Tariff Turmoil Foreshadows an Eventful Budget Season

Highlights

• Canadian provinces look to have begun 2025 on a strong note, but impending US tariffs could cause significant slowdowns and alter the growth rankings among provinces. Non-energy sectors, particularly manufacturing, are expected to be the most affected. This would hinder economic activity in Ontario, Quebec, Manitoba and PEI, in particular, resulting in lower growth compared to the national average. In contrast, oil-exporting provinces like Alberta and Saskatchewan might fare better due to anticipated tariff exemptions. Meanwhile, British Columbia and Nova Scotia, being less reliant on US trade, should outperform other provinces.
• While most provinces anticipate robust revenue growth and restrained spending to narrow budget balances in FY2025–26 (FY26), tariff uncertainty introduces significant risks to this plan. Provinces will update their plans in the upcoming 2025 budgets to reflect these risks, likely resulting in weaker bottom lines than anticipated.
• The federal government and several provincial premiers have backed providing tariff relief, if needed. Provincial governments have the fiscal capacity to subsidize industries and individuals affected by the tariffs within a spending envelope in the order of $100B while keeping the net debt-to-GDP ratio below the pandemic level of 35%.
• Provinces with higher exposure to US trade, like Ontario, Quebec and Manitoba, may need more substantial support. However, provinces should maintain a manageable debt burden in the event that they provide targeted relief in regions and sectors most affected by US tariffs.