(Editor's Note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts and reassess our guidance accordingly (see our research here: spglobal.com/ratings).)
This report does not constitute a rating action.
Key Takeaways
- Preexisting pressures from mounting costs coupled with Canadian federal policy changes will weigh on Canadian provinces going into the new budget cycle.
- On top of this, the U.S tariffs on Canadian exports will affect each province differently.
- It will be important to evaluate each province on a case-by-case basis to assess the cumulative impact of these factors on provincial economies and the levers they use to mitigate them.
Canadian Provinces Were Already Squeezed Going Into The New Budget Cycle
As Canadian provinces enter the 2025 budget cycle, S&P Global Ratings believes that preexisting pressures could lead to slower economic growth and lower revenue receipts—aside from any impact from the 25% tariffs on exports to the U.S. that went into effect March 4, 2025. And some provinces are starting on a weaker fiscal footing than others. In general, Canadian provincial revenues have just recently started to outpace the growth in operating expenditures that reflects the structural gap created in the past two years due to higher costs related to wages and goods. In addition, our current base case for most provinces incorporates their plans for continued sizable capital investments in health care and transportation infrastructure. Given moderately weaker midyear financial performance to date in fiscal 2025 for most Canadian provinces (compared with 2024 budget expectations), and recent changes to federal policies related to reduced immigration targets, provinces are operating in a more complex environment. The recent U.S. tariff announcements and counter-tariffs imposed on the U.S. by the Canadian government compound the economic uncertainty.
Effective March 4, the U.S. government imposed a 25% tariff on almost all imports from Canada and a 10% tariff on Canadian energy imports such as oil and natural gas. In response, Canada announced its own set of retaliatory tariffs of 25% on C$30 billion of U.S. imports, effective the same day. The tariffs will then be applied to another C$125 billion worth of American imports in three weeks following a consultation period.
A recently published scenario analysis by S&P Global Ratings Economics considered all the tariffs the U.S. announced on Feb. 1, 2025, and arrived at preliminary, high-level estimates of the potential economic impact on Canada, China, Mexico, and the U.S. The outcomes of this analysis showed that the effects on some sectors of Canada's economy and on the country's overall growth in 2025 could be significant (see "Economic Research: Macro Effects Of Proposed U.S. Tariffs Are Negative All-Around," published Feb. 6, 2025). That scenario assumed the 25% across-the-board tariff on imports from Canada would remain in place through 2025, and that Canada would implement a reciprocal tariff of 25% on nonmanufacturing imports from the U.S. The scenario also assumed that these tariffs would be lowered to 10% in 2026 as the review process for the United States-Mexico-Canada Agreement kicks off.
Each province will have to navigate a different landscape
The impact of these tariffs will differ for each Canadian province based on the diversity of its economy. The percentage of exports to the U.S. as a share of provincial GDP and key exports to the U.S. vary by province, with Alberta and New Brunswick having the largest exposure at more than 30% of GDP exposed to U.S. exports. Despite some concentration in trade flows (see charts 1 and 2)--that might mean a hit to growth rates--we don't expect to see material changes in the provinces' economic assessments in the short-to-medium term because per capita GDP levels are expected to remain resilient and/or relevant sector concentration is generally already considered in the ratings.
Chart 1
Chart 2
Although Canadian provinces have relatively high debt burdens and weaker budgetary performance compared with those of international peers, in our view, provincial ratings that span the 'A' and 'AA' categories remain supported by a solid institutional framework, generally diversified regional economies, solid financial management, and strong access to external liquidity mostly through capital markets (see chart 3).
Chart 3
We do see more potential for an impact on fiscal outcomes over the next couple of years. Tariff increases on exports to the U.S. on top of federal policy changes, such as those related to reduced immigration targets and the potential reversal of the increase to the capital gains inclusion rate, taken together will likely weigh on growth and revenues for all Canadian provinces.
And as a result, provinces' borrowing requirements could increase in the next two years more than we have anticipated. In particular, we expect the borrowing needs of the three largest provinces, British Columbia, Ontario, and Quebec, will continue to dominate Canadian provincial borrowing in fiscal years 2025 and 2026. On a case-by-case basis, we'll continue to monitor the evolution of fiscal trajectories and management policy responses, which we believe could be material for ratings.
The extent of the effect of this complex environment on each province will depend on what is already factored into our base cases for revenue growth and future local growth dynamics. Ratings implications will consider each province's budgetary flexibility and management approach--such as the levers available and willingness to adjust revenues and/or expenditures--alongside support provided by the federal government play a role beyond the export exposure of each provincial economy.
Related Research
- Economic Research: How Might Trump's Tariffs--If Fully Implemented--Affect U.S. Growth, Inflation, And Rates?, Feb. 6, 2025
- Economic Research: Macro Effects Of Proposed U.S. Tariffs Are Negative All-Around, Feb. 6, 2025
- Economic Research: Which Sectors Would Be Most Vulnerable To U.S. Tariffs On Canada And Mexico?, Jan. 30, 2025
| Primary Credit Analyst: | Bhavini Patel, CFA, Toronto + 1 (416) 507 2558; bhavini.patel@spglobal.com |
| Secondary Contacts: | Dina Shillis, CFA, Toronto + 1 (416) 507 3214; dina.shillis@spglobal.com |
| Lisa M Schineller, PhD, New York + 1 (212) 438 7352; lisa.schineller@spglobal.com | |
| Daniela Brandazza, Toronto 1 (437) 833- 0581; daniela.brandazza@spglobal.com |
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