BC’s Carbon Tax Exit Sparks New Fiscal and Deficit Challenges

Takeaways

• British Columbia has replaced ongoing carbon tax revenue with a one-time tobacco settlement, triggering a slightly higher deficit path.
• Lower capital spending helps trim near-term borrowing needs, but the province now faces a structural revenue gap.
• Economists warn that slower economic growth and reliance on temporary revenue could pressure BC’s long-term fiscal resilience.

British Columbia’s latest fiscal update shows the province swapping stable carbon tax revenue for a one-off tobacco settlement, an accounting shift that eases near-term debt growth but leaves a tougher deficit path ahead.

According to Scotiabank, BC’s second-quarter fiscal report projects an $11.2 billion deficit for 2025–26, equal to 2.5% of nominal GDP. That estimate is largely unchanged from Budget 2025. Meanwhile, the 2024–25 public accounts came in stronger than expected, showing a $7.3 billion shortfall, smaller than the $9.1 billion forecast earlier this year.

On the revenue side, BC now expects $83.8 billion in 2025–26 income, roughly $200 million below Budget 2025 and slightly below this year’s total. The main reason is the province’s decision to scrap the carbon tax starting April 1, 2025. The move is forecast to erase $2.8 billion in annual revenue. A $2.7 billion tobacco settlement will almost fully offset the hit, but only once, creating a structural gap in the years ahead.

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Higher assessments for 2024 allowed BC to raise its personal and corporate income tax projections by $750 million and $980 million, but even stronger tax inflows cannot compensate for the end of the carbon tax.

On the spending side, expenditures for 2025–26 are pegged at $95.0 billion, little changed from earlier plans. Extra wildfire-related fire management costs add nearly $500 million, but that is balanced by a reduction of about $600 million in refundable tax credits, including the elimination of the climate action tax credit.

The province’s net debt for 2025–26 is now forecast at $117.7 billion, or 26.4% of GDP, slightly lower than in Budget 2025. BC achieved this improvement by slowing capital spending, pushing $1.4 billion in health and transportation projects into later years. While the shift eases borrowing needs, it also delays investments that usually support economic productivity.

Scotiabank notes that the fiscal picture is complicated by slower economic momentum. Real GDP growth has been downgraded to 1.4% in 2024 and 1.3% in 2026, compared to 1.8% and 1.9% previously. Softer growth may limit future revenue and keep deficits elevated.

For investors, the trade-off is mixed: BC is still running a large deficit, but with slightly lower borrowing requirements than expected. Credit analysts caution that relying on temporary funds like the tobacco settlement to replace permanent revenue sources increases long-term risk, especially as interest costs continue to rise.

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The broader concern is structural. By removing both the carbon tax and the climate action tax credit, BC is trading predictable yearly income and targeted household support for a one-time fiscal reset. Without new revenue measures or reduced spending growth, the province could face harder budget decisions later, particularly if wildfire costs or economic shocks worsen.

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Source: finimize