Canadian Analysis

• Nova Scotia projects a $1.24 billion deficit for 2026–27 that will remain above $1 billion through 2028–29, a stark shift from last year’s deficit reduction plan.

• Spending pressures remain despite cuts to public service.

• Revenues are recuperating from the soft performance in fiscal 2025-26, but not enough to materially shrink the deficit.

• The debt-to-GDP ratio will breach the government’s 40% guardrail by 2027–28 and climb to 45.7% by 2029–30.

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Nova Scotia’s fiscal trajectory has fundamentally shifted—and it’s taking the government on a long detour towards balancing the books. Budget 2026–27 projects a $1.24 billion deficit that will persist above $1 billion through 2028–29, a notable departure from the sharper deficit reduction path charted just one year ago that was projected to culminate in a deficit one-fifth of the billion-dollar shortfall now projected by 2028-29.

The divergence stems from spending pressures that have intensified across multiple fronts in 2025-26—like healthcare, education, and restructuring costs tied to public service downsizing–which put the province in a worse starting point for 2026-27. Program expenditures are now expected to increase 4.2% in 2026-27, following an outsized 7.2% increase in the year prior.

Revenues are estimated to contract in 2025-26 on tax cuts and economic weakness—and barely outpace spending growth in 2026-27. As a result, the province’s net debt-to-GDP ratio is approaching its self-imposed 40% guardrail and is expected to breach it by fiscal 2027-28, with further deterioration thereafter.

Public sector cuts won’t close the gap on their own

The $1.24 billion deficit for 2026–27 is $518 million larger than the previous year’s forecast—a gap that has blown open in just twelve months due to high expenditures and soft revenues.

Despite some cuts, total expenditures are projected to continue rising in 2026-27 (4.2%) driven by increases for Health and Wellness (up 6% to $6.7 billion)—reflecting higher staffing, facility, and supply costs. Seniors and Long-term Care and Education were other notable spending pressures, reflecting aging demographics and lunch programs for students.

The government has embedded significant public sector headcount reductions as a cornerstone of fiscal stabilization, targeting $914.3 million in cumulative savings by 2029–30. Still, departmental expenses will continue to outpace population growth and inflation at 3.9% in 2026–27, despite the reductions.

Though revenue growth is projected to accelerate to 4.6%, it won’t materially narrow the fiscal hole. Revenue generated from personal income tax is expected to gain momentum in 2026–27 after last year’s tax cuts and weak economic conditions caused revenues to fall.

Conservative economic growth assumptions among the few prudence measures

Budget projections are based on conservative economic assumptions. The government expects nominal GDP to expand by 3.4% in 2026, lower than RBC Economics’ projection of 4%.

Added to an annual $50 million contingency reserve fund, they provide some cushion against unforeseen shocks—a prudent safeguard in such times of economic uncertainty.

Spending more on debt servicing

Net debt is projected to reach $28 billion in 2026–27 and $36 billion by 2029–30. The net debt-to-GDP ratio will breach the government’s 40% guardrail by 2027–28 and continue climbing to 45.7% by 2029–30.

Debt servicing costs are expected to rise from 5.5% of revenues in 2025–26 to 7.6% by 2029–30. Interest payments will consume an ever-larger share of provincial revenues that won’t be available for schools, healthcare, and emergency response.

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About the author

Rachel Battaglia is an economist at RBC. She is a member of the Macro and Regional Analysis Group, providing analysis for the provincial macroeconomic outlook.

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