In a Polycrisis World, Could Health Care Be the Biggest Risk to Canada’s Fiscal Sustainability?

One of the more striking trends to emerge from the 2026 provincial budget season was the deterioration in planned government deficits. Lower-than-anticipated resource revenues played an important role in some instances. But the biggest driver of larger deficits was higher-than-previously-planned spending, particularly on health care. While the reasons for this sharp increase in expected health care expenditures differed across provinces, the trend was unmistakable.

What is happening with public health care in Canada? Spending on publicly provided health care increased significantly during the COVID‑19 pandemic. It has remained elevated since and has yet to return to its pre-pandemic trend (graph 1). The same is true for per capita public health care spending. Meanwhile, public spending on health care in Canada continues to trend gradually upward as a share of the economy, as health spending is advancing faster than the Canadian economy is growing.

What’s been driving elevated public spending on health care in Canada? Health care cost inflation has played an important role, often surpassing total CPI inflation (graph 2)—a trend which is likely to continue. And while population growth has contributed little historically to the rise in publicly provided health spending, it has been an important driver in recent years. However, this tide has turned as Canada’s population has begun to shrink due to a sharp decline in non-permanent residents. As such, population growth shouldn’t be a major factor going forward and may instead act as a headwind to rising health care expenditures.

Governments have revised down their projections for future population growth while at the same time increasing their outlooks for planned spending on health care. As such, it’s rising per capita costs that are expected to make an outsized contribution to higher health care spending in the coming years. According to data from the Canadian Institute for Health Information (CIHI), per capita public spending on health care surpassed its COVID‑19 pandemic peak in 2023 and is still rising (graph 3).

Underpinning the rising per capita health spending numbers is the changing demographics in Canada. The average age of Canadians is increasing, and the recent tightening of immigration is only going to exacerbate that trend. According to Statistics Canada, the share of people 65 years and over in the population went from 16.0% in 2015 to 19.5% in 2025 and could rise to nearly 23% by 2035. The impact on public finances operates through both spending and revenue channels. From a spending perspective, per capita government health expenditures increase almost exponentially starting around middle age (graph 4). As the population ages, this gets compounded. On the revenue side, the share of working-age Canadians who finance these rising expenditures is getting smaller.

And there’s the rub: health care costs are expected to rise sharply while revenue growth slows. Given that health care is the largest spending line for provincial governments, they are most at risk of these mounting costs eroding fiscal sustainability. According to the Office of the Parliamentary Budget Officer’s (PBO) Fiscal Sustainability Report 2024 External link., half of Canada’s provinces were in a fiscally unsustainable position before President Trump returned to office. And many of those whose finances were fiscally sustainable were just on the right side of the line. Since then, Canada has been hit with US import tariffs, an oil price shock and back-to-back budget seasons that for the most part saw planned deficits widen, not narrow.

The Office of the PBO External link. determined that, unlike the provinces, the federal government was in a fiscally sustainable position following its 2025 budget, albeit just barely. With the Canada Health Transfer having fallen as a share of provincial health spending and expected to fall further in the years ahead, there will be calls for the federal government to pony up. It no longer has the fiscal room do to that while keeping its debt outlook sustainable. As such, more needs to be done to improve the efficiency of publicly provided health care in Canada to keep costs down against the backdrop of rising demand and limited fiscal capacity. Failure to do so could involve some very difficult trade-offs.