Provincial Credit Watch
April 06, 2026 | 10:03
Provincial Credit Watch: April 2026
Economics
Economics
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Provincial Returns |
Long provincial returns were under pressure over the past month alongside higher oil prices and a broad backup in bond yields. Spreads were relatively well behaved despite the risk-off sentiment stemming from the conflict in Iran, and provincials continue to outperform GoCs by a solid margin over the past 6- and 12-month periods. The geopolitical conflict and looming inflation impulse from higher oil prices has shifted market pricing on the Bank of Canada toward rate hikes later this year, although we still believe the bar for that is high given sluggish growth. |
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Relative Performance |
Long spreads were mixed across the provinces over the past month. Alberta outperformed on expectations that the recent budget, and it's $9 billion deficit, will swing well into surplus in an environment of $100 oil prices. Meantime, British Columbia continued to lag on deficit concerns and further credit rating downgrades. Most provinces have now tabled their FY26/27 budget, and we recap below. |
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Fundamentals |
Provincial Budget Season RecapThe provincial budget season is winding down, with just PEI and Newfoundland and Labrador still to table their FY26/27 documents. At this point, we have a sense of how fiscal policy is looking at the provincial level for the year ahead. Here are five themes: Deep deficits persist: A few provinces are slipping deeper into the red, while a few are moving to slightly shallower shortfalls. The big picture is that, as a group, the chunky $40 billion deficit for the fiscal year just ending (FY25/26) will persist in FY26/27, with a combined shortfall of $46.7 billion expected. That’s a manageable 1.4% of GDP, but would only be topped twice in the past two decades: at the depth of the pandemic, and the depth of the financial crisis. Certainly uncertain: This year’s budget season acknowledged the wild uncertainty in macroeconomic conditions. But, unlike last year, where every province seemingly took a different approach to setting an economic outlook (assume tariffs, no tariffs, publish different scenarios, etc.), this year was largely based on a ‘normal’ baseline economic outlook and a status quo on trade policy. With that in mind, the group overall has embedded more than $10 billion of contingencies into the FY26/27 fiscal plan, leaving some room for upside if the economy holds up. Revenue gusher (for some): The two big oil-producing provinces locked in their budgets ahead of the conflict in Iran and associated surge in oil prices, and budget assumptions immediately look wildly conservative. Alberta assumed $60.50 for WTI this fiscal year and Saskatchewan assumed $59.80 (Newfoundland & Labrador still to be tabled). At current levels for WTI, the light-heavy differential and the loonie, we could see upwards of $20 billion of revenue upside in those two provinces alone, swinging both well back into surplus. Debt climbing: The combined provincial net debt-to-GDP ratio is looking to push 32% in FY26/27, which would be a fourth consecutive increase from the post-pandemic lows. Recall that there was meaningful fiscal consolidation during that period when inflation and nominal growth were ripping. Interestingly, debt ratios don’t look any worse than they did a year ago thanks to hefty upward nominal GDP revisions, but the provinces are clearly still open to borrowing. This year’s long-term borrowing program is on pace to run at around $140 billion, just a shade lower than seen over the prior two years and the pandemic high. Policy steady: There were no show-stopping policy changes at the provincial level this budget season. While there were no major tax changes, some provinces nudged taxes higher (e.g., B.C. broadening the PST base and lifting income taxes), while others pushed through some targeted policy (e.g., Ontario expanding the HST rebate on new homes to all buyers). In general, the provinces continue to focus heavily on infrastructure, still catching up to past population growth (hence the hefty borrowing program), while program spending looks to run strong at more than 4% overall. At the federal level, a spring fiscal update awaits after Ottawa reset its budget cycle last year. The deficit is running at $31.2 billion for the April-to-January period, only slightly worse than $26.8 billion a year ago. While year-end adjustments can be hefty, there looks to be some serious upside to the estimated $78.3 billion shortfall for FY25/26 (i.e., a much smaller deficit), which could carry over to the coming fiscal year.
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Recent Publications of InterestCanada’s Population Estimates: Shrink Nation. Canada’s population fell 0.2% y/y in Q1, the first annual population decline on record going back to WWII. Full analysis here Canadian Housing Monitor: Canada’s housing market remained very quiet through February, with weak demand conditions and a low-volume period of the year working together to keep activity suppressed. Full analysis here Provincial Monitor: The Canadian economy is still dealing with the burden of U.S. tariffs, but the impact is uneven across the country, and conditions are beginning to drift apart. Full analysis here. Housing Outlook: What You See is What You’ll Get: As we continue to work through the secular downturn in Canadian housing, expect more of the same for sales and prices in 2026. This year figures to bring a weaker Federal Budget: The highly anticipated 2025 budget lands in the middle of a trade dispute, and at a time when the economy is struggling to grow. Full analysis here. Canada’s Job Market: Decoding the Disruptors: Canada’s job market is exhibiting signs of slack, which could still tilt the BoC toward easing. Notable longer-term disruptions include the trade war, a leaner federal government, high youth unemployment and the proliferation of AI. Full analysis here. Surveying the Provincial Landscape: The trade war threatens to drive a wedge between economic performance in provinces with high and low exposure to U.S. trade. At the same time, a new federal government is expected to push through various policy measures that will impact the provincial landscape in the coming years. Full analysis here. Supply, Meet Demand: Housing affordability will return to pre-pandemic norms through a combination of market dynamics, income growth, a modest reduction in borrowing costs and firm construction activity. Full analysis here. Guns N’ Bonds: Ottawa’s sudden shift to higher defence spending will also have implications for the budget deficit and, potentially, long-term interest rates. Full analysis here. 2025 Election — The Same, but Different: The Canadian election results are still being finalized, but Mark Carney and the Liberals appear to have secured a strong minority government mandate. Full analysis here |
FY26/27 Budget ReportsThe Province of British Columbia is projecting a $13.3 billion deficit in FY26/27. Full analysis here The Province of Alberta is projecting a $9.4 billion deficit in FY26/27. Full analysis here The Province of Saskatchewan is projecting a $819 million deficit for FY26/27. Full analysis here. The Province of Manitoba is projecting a $498 million summary budget deficit in FY26/27. Full analysis here The Province of Ontario is projecting a $13.8 billion deficit for FY26/27. Full analysis here The Province of Quebec is projecting a $6.3 billion deficit in FY26/27. Full analysis here The Province of New Brunswick is projecting a $1.4 billion deficit for FY26/27. Full analysis here The Province of Nova Scotia is projecting a $1.2 billion deficit in FY26/27. Full analysis here The Province of Prince Edward Island: Pending The Province of Newfoundland & Labrador: Pending |