{"id":3204,"date":"2025-07-22T18:13:05","date_gmt":"2025-07-22T18:13:05","guid":{"rendered":"https:\/\/www.rbc.com\/en\/economics\/2025\/07\/22\/hey-big-spender-canadas-federal-and-provincial-spending-an-upside-to-growth-forecasts\/"},"modified":"2026-03-31T19:01:50","modified_gmt":"2026-03-31T19:01:50","slug":"hey-big-spender-canadas-federal-and-provincial-spending-an-upside-to-growth-forecasts","status":"publish","type":"post","link":"https:\/\/www.rbc.com\/en\/economics\/canadian-analysis\/provincial-and-fiscal-outlooks\/budget-analysis\/hey-big-spender-canadas-federal-and-provincial-spending-an-upside-to-growth-forecasts\/","title":{"rendered":"Hey big spender! Canada\u2019s federal and provincial spending an upside to growth forecasts"},"content":{"rendered":"\n
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The federal government may not have a 2025 budget until the fall, but deficits are likely heading higher from what was expected in the 2024 fall update. Announcements on items like defence along with extensive election promises make the direction clear\u2014even if the exact when and where are not.<\/p>\n<\/div><\/div>\n<\/div>\n<\/div>\n\n\n\n

Meanwhile, what has often been less appreciated is how provincial government balances play into the government spending outlook. Collectively, provinces are about half of combined federal and provincial government program spending. They represent only a quarter of combined deficits expected for 2024-25, but the overall firm increase in future deficits baked into 2025 provincial budgets make it a story worth paying attention to.<\/p>\n\n\n\n

We have conservatively marked up our late 2025 and 2026 gross domestic product forecasts<\/a>, given the strong expected fiscal impulse.<\/p>\n\n\n\n

But fiscal policy will remain a wildcard in the economic outlook. Its impact on growth depends on what types of initiatives move forward, when, and how the overall economy evolves. Here\u2019s how it breaks down.<\/p>\n\n\n\n

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Fiscal balances have eroded since fall updates even before a 2025 federal budget<\/h4>\n\n\n\n

The federal and provincial net fiscal balance is expected to erode over the forecast horizon, especially in the 2025-26 year with a peak $37 billion in additional deficit spending versus fall plans under base assumptions (see below). This would raise the combined 2025-26 deficit from $51 billion to $88 billion.<\/p>\n\n\n\n

Our analysis includes budget 2025 projections for all provinces but, for comparability, removes the differing contingencies many provinces added in early spring budgets at the height of U.S. tariff threats1<\/a><\/sup>. For the feds, base figures include announcements to date2<\/a><\/sup>, while potential figures incorporate platform measures. Caution is needed on the latter as it\u2019s common for some platform promises to go unpursued, and the fall budget suggests platform in-year spending could be pushed later as well.<\/p>\n\n\n\n

Under base (potential) assumptions for the federal deficit, provinces contribute more than 60% (45%) to projected deficit additions over the next two years, and an average 33% (28%) of the total deficit.  In the fall, provinces were expected to represent only 17% of the lower combined deficit. In 2027-28, the combined provincial deficit could be minimal ($4 billion), while the federal deficit could still be in the $50-$60 billion range.<\/p>\n\n\n\n

Provincial budgets tend to cover three years ahead, while the feds cover five years, so looking at contributions beyond 2027-28 would give a distorted picture. Moreover, it\u2019s important to keep in mind the trend of recent years \u2013 federal deficits have tended to come in higher than previously projected, while on average, provincial deficits have tended to be lower.<\/p>\n\n\n\n

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Fiscal impulse could be much higher in the future<\/h4>\n\n\n\n

These deficit figures would lead to a significant increase in the fiscal impulse compared to what was expected in late fall when federal and provincial spending was expected to be 1.6% of GDP in 25-26 and fall to under 1% the next two years.<\/p>\n\n\n\n

Now, the combined fiscal balance could approach 3% in 2025-26 under base federal spending and remain around 1.5% the following two years.<\/p>\n\n\n\n

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