OTTAWA — A new report from the Conference Board of Canada indicates that while all provinces are projected to run fiscal deficits this year due to the U.S. trade war and a slowing economy, these deficits are expected to decrease in the coming years. Released on Tuesday, the report highlights the financial struggles provinces face as they attempt to balance their budgets.

Emerging from a pandemic that significantly increased deficits, provinces are now confronted with the challenges posed by ongoing trade tensions. Many provinces have established contingency funds in their budgets to assist workers and vital industries affected by tariffs. Additionally, they are collaborating with the federal government to advance major infrastructure projects, which is putting pressure on capital expenditures.

As provinces deplete their financial reserves, they are also preparing for economic setbacks. Richard Forbes, a principal economist at the Conference Board, stated, "When we see a slowdown in economic activity, that leads to less job creation, less spending, less incomes and less corporate profits. And these are … major drivers of provincial revenues."

The report notes that a slowdown in population growth, exacerbated by federal immigration caps, is further hindering provincial revenues. Many provinces are grappling with demographic challenges, including an aging population and baby boomers retiring, which negatively impacts income tax revenue. The increasing number of retirees also raises demand for healthcare spending.

Forbes pointed out that Newfoundland and Labrador is expected to see its population decline by 10,000 over the next five years. Quebec and several Maritime provinces are also anticipated to experience the adverse effects of an aging population. In contrast, Prince Edward Island is witnessing the highest population growth among provinces, with a 25% increase over the past decade, which has lowered its median age by 2.6 years.

The Conference Board's forecast suggests that the economy contracted in the second quarter of the year due to tariffs and uncertainty affecting manufacturing. However, a modest economic recovery is predicted for the remainder of the year. As provinces look ahead, the report anticipates that governments will tighten spending, which should help reduce deficits by the end of the decade.

The federal government plans to balance its operating budget within the next three years, and Forbes expects provinces to follow suit by cutting spending in areas like public administration. "Speaking broadly, of course, we are seeing provinces showing more prudence when it comes to their spending plans over the last couple of years," he said.

Some provinces, including Saskatchewan and Alberta, are projected to return to budget surpluses before 2030. The Conference Board notes that Canada’s Prairie provinces are in relatively stable fiscal positions, partly due to younger demographics and some protection from tariffs. Provinces such as Alberta, Saskatchewan, and Newfoundland and Labrador are expected to shift their economies toward renewable energy in the coming years, although the oil and gas sector will continue to impact their fiscal outlooks.

Ontario is also expected to achieve a balanced budget by the end of the decade. The report indicates that while accelerated infrastructure spending may increase debt in the short term, planned reductions in healthcare and education spending will aid in eliminating deficits.

Quebec faces a challenging situation, with weak demographic growth, economic uncertainty, and rising healthcare and education costs. However, the Conference Board believes Quebec could return to a modest surplus by 2029 if it can implement spending controls. British Columbia is also dealing with a significant deficit, but a reduction in spending and increased natural gas royalties are expected to help it recover in the coming years.

The federal government's infrastructure initiatives could provide additional support for British Columbia. New Brunswick has been recognized for its fiscal restraint, but it faces challenges from an aging population and the forestry industry's exposure to tariffs. Nova Scotia is also expected to encounter difficulties due to a slowing economy, particularly from a lack of private sector investment and housing activity.

Forbes cautioned that while the Conference Board's forecast assumes trade uncertainties will lessen next year, the provinces' financial situations could worsen if the tariff dispute with the United States continues. The report emphasizes the importance of applying a uniform scenario to all provincial budget plans, contrasting with the varied assumptions that inform each province's individual spending strategy.