Ottawa's fiscal position deteriorates at federal level despite provinces pulling back from year-ago spending surge
Canada's general government posted a deficit of $16.4 billion in the first quarter of 2026, widening by $1.5 billion from the same period a year earlier, as spending edged higher and revenue softened, according to Statistics Canada data.
The agency's government finance statistics for the January-to-March quarter show that expenses across the general government rose 0.4% while revenue slipped 0.1%, tightening the fiscal picture heading into the second quarter.
The federal government bore the sharpest deterioration, with its deficit climbing $3.3 billion year over year to reach $19.4 billion. Ottawa's revenue base was squeezed by the abolition of the consumer carbon tax on April 1, 2025, which drove a $3.8 billion, or 18%, drop in taxes on goods and services. That more than cancelled out a $2.2 billion gain in household income, profits and capital gains taxes.
Federal spending rose $1.2 billion, or 0.8%, with higher outlays on goods and services accounting for $800 million of that increase, reflecting primarily elevated ammunition purchases. Social benefits spending fell $400 million as the elimination of the Canada Carbon Rebate reduced household transfers, while subsidies declined modestly following a pullback in zero-emission vehicle incentives that outweighed new support channelled to Canada Post.
Provincial and territorial governments moved in the opposite direction, with their combined deficit narrowing by $5.2 billion from a year earlier to $18.2 billion. Statistics Canada noted that the first quarter of 2025 included one-time transfer payments in Ontario, including a taxpayer rebate program and substantial capital funding for transit infrastructure, which did not repeat in the current quarter.
As a share of the economy, the general government deficit represented 2.1% of nominal gross domestic product, up from 1.9% in the first quarter of 2025. The federal government's deficit-to-GDP ratio moved from 2.1% to 2.4%, while the provincial and territorial ratio improved from 3.0% to 2.3%. Social security funds continued to run a surplus, though it eased to 2.2% of GDP from 2.5%.
On the balance sheet, Canadian general government net debt fell $26 billion, or 4.6%, year over year to $538.1 billion at the end of the quarter, as financial assets grew faster than liabilities. Once the accumulated surplus of social security funds is stripped out, however, net debt stood at $1,490 billion, up $61.8 billion, or 4.3%.
The federal government's net debt reached $1,018.2 billion, an increase of $30.6 billion, or 3.1%, from a year earlier, driven by a $78.8 billion rise in debt securities. Provincial, territorial and local government net debt climbed $31.2 billion, or 7.1%, to $471.8 billion.
Trade-related taxes added a note of context to the Canada-US relationship. Taxes on international trade and transactions totalled $1.9 billion in the first quarter of 2026, up 3.5% from the same period in 2025, though well below the 25.7% year-over-year surge recorded in the fourth quarter of 2025. For the full 2025/2026 fiscal year ending March 2026, such taxes reached $10.3 billion, compared with $6.2 billion in 2024/2025, a 66% jump. Canada removed counter-tariffs on most US imports from September 1, 2025, retaining levies only on steel, aluminum and motor vehicles.
Statistics Canada noted that trade and transactions taxes represented 1.4% of total federal revenue in the first quarter of 2026, consistent with the fourth quarter of 2025.
