Canada's provincial governments have enough fiscal firepower to respond to looming U.S. tariffs without supersizing their debt burdens, a new report says.
The analysis released Tuesday from Desjardins Economics predicted upcoming provincial budgets will be dominated by plans to prepare for an unknown 2025 as promised tariffs from U.S. President Donald Trump put a cloud over fiscal forecasts.
"The provinces are heading into a budget season with the type of uncertainties we haven't seen since the pandemic," said Laura Gu, senior economist at Desjardins, in an interview.
Nova Scotia kicked off provincial budget season last week and offered the first peek at how the provinces are preparing for threats of sweeping tariffs on Canadian exports to the U.S.
Nova Scotia Finance Minister John Lohr said the province was entering "a period of heightened uncertainty and heightened risk" as he unveiled plans for a $200-million reserve fund to respond to the threat of U.S. tariffs.
Desjardins projects that the provinces collectively have up to $100 billion in free fiscal firepower to put toward relief for industries and individuals affected by tariffs. The report expects a similar amount of support is available from the federal government.
Desjardins anticipates that provincial governments could deploy those funds without the net debt-to-GDP ratio across all provinces rising above 35 per cent — levels last seen during the COVID-19 pandemic.
Debt-to-GDP is a metric that broadly reflects a government's ability to pay down debt by tracking the size of its loans against growth in the economy. Desjardins forecast that these figures would stabilize at 30 per cent across the provinces for the next two years, barring potential tariff impacts.
Gu said that Desjardins does not see the economic hit tied to U.S. tariffs being as stark or broad-based as the pandemic downturn, instead comparing its scale to the global financial crisis of 2008-09.
"It is reassuring to say that the provincial and federal governments have the firepower to respond, but on the other hand, we don't see the necessity of a pandemic-level stimulus," she said.
Provinces ought to be "mindful" of keeping any relief efforts targeted and temporary, Gu said, lest they risk the progress made taming debt levels since the pandemic.
Before the prospect of U.S. tariffs, most provinces had been expecting their fiscal situations to improve in 2025 amid forecasts for renewed economic growth, the Desjardins report said.
How sharply tariffs would impact the provinces' bottom lines varies depending on how tied a provincial economy is to its manufacturing sector and to U.S. exports more broadly.
Central provinces including Ontario, Quebec and Manitoba, in addition to Prince Edward Island, are forecast to take the steepest hit under Desjardins' analysis, while British Columbia and Nova Scotia would avoid the sharper downturns because they're relatively less reliant on U.S. trade.
The Desjardins report also assumes Canada will secure a carve-out for energy products before tariffs come into effect, protecting Alberta, Saskatchewan, Newfoundland and Labrador and, to an extent, New Brunswick, from the worst of the hits.
The magnitude and scope of possible U.S. tariffs against Canada remain uncertain. Canada secured a month-long pause on Feb. 4 after Trump signed an order for blanket tariffs on Canadian goods, though he later imposed additional 25 per cent tariffs on all steel and aluminum imports, set to take effect on March 12.
Desjardins' baseline scenario assumes a "partial" imposition of the threatened tariffs at 10 per cent on all goods except energy, 35 per cent on steel and 25 per cent on aluminum.
This outcome would see total employment fall by one per cent in the hardest-hit provinces, though Desjardins warns more severe scenarios could have job losses hit "recessionary levels" in Central Canada and P.E.I.
The likes of Ontario, Quebec and Manitoba could therefore require more fiscal support than other provinces in the event of a prolonged trade dispute with the U.S.
"The theme of this budget season would be to respond to these immediate threats in the most timely manner to avoid the very severe economic fallout," Gu said.
Alberta is on deck for the next provincial budget release on Thursday.
