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It’s been six weeks since the Canadian federal government released Budget 2025, and provinces across the country have now delivered mid-year updates. With this fresh set of fiscal plans and evolving information on an economy that’s looking stronger than expected, we review the combined federal and provincial fiscal path ahead, and what it means for the outlook.
Resilient economy improves combined fiscal position even as planned deficits increase
Better-than-expected economic growth improved final 2024-25 public accounts deficits for the feds and provinces collectively, compared to their most recent projections (rounded up here). Thus, the combined fiscal balance totaled -1.4% of gross domestic product (GDP) in 2024-25 versus the expected -2.0%.
Meanwhile, the federal budget boosted 2025-26 combined planned deficits to 3.5% of GDP, higher than the 3% upside scenario in our prior roundup associated with full federal platform spending. If delivered as planned, it would be the largest combined deficit since the early 1990s, outside of COVID-19 and the global financial crisis. Planned deficits are closer to prior expectations for subsequent years at 2.5% in 2026-27 and 1.9% in 2027-28.1
Even though 2025-26 fiscal estimates are recent, some were penned before newer positive news for the Canadian economy, including strong GDP growth in Q3 2025. It’s meant a gap in current nominal GDP growth projections versus those embedded in budgetary documents.
Attempting to harmonize balances for the feds and big four provinces to RBC Economics’ most recent forecast would instead see combined deficits of 3.3% of GDP in 2025-26 and 2.3% in 2026-27, both smaller by 0.2 percentage points than the new baseline.2 That may not be dramatic, but it’s emblematic of Canada’s surprising economic resilience.
Federal planned deficits expand, but spending will come later
So far federal accounts are not tracking 2025-26’s significant deficit expansion
For the first half of the year, the Fiscal Monitor shows the federal deficit up less than 25% year-over-year versus the more than doubling expected in the budget – to $78 billion from $36 billion in 2024-25. It’s both a revenue and expenses story that should partially unwind over the remainder of the year, although with risk of a lower 2025-26 deficit.
Revenues are up to date despite a small projected full-year decline in the budget, driven by particularly strong corporate income tax receipts. Some of this is likely to reverse as the fiscal year progresses, but it could be another sign of a more resilient Canadian economy. Even if revenue growth slows, our recent outlook suggests the federal deficit could be almost $5 billion lower than planned given stronger economic growth than that embedded in the budget.
Spending is also lagging, although it should start to accelerate. Even though the budget implementation bill will not pass before the end of January – it is paused now that the House of Commons has risen for the holiday break – at least half of $29 billion in ‘new’ budget measures already have spending authority from early summer.3 Also, although higher capital spending is a core budget theme, the majority of planned 2025-26 spending is operational, including for defence, suggesting a potentially easier path to deployment once spending is authorized.
Still it’s looking unlikely that all planned spending can be unleashed in-year. Also, any spending ramp up in fiscal 2025-26 is unlikely to be material in calendar 2025, making it part of the 2026 story.
If spending is delayed to 2026-27 and beyond, it could arrive in a different economic context
Besides possible spending delays from 2025-26 plans, spending from 2026-27 and later years could also be backed up given the higher capital and defence share. Combined with execution risk on the operational savings side – where later-stage departmental cuts may be harder won – and it means risk that future deficits are larger.4 Although some delayed spending may not materialize.
There is excess capacity in the economy in the near-term to absorb some fiscal stimulus. However, recent data also suggest the output gap is lower than previously assumed. Our outlook expects a strengthening Canadian economy through 2026 and progressive closing of the output gap. Delayed spending could thus arrive when the Canadian economy is already much stronger.
Given uncertainty around federal deficits levels and timing, we’ve not made any changes to our ‘fiscal add’ to GDP in our outlook, which already included +0.4 percentage points to growth over 2025 and 2026.
Provincial updates bring 2025-26 downgrades for all but Ontario & Quebec
We continue to emphasize that fiscal support is not solely a federal story, but also a provincial one. This is why our work seeks to combine the federal and provincial deficits. And while the feds are facing the prospect that improved growth (and delayed spending) softens the deficit blow, that’s not the same story for all provinces.
A stronger-than expected economy left most with lower 2024-25 deficits than planned in 2025 budgets. Only British Columbia had a material deficit increase, while Newfoundland & Labrador (NL) and Manitoba had minor negative variations.
This stronger growth carried into 2025-26, driving overall deficit improvements in mid-year updates in Ontario and Quebec. However, the smaller provinces expect higher deficits than in 2025 budgets.5 NL, Alberta, Nova Scotia, New Brunswick (NB), and Saskatchewan (SK) saw material downward revisions, with lower energy prices weighing on the first two. Higher health-related spending affected the latter three, with NB also seeing lower tax revenues and SK affected by wildfire expenses.
In total, expected provincial deficits for 2025-26 increased from $32 billion to $35 billion (contingencies removed), representing 1.1% of GDP. Beyond 2025-26, only Ontario and Quebec provided updated figures, with both leaving deficits essentially unchanged from 2025 budgets.
- As before, published deficits are restated to remove contingencies/reserves that push up published deficits, since they obscure expected baseline performance. Adding contingencies back in affects provincial balances and would raise combined deficits to 3.9% in 2025-26, 2.9% in 2026-27 and 2.3% in 2027-28. ↩︎
- Together the big 4 provinces – Ontario, Quebec, Alberta and British Columbia – represent about 90% of Canadian GDP and planned deficits. Published economic forecasts and budget sensitives were used to make the adjustments for nominal GDP growth and interest rates. ↩︎
- This includes defence spending, tax cuts, and some pre-budgetary announcements. Regarding the tax cuts, Bill C-4 was passed by the House but has not yet passed the Senate nor received Royal Assent. However, per convention, CRA is already administering the tax changes, effective July 1, 2025. ↩︎
- Of note, there is also material non-budgetary spending in federal budget 2025 that could be stimulative for the economy but is similarly beset by deployment questions. This includes an additional $20 billion cash in defence spending associated with amortized assets and various lending programs through federal Crown corporations. ↩︎
- PEI which has not yet published a fall update ↩︎
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