The federal and provincial governments are heading into the 2025 budget season facing difficult issues with the threat of a trade war with the United States at the top of the priority list. However, Canada\u2019s changing relationship with the U.S. won\u2019t be an isolated risk for governments.<\/p>\n
We have argued<\/a> that structural economic challenges will need to be addressed this budget season, including managing the fiscal fallout from lower immigration targets and tackling the ongoing affordability crisis (especially amid election-year pressures). At the same time, cracking Canada\u2019s long-standing productivity puzzle<\/a> remains a critical priority.<\/p>\n More recently, border tensions with the U.S. have escalated and may require swift action to avoid a full-blown trade war. Federal coffers would bear the brunt of any new border security costs, but provinces must be prepared for revenue or spending pressures from trade-related turbulence.<\/p>\n Similarly, efforts to streamline interprovincial trade<\/a> have come into the spotlight. Breaking down internal trade barriers would enhance growth (and revenue) potential, but it may also come with near-term infrastructure or regulatory costs for provinces.<\/p>\n The federal government\u2019s recent decisions to delay the increase in the capital gains tax inclusion rate will also need to be accounted for in this round of budgets. Federal tax changes, which were mirrored at the provincial level, had already been accounted for in previous budget projections. Removal of them will result in revenue losses for some governments.<\/p>\n Together, these pressures will play an important role in shaping fiscal decisions from coast to coast. Balancing pressing demands against a potentially volatile economic environment will require careful stewardship of fiscal health to ensure governments are well-positioned to tackle emerging trade and geopolitical issues, without neglecting Canada\u2019s structural economic shortfalls.<\/p>\n B.C. is facing a budgetary squeeze. Its 2024-25 deficit is the deepest among the provinces and second heaviest on record as a share of gross domestic product (2.3%). Last year\u2019s spending boost ahead of a provincial election left its bottom line weaker than pre-pandemic norms, leading to a third credit rating downgrade in three years in April. Rising debt servicing costs are now adding to fiscal strain alongside heightened economic risk.<\/p>\n The year ahead is likely to remain challenging. We expect nominal growth to decelerate from 4% in 2024 to 3% in 2025. B.C. is more exposed than other provinces to federal immigration cuts<\/a> as it\u2019s overweight in international students and temporary foreign workers.<\/p>\n Slower growing tax revenue is likely to come with persistent pressure to address B.C.\u2019s housing crisis and strengthen infrastructure resiliency in the face of more frequent natural disasters. We see these efforts contributing to productivity gains, but costs of major infrastructure projects have ballooned amid delays and are adding to provincial debt levels.<\/p>\n Despite these pressures, total revenue growth is likely to remain positive in the near term. The entry into service of a new LNG export terminal later this year will add a new dimension to B.C.\u2019s economy and government revenues\u2014though the upside may be modest at first. B.C.\u2019s relatively light exposure<\/a> to ongoing tariff threats with the U.S. further supports the potential for export-driven revenue growth.<\/p>\n Alberta\u2019s finances are in a relatively strong position. Recent surpluses, solid economic growth and high commodity prices have led to a string of budget surpluses in recent years, allowing the government to pay down debt and grow the Alberta Heritage Fund. The province\u2019s debt burden fell to 8% of GDP\u2014nearly half of any other province in 2024-25.<\/p>\n We expect Alberta\u2019s economy to outpace all other provinces this year, though nominal growth is likely to moderate from a strong 4.7% in 2024. Barring any tariffs, the utilization of the newly expanded Trans Mountain Pipeline will be a boon for exports. A weaker loonie against the U.S. dollar and a narrowing light-heavy oil price differential offers upside to government revenues. In fact, the Alberta government already added another $3 billion over its Budget 2024 bitumen royalty projection for the 2024-25 fiscal year.<\/p>\nBritish Columbia: Navigating revenue uncertainty<\/h2>\n
Alberta: Commodity-sensitive fiscal outlook complicated by trade uncertainty<\/h2>\n