Canadian public finances are becoming a bet on markets

As published on The Hub

Canadian government finances are increasingly dependent on markets they cannot control. This year, higher oil prices could deliver multibillion-dollar revenue windfalls. But that short-term boost points to a deeper, less understood shift: federal and provincial finances are increasingly tied to asset values, corporate profits, and resource prices.

That dependence can turn a market upswing into an unexpected surplus, or a downturn into a sudden fiscal hole. Governments must respond by budgeting more cautiously, disclosing how exposed their revenues are to market swings, and setting clear rules for windfalls before the money arrives.

Revenue beating expectations

Oil prices are significantly outperforming projections. According to sensitivity estimates published in the spring, current crude values put the federal government on track for a $6 billion windfall, and Alberta is headed for a hefty $16-billion gain. But both governments would see gains if West Texas Intermediate (WTI) softened.

Graphic credit: Janice Nelson

Strong stock market gains should also boost revenues beyond expectations. After all, higher equity market valuations contribute to more dividend income and capital gains taxes paid on the sale of profitable equities, as noted in Quebec’s, Ontario’s and B.C.’s recent budgets.

Canadian and American equity markets are flying even higher now than they were when federal and provincial governments published their spring fiscal plans. The strong performance of the stock market has also supported corporate profitability, and Ottawa is projecting near-record inflation-adjusted per-capita corporate tax revenues.

Graphic credit: Janice Nelson

Growing exposure to market conditions

These windfalls are welcome, and the playbook for governments is well established. Treat temporary revenue as temporary. Resist the urge to fund permanent programs or embed windfalls into the spending base. Economic and commodity cycles turn, so today’s extraordinary revenue gain can become tomorrow’s shortfall.

But that playbook assumes windfalls are the exception. Increasingly, that’s not the world Canadian governments are budgeting in. A growing share of federal and provincial revenue is tied directly to asset values and commodity prices: capital gains, resource-linked corporate tax receipts, and royalties dependent upon oil prices. When that share grows large enough, swings stop being one-off deviations from trend and start being the trend.

The data show just how much governments are becoming increasingly dependent on asset values. Federal fiscal sensitivity to crude oil has roughly doubled since the mid-2010s, while Alberta’s exposure has spiked as more oilsands projects become profitable and subject to higher royalty rates.

Graphic credit: Janice Nelson

The shift is also evident in financial markets. Since 2010, capital gains have roughly doubled as a share of taxable income, reflecting greater market participation and equity ownership. Contributions to government revenue are likely even higher, as capital gains disproportionately accrue to higher-income earners. They’re also likely growing: as of the first quarter of 2026, equity fund values made up nearly one-third of Canadian household assets, the highest share since at least 1990.

Graphic credit: Janice Nelson

Financial and commodity markets move much faster than the broader economy. As governments become more reliant on market-linked revenues, public finances are more exposed to sudden shifts in investor sentiment.

Fiscal planning challenges

The shift raises important questions about fiscal planning. With revenues more dependent on financial markets, the traditional principles of fiscal conservatism are more relevant than ever. Governments need to place greater emphasis on prudence, contingency reserves, and the distinction between cyclical windfalls and permanent revenue capacity.

Forecasts need to be prudent, and windfalls should not be mistaken for sustainable fiscal strength. To improve transparency, governments should also regularly publish fiscal sensitivities and scenarios for equity market returns, as they do for GDP, interest rates, and commodity prices.

Equally important is what to do in the event of outperformance. Governments should outline plans to build reserves, reduce debt, and prepare for future shocks from market-driven revenue gains. Alberta already does this with its surplus and Heritage Fund allocation rules. More governments should follow suit and incorporate equity market-related windfall rules.

This isn’t run-of-the-mill advice about managing windfalls; it’s about recognizing a more volatile revenue base. The financialization of government finances can create a disconnect between budgetary performance and economic performance. That makes it harder for businesses and other levels of government to do multi-year program and infrastructure planning and has the potential to further erode public trust. Greater fiscal planning transparency can help remedy both issues.

A more market-dependent fiscal state

The growing role of oil markets and financial assets in public finances represents an important structural change in Canada’s fiscal landscape. Government revenues increasingly rise and fall with commodity markets, asset prices, and investor sentiment.

This requires adaptation. Governments need more transparent fiscal sensitivities, more prudent forecasting assumptions, and clearer plans for managing windfalls when they occur. Revenues are already more volatile. The challenge now is building budgets that are resilient enough to handle it.