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’s changing relationship with the U.S. won’t be an isolated risk for governments.

We have argued 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’s long-standing productivity puzzle remains a critical priority.

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.

Similarly, efforts to streamline interprovincial trade 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.

The federal government’s 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.

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’s structural economic shortfalls.

British Columbia: Navigating revenue uncertainty

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’s 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.

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 as it’s overweight in international students and temporary foreign workers.

Slower growing tax revenue is likely to come with persistent pressure to address B.C.’s 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.

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.’s economy and government revenues—though the upside may be modest at first. B.C.’s relatively light exposure to ongoing tariff threats with the U.S. further supports the potential for export-driven revenue growth.

Alberta: Commodity-sensitive fiscal outlook complicated by trade uncertainty

Alberta’s 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’s debt burden fell to 8% of GDP—nearly half of any other province in 2024-25.

We expect Alberta’s 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.

The heavy dependence on energy commodity royalties, however, makes government revenue prone to wild swings. The threat of U.S. tariffs could be a double whammy, knocking down both energy prices and exports. Alberta is the most reliant on U.S. demand for its exports with merchandise exports to the U.S. accounting for 34% of GDP in 2023. Given such sensitivity to the U.S. market, it would be prudent to build in contingencies to at least partially protect the fiscal plan against adverse trade developments.

The province’s demographic picture has faded somewhat, but it remains brighter than most other provinces. Alberta is set to lead the country in growth in 2025, which should also help maintain the government’s strong fiscal position.

Saskatchewan: Getting back on track

Saskatchewan’s fiscal situation is among the best in Canada—putting it in a better position than most to address new priorities. But, the government has faced challenges in recent years. Surging insurance claims related to destructive wildfires punched a hole in the province’s books last year, putting its debt burden back on an upward trajectory.

In the 2025-26 fiscal year, however, we expect agricultural insurance claims to roll off the ledger. This should make space for the debt burden to lighten and situate the province more favourably during a potentially volatile year.

Rising potash prices should be positive as well if the U.S. doesn’t move forward with blanket 25% tariffs. Resource royalty volatility, however, remains a key source of uncertainty along with the outcome of the arbitration process that will decide provincial teachers’ wage increases in the upcoming months.

Potential steel tariffs could also take a chunk out of Saskatchewan’s export revenue. It’s merchandise exports to the U.S. represent a relatively high share of GDP relative to other provinces, leaving it particularly exposed to the threat of blanket tariffs and posing a material risk for government revenues.

Manitoba: Juggling commitments

Budget 2024 vowed to eliminate Manitoba’s deficit by the 2027-28 fiscal year. Last year’s budget charted out plans to reach this goal, but it also set out large spending plans and costly tax reforms, which will leave less fiscal room to respond to new challenges. Tariff threats, however, may force the government to shift priorities.

We expect Manitoba’s economy to expand at a slightly faster pace in 2025 as falling interest rates foster a better investment environment for households and businesses. Public sector construction investment continues to act as a tailwind as well, while also adding to provincial debt.

Broad-based policies were included in last year’s budget to meet election promises, including increases to healthcare capacity with more staffing and capital investment.

Productivity-enhancing measures are something we hope to see more of in Budget 2025 given Manitoba’s labour productivity is among the weakest in the country . Addressing this may take up front investment or policy changes—forcing the government to juggle its healthcare spending and tax cut commitments to meet its deficit elimination promise on time.

Ontario: A tough balancing act

Ontario faces a high stakes balancing act. Maintaining its deficit reduction plan while addressing potential economic turbulence related to U.S. policy changes will be a challenge.

The province is brushing up close to two of its fiscal anchors and has already breached the third. We have highlighted that governments face higher interest costs when straying from fiscal promises, which may add to fiscal strain.

Ontario’s economy is expected to see a modest improvement in 2025 as falling interest rates support a modest acceleration in consumer spending and a housing market rebound. Despite this, factors such as subdued inflation and more gradual employment gains could temper revenue increases.

Sluggish business investment is another concern, especially as the U.S. implements tax incentives to draw capital to the south. In response, Ontario may need to consider a strategy to boost competitiveness and investment to support long-term growth—which could come at the cost of revenues or higher expenditures.

The province is firmly engaged in building up infrastructure, which will likely translate into higher capital investment in fiscal 2025-26. We see upside from the $29.5 billion for fiscal 2025-26 that was announced in Budget 2024 as multi-year projects (such as the Ontario Line and Highway 413) face delays.

Rapidly rising healthcare costs are likely to drive up provincial expenditures—particularly as it implements wage increases for healthcare workers after recent labor disputes.

Québec: Time to chart a course to balance

Québec’s 2024 Budget was heavy on spending and strayed from its commitment to balance the books over the six-year fiscal plan. Mounting healthcare costs and a push to modernize hospitals and digital health systems have been big line items in recent years. An increase to existing portfolio expenditures—including wage adjustments after hundreds of thousands of public service workers went on strike in 2023—added to Quebec’s fiscal struggles last year. The province dipped into its contingency reserve fund to prevent its massive budgetary shortfall from growing further.

Still, the budgetary shortfall is currently the largest of any province at $11 billion and the second largest as a share of GDP (1.4%). Its latest fiscal plan did not include a path to balance over the six-year forecast horizon. Budget 2025 will need to outline a clear plan to achieve balance by 2029-30 to meet its Balanced Budget Act obligation.

Delivering on this commitment may prove challenging. Québec has aligned itself with the federal government on postponing changes to the capital gains inclusion rate. This will have a material impact on the upcoming budgetary plan given the $2.5 billion in additional revenue over five years was already baked into fiscal plans. Nearly $1 billion was expected in fiscal 2024-25.

Atlantic Canada: Aging demographics, productivity drive spending needs

The Atlantic provinces face some of the most acute fiscal challenges in the country. Expenditures as a share of GDP are among the highest in Canada due to demographic pressures from an older population and higher proportion of the workforce in seasonal occupations.

Cuts to immigration targets risk reigniting the long-standing demographics pressures with population aging once again likely to take centre stage. Weak productivity growth across the region offers little fallback to boost revenues, leaving governments heavily dependent on federal transfers .

These provinces have varying exposure to new and potential tariffs from the U.S. with New Brunswick being among the most exposed in Canada and Nova Scotia the least.

New Brunswick has significantly improved its fiscal position over the last decade by keeping its net debt-to-GDP on a downtrend. In the last 10 years, the province’s debt burden shrunk from 40.8% to 25.8%—putting it in a stronger position to address unforeseen shocks.

Prince Edward Island, on the other hand, has less firepower under its belt given its higher debt burden and deeper budget deficit as a share of GDP. It isn’t as exposed as New Brunswick to a trade standoff with the U.S., but knock on effects would be inevitable and could touch its growth and revenue outlook.

Newfoundland and Labrador has the heaviest debt burden among provinces by far, which leaves it relatively less room (if any) to manoeuvre and address new economic shocks. Its fiscal situation improved briefly in fiscal 2022-23, but has since deteriorated. Putting its debt-to-GDP back on a downtrend will be critical to ensure fiscal sustainability.

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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