07:13 AM EDT, 05/23/2025 (MT Newswires) -- Canadian provincial governments had the difficult task of finalizing their annual budgets just as the United States was starting a global trade war, said Scotiabank.

Each made different assumptions about the economic and fiscal impacts of the trade war, and many built in contingencies into their fiscal frameworks to buffer against trade war impacts, noted the bank.

Taken together, the provincial budgets' baseline scenarios project the aggregate provincial deficit to rise from $20.6 billion, or 0.7% of nominal gross domestic product, in FY25 to $44.9 billion, 1.4% of GDP, in FY26.

This reflects a worsened revenue outlook due to the deteriorated economic outlook, combined with continued operational and capital spending growth, as well as substantial increases to contingency reserves, stated Scotiabank. New tax or spending measures were generally relatively minor, reflecting the challenging economic and fiscal situations facing provincial governments.

Provinces' borrowing requirements are expected to remain elevated at roughly $138 billion in FY26, somewhat lower than the $147 billion recorded in FY25 but still substantially more than the $112 billion raised in FY24. This reflects the higher operational deficits and rising capital spending in most provinces, pointed out the bank.

Aggregate net debt as a share of GDP is projected to increase from 29.6% in FY25 to 33.2% by FY28, with the largest increases expected in British Columbia, Nova Scotia, and Prince Edward Island. Aggregate debt service as a share of revenues will rise from 6.2% to 6.4% in FY26.

The provinces' fiscal outlooks face risks from the ongoing U.S. trade war. Using Scotiabank's latest provincial economic growth projections instead of the economic growth assumed in each budget, the bank estimates that there could be revenue shortfalls, but within the contingency buffers set aside by most provinces.

However, in a more negative economic scenario, combined with an increase in spending by provinces, contingency buffers could be overwhelmed in most provinces, added Scotiabank.

While most provinces maintain relatively sound fiscal positions, given the deteriorated fiscal outlook and residual downside risks, a number of provinces have seen credit rating or outlook downgrades in the last month, and more downgrades could follow.

As impacts from the trade war and associated uncertainty gradually subside in the medium term, fiscal outlooks should improve, especially if provinces can deliver on promised spending restraint over the medium term, according to the bank.