Why Deficits Carry More Risk in Atlantic Canada
With large provincial deficits on the books from B.C to Nova Scotia, Atlantic Canada’s smaller, aging economies, are being tested faster – and with higher stakes
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New Brunswick and Nova Scotia are now running with the big provinces. From B.C. to Nova Scotia, provinces are posting record deficits and edging closer to debt‑to‑GDP warning lines.
Finance ministers say it’s a calculated bet to protect health care and keep East Coast economies competitive, but in these smaller, older provinces, that wager is both more urgent and more precarious.
New Brunswick’s $1.4‑billion and Nova Scotia’s $1.2‑billion deficits naturally invite criticism. However, to understand what’s at play right now in Canada’s provinces – the middle layer of government in our federation – it’s useful to consider why governments are running deficits and what the money we’re borrowing is being spent on.
Let’s dig in, with some help from two experts on public finances and the Atlantic Canadian economy: Rebekah Young, Scotiabank Vice-President, Head of Inclusion and Resilience Economics, and Lana Asaff, senior economist at the Atlantic Economic Council.
Please note, PEI and Newfoundland and Labrador have yet to release their 2026–27 budgets, but based on previous budgets, both provinces will likely face large deficits and increased debt.
Why are all provinces in deficit at the same time?
Because two forces have collided simultaneously: an aging population and geopolitical rifts.
The phrase “global uncertainty” is neat shorthand for the messy list of challenges confronting Canadians in the news every day. U.S. tariffs and trade disruptions have businesses holding back on investment and hiring decisions. Slower hiring means slower wage growth, which means slower HST and personal income tax revenue – the primary revenue streams for Atlantic Canadian provinces, which don’t have the same large royalty base as Alberta or the same economic scale as Ontario and B.C.
That means government revenues aren’t increasing fast enough to confront our accelerating government expenditures, which are being driven by our changing demographics.
How much debt is too much?
This year, you might have noticed provincial premiers and finance ministers referring more often to the debt‑to‑GDP ratio, an economic measurement that banks and financial institutions use to evaluate the risk associated with lending governments money. The higher the ratio, the higher the risk, because it indicates a government’s capacity to make its debt payments.
Financial institutions often treat a 40 per cent debt‑to‑GDP ratio as a warning line, but as Lana Asaff and other economists point out, no single number works as a hard cap for every province. What matters is whether that ratio is climbing or slowly coming down.
With that in mind, I classify the eight provinces with updated budgets into three groups: Nova Scotia (39.4 per cent), Quebec (38.9 per cent), Manitoba (38.2 per cent), and Ontario (37.7 per cent) are in the warning zone; New Brunswick (30.8 per cent) and B.C. (30.6 per cent) are in the “still got room but be careful” zone; and Saskatchewan (16.1 per cent) and Alberta (10.5 per cent) are in the “likely going to be okay if royalty payments bounce back” zone.
While we don’t have new budgets from PEI and Newfoundland and Labrador, if each maintains the trajectory from the 2025-26 budgets, the estimated debt-to-GDP ratios are 35 per cent (PEI) and 45.6 per cent (NL), the latter making The Rock the most indebted province in Canada.
What is the big pressure on Atlantic Canada governments?
On the demographic front, Atlantic Canada sits at the leading edge of a national story. New Brunswick, Nova Scotia, PEI and Newfoundland and Labrador, along with Quebec and B.C., have some of the oldest populations in Canada, which impacts government budgets in two ways.
First, it reduces government income tax revenues when older Canadians leave the workforce and are not replaced, and it increases government expenditures because health care needs, and therefore costs, increase as we age.
This is why Atlantic Canadian governments have, for well over a decade, embraced immigration.
“We need people now,” says Lana Asaff, senior economist at the Atlantic Economic Council. “This is why it is important to be able to attract and not only attract, but then also retain immigrants, interprovincial migrants, [and] non‑permanent residents that come to our region, so they can contribute to our labour force.”
This demographic problem is, in large part, on us.
We have known for decades that as the baby boom generation – that very large population group born between 1947 and 1965 – aged into their senior years, health-care costs would increase.
You don’t need to be an economist to understand that: we see it in the amount of care our family and friends receive, relative to their age.
“When I looked at all the provincial budgets, I did sort of suck in my breath,” Scotiabank’s Rebekah Young says. “Health‑care expenditures are increasing anywhere from four to six percent annually, which isn’t surprising given the pace of that aging cohort.”
For instance, an 85‑year‑old costs roughly three times what a 65‑year‑old costs the health‑care system, and about six times what a 30‑year‑old does.
Governments cannot hold the line on health expenditures when the population driving that cost is growing and aging simultaneously. And in Atlantic Canada, where tax bases are smaller and economies are more reliant on income and sales taxes than on resource royalties, those demographic pressures bite harder and sooner.
As the population ages, health‑care delivery costs rise too. The pressures showing up in this year’s budgets have been building for decades.
Is borrowing to cover that gap irresponsible?
Governments, like households, can borrow for different reasons. Taking on debt to renovate a house, which protects or increases its value, is a different decision than borrowing for a vacation. The question is what the money is for.
Young frames it this way: “We often think very simplistically about deficits as good or bad. But you have to look at which part of the deficit is intended to grow the economy, and which part is not.”
For provinces, that means looking at how much of the debt is going into things that sustain or expand economic capacity and how much is simply covering the rising cost of doing what governments already do.
To use the household expenses analogy: are your energy costs increasing because the price went up, or are you investing in energy efficiency changes that will lead to lower future costs?
This is where debt‑to‑GDP comes back in. A provincial economy that is expanding can carry more government debt sustainably than one that isn’t.
“The net debt‑to‑GDP ratio is a really important metric, but there is no appropriate ratio that all provinces should be aspiring to,” says Asaff. “The important part is whether that ratio is declining over time, because that gives you confidence that governments will be able to sustain the current level of services.”
Unlike Alberta, which draws on resource royalties, or Ontario, with its large and diversified private sector, the Atlantic provinces rely heavily on income and consumption taxes, along with federal transfer payments.
Increasing tax revenues means increasing the population and the wage base, but attracting and retaining workers requires the public services that chronically strain provincial budgets: health care, long-term care, and schools.
The budgets released this spring are, in effect, a wager.
Whether that wager pays off depends on factors no provincial finance minister can fully control: trade policy, immigration levels, private‑sector investment decisions, and the pace of a demographic shift decades in the making.
It’s a big, wicked problem that we, as citizens, need to understand so we can weigh the trade-offs, benefits, and risks our communities, companies and governments must make to ensure today’s bets pay off not that far into the future.
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