• The Alberta government expects a $5.2 billion deficit in fiscal 2025-26 after a surprise surplus in fiscal 2024-25 ($5.8 billion).
  • A larger $4 billion contingency allowance (+$2 billion) has been set aside to mitigate the impact of potential U.S. tariffs and other unexpected expenses.
  • Early implementation of a planned personal income tax cut, weak natural resource revenues, and prudent economic assumptions weigh on the revenue outlook.
  • Net debt-to-gross domestic product is tracking lower than previous estimates (7.6% in 2024-25).
  • Deficits and moderating growth will put its debt burden back on an upward trajectory for the first time since the pandemic .

The Alberta government unveiled Budget 2025, projecting a $5.2 billion deficit for fiscal 2025-26 after an unexpectedly large $5.8 billion surplus in fiscal 2024-25 due to higher resource royalties. It’s a shift from four consecutive years of surpluses.

The projected deficit is primarily attributed to a larger $4 billion contingency allocated to fiscal 2025-26—a prudence measure we’ve argued in favour of given Alberta is the most exposed to U.S. trade risks. Additional expenses from ongoing collective bargaining, disaster relief, and other immediate priorities are also expected to be covered under the contingency.

Weaker oil and gas revenues contribute to the weaker bottom line as well, shaving $4.5 billion off revenues relative to fiscal 2024-25. Earlier than anticipated tax cuts (see below) and weaker investment income from reduced natural resource royalties will pull revenues down further.

Legislation allows the province to record deficits under certain circumstances (including if there is at least a $1 billion drop in revenue like the present circumstance), but it also requires the government to return to balance within three years after a deficit is reported. This suggests Budget 2026 will chart a path to balance by fiscal 2028-29.

Tax changes to take effect two years ahead of schedule

Budget 2025 followed up on last year’s announcement of a new 8% personal income tax bracket for those earning up to $60,000. The measure was previously contingent on meeting the balanced budget commitment. Despite recording deficits, however, the government plans to move ahead with the tax change two years ahead of schedule to help Albertans with the higher cost of living and prepare for potential Canada/U.S. trade challenges.

The tax change will be retroactive to Jan. 1, 2025 with payroll adjustments becoming visible after July 1, 2025. Early implementation of the tax change is set to cost $1.2 billion in forgone revenue in fiscal 2025-26

The tax cuts are coming when revenues are already projected to decline from fiscal 2024-25 on lower resource royalties, and moderating population and economic growth. In total, revenues are projected to drop $6.6 billion (-8.2%) from fiscal 2024-25. Alberta remains highly exposed to boom-bust cycles with tax cuts further narrowing the revenue base. There were no notable measures to diversify revenue streams in response to new trade pressures from the U.S.

Conservative growth assumptions act as prudence measure

The government’s assumptions on economic growth are more conservative than ours, acting as another prudence measure. Alberta is expecting real and nominal GDP to slow materially from 2024 growth estimates on new tariffs from the U.S. Economic assumptions internalize a potential 15% tariff on all Canadian goods with the exception of energy products, which may face a smaller 10% tariff. The province also assumes broad-based retaliatory measures from the federal government, dampening the growth outlook for 2025 and 2026.

However, in the absence of broad-based tariffs, Alberta’s economy would likely grow at a much faster rate of 2-3%. Higher growth would offer upside to revenue projections in Budget 2025.

Operating expenditures abide by fiscal anchor

Expenditure growth is projected to slow from fiscal 2024-25 despite notable increases to the contingency fund. This is primarily due to unexpectedly high expenditures in fiscal 2024-25 as disaster and emergency expenses due to wildfires surpassed last year’s the allotted contingency.

The increased contingency allowance (+$2 billion) in fiscal 2025-26 accounts for nearly half of the $4.4 billion expenditure increase. Increased operating expenses—primarily for health and education—account for another $2.2 billion.

Operating expenditures are set to rise 3.6% over fiscal 2024-25, remaining within the commitment of keeping expenditures below the sum of the rate of population growth and inflation—which are projected to be 2.5% and 2.6%, respectively.

Capital plan grows despite deficits

The government plans to increase capital spending despite the projected deficit. The capital plan will invest $1.1 billion over the Budget 2024 commitment, reaching $26.1 billion in total. Some of the increase, however, will be rolled over from the 2024 capital plan, which is tracking $634 million lower than anticipated due to reprofiling of projects to align with new timelines and adjustments from underbudget projects.

The 2025 capital plan prioritizes municipal infrastructure support ($7.5 billion), including transportation projects and programs. Capital maintenance and renewals ($3.8 billion), health ($3.6 billion), school ($2.6 billion) and road infrastructure ($2.5 billion) are other priorities.

Deficits put debt burden on an upward trajectory

Budget 2025 strayed from the commitment to keep the net debt-to-GDP on a downward trajectory. The debt burden is now expected to increase modestly to 9.3% by the end of the fiscal plan after tracking lower in fiscal 2024-25 (7.6%).

New deficit projections add to the debt load, while conservative economic assumptions keep GDP growth projections modest. Together, these factors put upward pressure on the net debt-to-GDP ratio.

Still, Alberta’s debt burden remains the lowest in the country by a large margin, putting it in a relatively favourable position to address upcoming challenges and new priorities. Greater revenue diversification would help ensure financial stability even when the outlook for natural resources is less favourable.

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 and budget commentaries.

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