Canada’s 2025 Budget Faces Pressure Amid U.S. Tariffs and Policy Shifts

S&P Global Ratings warns that Canada's provincial budgets in 2025 will face mounting pressures from federal policy changes, rising costs, and newly imposed U.S. tariffs. The economic outlook varies by province, with some more vulnerable due to their export exposure.

The 25% tariffs on most Canadian exports to the U.S., effective March 4, 2025, alongside a 10% tariff on Canadian energy imports, add to existing fiscal strains. In response, Canada imposed a 25% tariff on C$30 billion of U.S. imports, with plans to extend tariffs to an additional C$125 billion after consultations. These trade barriers could significantly impact growth, particularly in Alberta and New Brunswick, where over 30% of GDP is tied to U.S. exports.

Provincial governments are contending with rising wage and goods costs that have outpaced revenue growth. However, recent trends indicate revenues are catching up, with provinces prioritizing healthcare and transportation infrastructure investments. Midyear financial reports suggest weaker-than-expected fiscal performance, further compounded by federal policies like reduced immigration targets.

A scenario analysis by S&P Global Ratings Economics predicts that the tariffs could disrupt key sectors and slow economic growth in 2025. However, per capita GDP levels are expected to remain resilient in the short-to-medium term. The tariffs are likely to be reduced to 10% in 2026 as negotiations under the United States-Mexico-Canada Agreement (USMCA) begin.

With provinces starting the budget cycle on varying fiscal bases, their ability to mitigate these economic headwinds will be crucial. The coming months will reveal how effectively they adapt to shifting trade dynamics and fiscal pressures.