By Promit Mukherjee
OTTAWA, April 28 (Reuters) - Canada's fiscal update on Tuesday is likely to show the budget deficit improved and revenues rose in the last fiscal year but gains from higher oil prices were largely offset by weak consumer spending and new spending measures, economists said.
While Canada's economy has slowed in the past year since Prime Minister Mark Carney took office, it has withstood the impact of U.S. President Donald Trump's tariffs better than expected.
"There will be good news
... on the fiscal situation," Carney said on Monday.
The government's performance on hitting deficit targets and getting spending under control will show an improvement, he said.
Finance Minister François-Philippe Champagne presented Carney's first federal budget in November, doubling Canada's deficit projection for the year ending March 2026 with spending initiatives to fight Trump's tariffs and boost capital investment.
"Monthly fiscal numbers look as if the government is well ahead of its projections," said Doug Porter, chief economist with BMO Capital Markets.
Despite trade tensions and uncertainty, the Canadian economy performed slightly better than expected in 2025, with stronger revenues, lower spending and reduced interest costs easing the debt-servicing burden, he said.
GDP grew by 1.7% in 2025, surpassing the federal budget projection of just above 1%.
On the fiscal front, the federal budget estimated the 2025/26 deficit at C$78.3 billion, a 116% increase, with the deficit-to-GDP ratio at 2.5%.
Federal governments typically provide fiscal updates in the fall and unveil their budget in April, but Carney changed the timing of the annual federal budget to November to align with the provinces, and pushed the mid-year fiscal update to April.
Cynthia Leach, assistant chief economist at RBC, said she expects the deficit-to-GDP ratio for the fiscal year 2026 that ended in March to be below 2%.
FISCAL RISKS
Still, the uncertainty of the U.S.-Mexico-Canada free trade deal, higher bond yields and strain on consumers from higher oil prices pose risks for the economy, economists said.
Although Canada is a net oil exporter, the current price spike is not expected to have a multiplier effect on investment. It will boost government revenues through higher corporate income tax, but that will be largely offset by higher spending.
Fiscal measures such as suspending the gasoline tax, money for lower-income groups to counter the high grocery prices and increased defense spending will eat into the benefits from higher oil prices, economists said.
The groceries credit is expected to cost about C$10.5 billion over five years, while the fuel tax cut will cost the government C$2.4 billion, said Gemma Stanton-Hagan, director of economics and policy at PwC.
"You're unlikely to be able to make up for that through oil and gas revenue," she said.
(Reporting by Promit Mukherjee, editing by Deepa Babington)
