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Investing.com -- On Wednesday, S&P Global Ratings issued a report highlighting that the new budget cycle for Canadian provinces is anticipated to be influenced by pre-existing pressures and recent policy changes by the Canadian federal government. Added to this, the U.S tariffs on Canadian exports will have varying impacts on each province. The cumulative effect of these factors on provincial economies will need to be evaluated individually to assess their mitigation strategies.
As the 2025 budget cycle commences, S&P Global Ratings indicates that pre-existing pressures could result in slower economic growth and reduced revenue receipts for Canadian provinces. This is apart from the impact of the 25% tariffs on exports to the U.S., which came into effect on March 4, 2025. Provinces are starting on varying fiscal bases, with some weaker than others.
In recent years, the growth in operating expenditures related to wage and goods costs has outpaced provincial revenues. However, recent trends show revenues starting to catch up. Most provinces’ current base case includes plans for substantial capital investments in healthcare and transportation infrastructure.
The midyear financial performance for most provinces in fiscal 2025 is moderately weaker compared to 2024 budget expectations, due to recent federal policy changes, including reduced immigration targets. The recently announced U.S. tariffs and Canada’s counter-tariffs further compound the economic uncertainty.
On March 4, the U.S. government imposed a 25% tariff on almost all imports from Canada, along with a 10% tariff on Canadian energy imports such as oil and natural gas. In response, Canada announced a 25% tariff on C$30 billion of U.S. imports, effective the same day. These tariffs will be applied to an additional C$125 billion worth of American imports following a three-week consultation period.
A recent scenario analysis by S&P Global Ratings Economics, considering all tariffs announced by the U.S. on February 1, 2025, estimated the potential economic impact on Canada, China, Mexico, and the U.S. The outcomes showed that the effects on some sectors of Canada’s economy and the country’s overall growth in 2025 could be significant. This scenario assumed that the 25% tariff on imports from Canada would remain in place through 2025, and that Canada would implement a reciprocal 25% tariff on non-manufacturing imports from the U.S. The tariffs are expected to be reduced to 10% in 2026 as the review process for the United States-Mexico-Canada Agreement commences.
The impact of these tariffs will vary for each Canadian province based on its economic diversity. The proportion of exports to the U.S. as a percentage of provincial GDP and key exports to the U.S. differ by province. Alberta and New Brunswick (NYSE:BC) have the highest exposure, with over 30% of GDP exposed to U.S. exports. Despite the potential impact on growth rates, significant changes in the economic assessments of the provinces are not expected in the short-to-medium term, as per capita GDP levels are predicted to remain resilient.
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