population shrink by 10,000 over the next five years. Quebec and most of the Maritimes are also expected to feel the “sting” of an aging population, the report said.

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Prince Edward Island, meanwhile, is experiencing the strongest population growth of any province in recent years. A 25-per cent increase in population over 10 years has helped to lower P.E.I.’s median age by 2.6 years, the report said.

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The Conference Board’s forecast assumes the economy contracted in the second quarter of the year as tariffs and uncertainty sank manufacturing activity. The think tank predicts a modest return to growth through the rest of the year.

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At the tail end of the provinces’ planning horizons, the Conference Board report sees governments reining in spending, which is expected to narrow those deficits by the end of the decade.

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The federal government has announced plans to balance the operating side of its budget over the next three years. Forbes said he expects to see similar trimming by the provinces in areas such as public administration.