Canadian provinces are facing mounting deficits, with Prince Edward Island standing out as the most extreme case. According to economists, the combined provincial deficit could rise to as much as 1.4% of gross domestic product, excluding Quebec, which is the only province to buck the trend.
Provincial Fiscal Deterioration
Nine out of ten provinces have tabled their budgets, and their fiscal positions have eroded significantly. The combined shortfall is expected to widen, with net debt to GDP jumping by nearly a percentage point to 31.5% by 2027/28, approaching levels seen during the shaky economic period of 2012-2015. Debt servicing costs are also climbing, with interest rising from 6.4% this fiscal year to 6.7% by 2028/2027.
Toronto Dominion economists Rishi Sondhi and Marc Ercolao noted that while the interest bite remains below the elevated levels of the 1990s and early 2000s, it will further constrain fiscal flexibility and leave provinces more exposed to rate shocks.
Prince Edward Island's Record Deficit
PEI's budget projects a deficit of $450 million, or 4% of GDP, the highest in its history and the largest in Canada as a percentage of the economy. Cynthia Leach, assistant chief economist at RBC, stated that there is no path to balance in the forecast period. The higher deficits significantly increase the province's debt burden, expected to hit 39.9% of GDP by 2028-29, just shy of its 40% fiscal anchor ceiling.
Other Atlantic provinces, such as New Brunswick and Nova Scotia, also show marked fiscal deterioration. Both posted some of the biggest deficit jumps in the country as a share of the economy, and their already higher-than-average debt burdens will see very significant increases.
Healthcare Spending Drives Deficits
Rising healthcare spending is a major factor behind the erosion of fiscal balances across all provinces. These costs contributed more than 100% of the combined deficit increase for the four biggest provinces, led by Alberta and Ontario.
Oil Prices Offer Some Relief
High oil prices resulting from the Iran war are expected to boost budgets in crude-producing provinces like Alberta, Saskatchewan, and Newfoundland and Labrador, providing a partial offset to the broader trend of rising red ink.
