Provincial deficits are widening even as Ottawa's numbers improve — and the gap has real implications for bond investors
Ottawa posted a deficit of $370 million for the first quarter of the 2026-27 fiscal year, a marked improvement on the $6.28 billion shortfall recorded over the same three months last year.
Taken on its own, that’s a good headline for the federal government. Taken alongside what’s happening one level down, it’s a more complicated picture, and one that matters more to financial planners than the federal number alone.
The quarter, in numbers
The Finance Department’s fiscal monitor for April through June shows revenue reaching $132.64 billion, up from $120.84 billion a year earlier, a gain of roughly 9.8 per cent.
Program expenses, excluding actuarial losses, rose more slowly to $117.16 billion from $112.34 billion, an increase of about 4.3 per cent.
Public debt charges climbed to $14.61 billion from $13.77 billion, up 6.1 per cent, and net actuarial losses rose to $1.25 billion from $1.01 billion, up close to 23.8 per cent.
Revenue growth outpaced the combined rise in expenses, debt charges and actuarial losses, which is why the deficit came in so much narrower than last year.
That narrowing sits inside a bigger federal trajectory. April’s Spring Economic Update projected a full-year deficit of $66.9 billion, an $11.5 billion improvement from Budget 2025, with a gradual decline expected to $53.2 billion in the years ahead.
Where the real story sits: the provinces
Federal restraint is only half the ledger. Quebec’s finance minister projected a $12.4 billion deficit for 2025-26 after a $2.5 billion deposit into the Generations Fund. Alberta’s government revised its own shortfall up to $6.4 billion this year, $1.2 billion worse than its original budget estimate, citing softening oil prices and a 30 per cent drop in natural resource revenue.
Saskatchewan’s position deteriorated too, moving from a planned surplus to a $427 million deficit for year-end, driven by higher health-care costs and unbudgeted wildfire response spending.
Alberta's picture illustrates that volatility most sharply. The province budgeted a $9.4 billion deficit for 2026-27, based on an oil price assumption of USD$60.50 a barrel. This shifted to a projected $2 billion surplus within months, after the US-Iran conflict pushed prices to around USD88 a barrel. For advisors, that swing in either direction is the point: resource-dependent provinces can move dramatically within a single fiscal year.
The Fraser Institute’s June analysis, published before Alberta's reversal, puts a number on what that adds up to for ordinary Canadians. It found every province along with the federal government is running a deficit in 2025/26, with no government projecting a return to balance in 2026/27. It also estimated that combined federal and provincial interest costs could run as high as $3,348 per taxpayer this year.
“Interest must be paid on government debt,” said Jake Fuss, Fraser Institute’s director of fiscal studies. “The more money governments spend on interest payments, the less money is available for the programs and services that matter to Canadians.”
For planners, that’s the more useful lens than the federal number in isolation. Clients holding provincial bonds, or exposed to sectors sensitive to provincial spending (health care, education, infrastructure), are looking at a fiscal trend moving in the opposite direction from Ottawa’s.
Global conditions have added another layer. Foreign investors piled into Canadian debt through the first half of 2026. Non-residents purchased a record $175 billion in total debt securities, well above the $20.9 billion bought over the same period in 2025. Federal government debt accounted for $80.0 billion of that total.
That appetite has since been tested. A global bond selloff in mid-August, triggered by the collapse of US-Iran talks, pushed yields sharply higher worldwide. The 30-year US Treasury yield climbed to 5.33 per cent, its highest since 2007, with yields on Canadian and many European government debt moving in step.
For clients with fixed income allocations, newly issued bonds at these levels offer better income than anything seen in over a decade, even if the near-term price volatility is uncomfortable.
Against this, the Bank of Canada has stayed still. It held its policy rate at 2.25 per cent in mid-July – its sixth consecutive hold – even as inflation ran above its comfort range.
That patience is being supported by growth. The economy expanded at an annualized pace of 3.3 per cent in the second quarter, its strongest showing in more than three years.
A resilient economy, a central bank in no hurry to move, and a widening federal-provincial fiscal gap are worth walking clients through. This is especially relevant for those weighing duration or provincial versus federal bond exposure heading into the fall.
