Budget pressures mount as oil windfall lifts some provinces while others fall behind
Canada’s provinces are entering the new fiscal year facing larger deficits, rising debt burdens, and increasingly uneven economic conditions, according to insights from Robert Kavcic.
In BMO Economics’ latest Provincial Credit Watch, he points out that while budget season is nearing completion, the broader fiscal picture remains under strain, even as higher oil prices provide some relief.
Across the country, provincial governments are projected to run a combined deficit of $46.7 billion in fiscal 2026/27, following another sizeable shortfall the year before. That equates to roughly 1.4% of GDP, a level typically seen only during periods of significant economic stress, including the global financial crisis and the pandemic.
A sharp rise in oil prices, driven partly by geopolitical tensions, is delivering a meaningful boost to energy-producing provinces. Alberta and Saskatchewan are expected to see the largest gains, with revenues potentially coming in as much as $20 billion higher than earlier forecasts.
That surge could push some provinces back into surplus, reversing earlier deficit projections. However, Kavcic’s analysis suggests the improvement is concentrated and does not materially change the broader fiscal challenges facing most provinces.
Regions with less exposure to the energy sector continue to face persistent deficits and growing fiscal pressure. British Columbia, in particular, is flagged as a province where credit risks are building.
Despite revenue gains in select areas, overall provincial debt continues to rise. The combined net debt-to-GDP ratio is expected to reach about 32% in the coming fiscal year, marking a fourth consecutive annual increase.
Borrowing requirements also remain elevated as provinces invest in infrastructure and respond to rapid population growth. Long-term borrowing is projected to total roughly $140 billion, still close to the highs seen during the pandemic.
While uncertainty remains a factor, provinces have largely returned to more conventional economic assumptions in their latest budgets. This represents a shift from the prior year, when governments leaned more heavily on alternative scenarios to account for trade disruptions and other risks.
Even so, a degree of caution remains embedded in fiscal plans. More than $10 billion in contingency reserves has been set aside, providing some flexibility should economic conditions deteriorate.
Limited policy changes
Policy changes have been relatively limited. Provinces are mostly maintaining their current fiscal approaches, with only targeted tax adjustments rather than broad-based reforms.
At the same time, spending continues to climb. Program expenditures are expected to increase by more than 4%, reflecting sustained investment in infrastructure and public services.
At the federal level, there are signs the deficit could come in lower than anticipated for the current fiscal year, which may offer some support heading into 2026/27. However, Kavcic notes that final figures could still shift as year-end adjustments are made.
In financial markets, provincial bonds have come under pressure amid rising yields and stronger oil prices. Despite that, spreads have remained relatively stable, and provincial debt has continued to outperform federal bonds over longer time horizons.
Looking ahead, Kavcic’s assessment suggests that while provincial finances remain manageable for now, risks are tilted to the downside. Slower growth or sustained borrowing costs could add further strain.
The result is an increasingly uneven fiscal landscape, where resource-driven provinces are benefiting from higher commodity prices while others face mounting budget pressures with fewer offsets.
