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Last year, PEI’s budget delivered the largest projected nominal deficit in the province’s history – $184 million (1.6% of GDP) for 2025-26. Even then, Budget 2026 has that number coming in much higher at $450 million (4.0% of GDP), by far the largest provincial deficit as a share of the economy.
Deficits improve from 2026-27 on but remain elevated at 2.6% of GDP by the end of the projection period. This is despite optimistic 2026-27 spending assumptions and savings in the outer years from an expenditure review that is just getting started.
Unsurprisingly, the province expects a big jump in its debt burden, surpassing its prior peak in 2013-14 and brushing right up against its fiscal anchor.
Deficit
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Budget 2026 sees significant red ink across the forecast period with no path to balance. Deficits peak at 4% of GDP in 2025-26 – the fiscal year just ended – falling to 2.6% by 2028-29.
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Reasonable economic assumptions see revenue growth outpace expenses growth from 2026-27 onwards. While this supports declining deficits, it is not enough to undo the deficit tract given significant deficit jumps in earlier years.
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Among provinces, PEI has the largest deficit as a share of the economy throughout the projection period, sometimes by a significant margin. Yet, its growth outlook is above average, per our projections.
Spending
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The 2025-26 deficit jumped on the back of 13% year-over-year expenses growth versus the 7% expected in budget 2025. The biggest surprises came in health spending and what appears to be a one time expense in the Agricultural Insurance Corporation.
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Going forward, the expenses profile is optimistic. While total expenditures grow 2.0% year-over-year in 2026-27, it’s only 0.7% for program spending. This coincides with projected population growth, implying an expectation for falling real spending.
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For 2027-28 and 2028-29, projected spending grows ~3% (~2% for program spending). These years include expected savings from a newly announced Comprehensive Expenditure Review that seeks to cut 5% of total spending. The allocation of the cuts is yet to be determined.
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Absent these savings, total spending in 2027-28 and 2028-29 would grow at 8% annually – similar to the high rates in 2024-25 and 2025-26, which makes 2026-27’s projected 2% growth anomalously low.
Debt and fiscal anchors
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Higher expected deficits will significantly increase the debt burden, more than unwinding the prior improvement seen since the last peak in 2013-14. By 2028-29, the debt burden will surpass this peak, totaling 39.9%, and brushing right up against the government’s 40% target as part of its fiscal anchor.
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The government’s other anchor – interest to revenue – will also get close to its 7.5% target by the end of the projection period.
Additional Tables
About the author:
Cynthia Leach is Assistant Chief Economist at RBC covering the team’s medium-term economic analysis, including primary research areas of federal and provincial fiscal analysis, structural government policy, and demographics.
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