Provincial Budgets

February 18, 2025 | 14:30

Nova Scotia (FY25/26) — Surplus Slips Away

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

The Province of Nova Scotia is projecting an $898 million deficit in FY25/26 (1.4% of GDP), a notable turn after four consecutive years in the black. The FY24/25 balance is now pegged at a small $82.4 million surplus, improved from the latest quarterly estimate of a $247 million deficit. Nova Scotia has seen strong revenue upside through the fiscal year, but will now ramp up spending in a number of priority areas, and implement a sales tax cut.

The Province is also building in a contingency for the first time, worth $200 million for FY25/26 and each year thereafter. This is a prudent move, and we'd expect other provinces to do as such, if not publish full downside scenarios this budget season. Note that this contingency could account for economic weakness that results from U.S. tariffs or other factors, but also "emerging priorities that may arise during the fiscal year and that are not practical to delay until the next budget". In other words, it could be spent, too.

Looking further ahead, the deficit narrows to a still relatively large $723 million by FY26/27, with no plan to balance the books through the FY28/29 forecast horizon.

The major policy announcement was a 1 percentage point reduction in the Harmonized Sales Tax, to 14%, effective April 1, 2025. The estimated cost is $294 million for FY25/26. Note that Nova Scotia currently shares the highest combined provincial/federal sales tax in Canada with New Brunswick, Newfoundland & Labrador and PEI. The small business tax rate will also be cut to 1.5% from 2.5%, while the income threshold will rise from $500k to $700k.

Nova Scotia saw strong revenue growth through the past fiscal year, but the tax cut and cooler nominal GDP growth will slow that down. Total revenue (including Government Business Enterprises) is projected to dip 1.8% to $16.5 billion in FY25/26, but that follows a significant upward revision over the course of FY24/25—that year is on pace to end almost $1 billion stronger than expected in the previous budget.

The Province's economic growth assumptions are reasonable from our perspective, with real GDP growth pegged at 2.0% this year and 1.8% in 2026 (our call is somewhat more muted at 1.6% and 1.3%, respectively). Similarly, nominal growth is estimated at a solid 4.7% this year before ebbing to 4.3% in 2026.

The province's economic outlook continues to be supported by robust residential investment, tourism, and ongoing population inflows, although the latter should slow to below 1% in 2025 alongside reduced federal immigration targets.

Total spending continues to rise at a solid pace, up 3.7% in FY25/26, with a like-sized increase in departmental spending. Health care remains a key priority and receives a 3.6% boost in this budget, while the level of spending in that area now tracks 8% above the original FY24/25 budget plan. While the spending line in Nova Scotia has certainly been rising at a fast clip, so have pressures from inflation and torrid population growth. Further ahead, departmental spending growth is expected to slow to a crawl in the latter years of the forecast horizon, to the point where spending begins to decline in real per-capita terms. That's a few years out, but we suspect that will be a challenge and highlights likely persistent deficits for the foreseeable future.

Total borrowing requirements are pegged at $3.2 billion in FY25/26 after contingency, or $639 million more than in FY24/25. The historically high level includes funding of the deficit, as well as a robust $2.35 billion capital plan focused on health infrastructure, public housing and highways. Total borrowing is expected to rise further to $3.6 billion in FY26/27 before peaking above $4 billion the year after.

Net debt is expected to rise to 34.6% of GDP in FY25/26, up from 31.6%, as the deficit and robust capital spending program lift borrowing. Last year's better-than-expected result helped set this ratio at a better starting point, but the direction for next few years is clearly higher. The net debt-to-GDP ratio is expected to top 40% by FY28/29, a level not seen in 20 years.

The Bottom Line: The first budget after a provincial election is usually filled with the cost of campaign priorities, and this one is no different. The promised sales tax cut and ramped-up spending in priority areas will swing Nova Scotia back to what looks like persistent deficits after four years in the black.