08:07 AM EDT, 04/11/2025 (MT Newswires) -- In line with most Canadian provinces that have announced their budgets, Prince Edward Island (PEI) anticipates a deterioration in its bottom line, with projected deficits deepening to $184 million, or 1.7% of nominal gross domestic product, in FY2026, before gradually narrowing to $120 million, or 1.0% of GDP, by FY2028, noted Desjardins.

This deterioration is driven by increased spending, reversing previously planned spending restraint in the near term, said the bank. Program spending is projected to rise by 6.5% this fiscal year, building on the 8.5% increase last fiscal year. Over half of this year's spending increase is allocated to healthcare.

To support businesses and individuals, the province has introduced several tax cuts, alongside a contingency reserve fund of $32 million in FY2026 to assist businesses and workers affected by tariffs, and a $3 million Aquaculture Contingency Fund.

The government has revised down its growth assumptions underpinning the budget plan, although these projections remain somewhat "optimistic," stated Desjardins. The province expects real GDP to grow by 2.5% this year and 2.0% in 2026. Population growth is expected to decelerate significantly to 1.1% this year and 0.7% in 2026 -- below the bank's projections. The economic outlook doesn't account for the impact of tariffs.

Estimated impacts of the proposed tariffs on the PEI economy range from 2% to 3.5% of GDP after one year, depending on the measures and counter-measures announced. While Desjardins doesn't anticipate the impact to be as severe given current information, the bank acknowledges that PEI is among the most affected provinces due to the significance of its agriculture and manufacturing sectors and their reliance on the U.S. market.

In the capital budget tabled in November, PEI committed investments of $483 million for FY2026, a 30% jump from last year, with a five-year total of $1.65 billion.

These enhanced infrastructure investments aim to stimulate economic activity amid U.S. tariff challenges but will also contribute to a higher net debt burden, added the bank.

Deeper deficits and increased capital spending have pushed the province's net debt-to-GDP ratio onto a much higher trajectory, with net debt projected to rise from 29% of GDP in FY2025 to 35.9% in FY2028. Despite this, the province still holds a smaller debt burden than provinces such as Newfoundland and Labrador, Quebec, Ontario, and Nova Scotia, according to Desjardins.