Do Canadian Governments Have a Revenue Problem?

Canadian governments are running near-record deficits almost across the broad, with the recent exception of some oil-producing provinces. Some of these mounting deficits are undoubtedly related to spending needed to fund public services and support households and businesses adversely impacted by the trade war with the US and higher prices at the pump. Indeed, general government spending—which includes expenditures by all levels of government—has risen considerably in recent years, hitting the highest level as a share of GDP in 30 years, not counting the pandemic (graph 1). But are weak revenues also to blame?

Canada’s general government revenues as a share of nominal GDP are below the OECD median (graph 2). This may come as a surprise to some given that Canada had the fifth highest top statutory personal income tax rate in the Organisation for Economic Co-operation and Development (OECD) in 2025. But while personal income taxes are typically the largest source of non-resource revenue in Canada, Canada had competitive corporate tax rates, and consumption taxes for the whole country were the eighth lowest in the OECD in 2025 (Tax Foundation, 2026 External link.). This lower level of own-source taxation is partly offset by the revenues some Canadian governments get from resources, a benefit not available to all provinces or many other countries.

Looking first to the Government of Canada, revenues as a share of GDP remain above their pre-pandemic levels and are expected to stay high despite slightly falling in recent years (graph 3). Elevated inflation because of sustained high energy prices has provided a tailwind to federal revenues in the near term. But this is likely to fade over the next couple of years, no longer providing an offset to recent permanent tax reductions. Slower revenue growth, combined with ongoing and newly announced spending measures, resulted in the Government of Canada projecting the largest deficits on record outside of the pandemic in its latest budget External link.. However, with revenues near their highest share of GDP in two decades—a time when the Government of Canada was running significant and sustained budget surpluses—ongoing large federal deficits today point more to a spending problem than a revenue one.

The provincial story is more nuanced. Provinces have enjoyed modest revenue upside in recent years beyond the substantial boost from stronger oil prices in energy-producing provinces. But these slight improvements do not change the broader trend of the post-pandemic revenue windfall dwindling rapidly. Provincial revenues reached 20.9% of nominal GDP in the 2024–25 fiscal year (FY25), are projected to ease to 20.1% in FY27 and could fall further and approach their pre-pandemic decade average of 19.7% in FY28. The decline is being driven largely by slowing own-source revenues and extends beyond royalties (graph 4). Even excluding resource receipts, revenues relative to GDP are moving back toward pre-pandemic norms. Lower property income may have contributed to this reversal, while strong equity markets should continue to support realized capital gains and related income tax receipts. That support remains vulnerable to a correction, particularly given stretched valuations. Similar concerns also apply to the federal government’s aspirational revenue projections.

Although federal transfers remain elevated relative to GDP, they have not kept pace with the cost of delivering public services, particularly health care. The Canada Health Transfer grows with nominal GDP and is subject to a temporary 5% minimum through FY28. Its share of provincial health spending has fallen from an average of 23% in the three years before the pandemic to close to 20% (graph 5). Provinces must therefore devote more of their own resources to meeting these steadily rising costs.

In resource-producing provinces, elevated commodity prices have provided an additional boost, but these gains can reverse quickly. In Alberta’s first-quarter update, higher oil royalties accounted for $9.3B of the $11.7B upward revenue revision. They now represent 29.2% of own-source revenues, well above the pre-pandemic average of 13.5% (graph 6). Without that support, Alberta would face an imbalance between revenues and expenditures, although it has more room to raise revenues than other provinces because of its relatively low level of non-resource revenues (graph 7). Saskatchewan is less exposed, with resource revenues accounting for 15.2% of own-source revenues, but its fiscal outlook also remains sensitive to commodity prices.

As revenue growth faces mounting headwinds, provinces lack a durable revenue base to support their expanding spending commitments. Additional federal funding could narrow the gap, while raising provincial own-source revenues through higher taxes and fees is another option. Spending cuts and/or often hard-to-find efficiencies are of course another option. But with spending maintained as currently planned, our calculations suggest the provinces collectively would need additional revenues approaching 1% of nominal GDP to balance their budgets on a sustainable basis over the next three years.

So, do Canadian governments have a revenue problem? Not necessarily. What Canadian governments have is a mismatch between the revenue-raising capacity and spending commitments of provinces and the priorities of the federal government. For instance, the Productivity Mega Deduction not only hit federal coffers but those of the provinces too. However, there was no increase in transfers to offset this lost revenue, transfers that were already shrinking as a share of expenses. At a time when the federal government is pursuing an ambitious spending and investment agenda, it should not lose sight of the mounting structural pressures facing provincial finances. With federal fiscal room potentially more constrained than budget projections suggest, there is a risk that Ottawa’s ability to respond to these pressures will become even more limited. While provinces ultimately remain responsible for managing their own finances, ensuring that fiscal arrangements adequately reflect the evolving responsibilities and spending pressures of both orders of government should remain an important consideration in federal fiscal policy. Ultimately, Canadians fund both levels of government and rely on the services they collectively provide. There is just one taxpayer in Canada after all.