Hear that? That’s the roar of the ‘New Economic Reality’ express train heading your way. Canadians across the country are scrambling to figure out which station it will stop at. Many of us may remain standing at our usual stop, watching helplessly as it flies by.

While it is unclear how to board the New Economic Reality express train, one thing is certain — denial won’t get you a ticket. Just as the COVID-19 pandemic ushered in a new normal of remote work, supply chain disruptions and labour shortages, we must now adapt quickly to the new normal that is taking shape in Canada.

Economic shifts are already hitting home

It took only a few months to feel the ripple effects of changing U.S. trade and tariff policies. In August, Canada’s unemployment rate rose to 7.1 percent — the highest since 2016, excluding the pandemic years. Ontario’s housing market has taken a downturn, and B.C.’s has slowed. Governments are scrambling to keep pace, announcing plans to restructure the economy, preserve jobs, invest in Canadian businesses, and reduce our exposure to U.S. tariffs and a potential trade war.

The initial economic impact is being felt unevenly. Southern Ontario communities most exposed to tariffs on steel and auto manufacturing are seeing the most sudden job losses. Prairie farmers are feeling the effects of Chinese tariffs on canola. However, in a recent interview conducted by Canadian Water Network (CWN) with municipal finance experts from Hemson Consulting, Craig Binning warned that municipal departments should not underestimate the impact of this sporadic economic downturn on municipal finance in all communities. Development charges (DCs) have dropped to near zero in some communities, assessment revenue will decrease as unemployment mounts and housing foreclosures increase. Renegotiation of the Canada-United States-Mexico Agreement (CUSMA) is on the horizon. With such uncertainty, municipal Councils, especially those facing elections next year, will be putting the breaks on spending.

Impact of federal and provincial policies on municipal finance

Federal and provincial policies will have a direct impact on municipal finance. For instance, on September 5, Prime Minister Carney announced an expansion of the federal ‘Buy Canadian’ procurement policy to include grants and loans provided to provinces and municipalities.

At CWN, we are working with our members and strategic partners to better understand and support the water sector’s response to the new economic reality. Earlier this year, we hosted a series of roundtables to help our water utility leaders navigate tariffs and learn from each other. Anecdotally, we are hearing that tariffs are only contributing 5-6 percent to overall cost escalation in project delivery. In fact, those municipalities offering compensation to suppliers affected by U.S. tariffs report that suppliers often cannot provide direct evidence of tariff-driven cost escalation.

However, as the Canadian Construction Association points out, the impact can be significant if the affected product supplied is a major component of a project. Likewise, as local, provincial, and federal governments adopt Buy Canadian policies, utilities whose sole source of a product is a U.S. supplier are having to work quickly to find new Canadian suppliers.

What lies ahead for municipal finance in 2026?

The bottom line is that 2026 is shaping up to be a challenging year for municipal finance. Many municipalities will be facing less revenue from assessments and DCs, and possibly less funding from senior governments. At the same time, cost escalation remains high despite easing inflation. See CWN’s cost escalation and cost containment brief here.

Strategic questions for the water sector

1. How should utilities proceed with housing-enabling capital works?

A big consideration we are hearing from some water utilities is at what pace should they proceed with housing-enabling capital works where there is a slow down in housing construction. Opinions are divided. Those dependent on DCs who have seen a steep drop in DC revenues may slow down their anticipated capital plan and phase projects with available funding. For those less dependent on DC revenues and with healthy reserves, this may be the best time to proceed with capital works given the relative lull in other construction. On the other hand, some cities are moving full steam ahead with new housing. The newly created Build Canada Homes Agency is providing assistance to select cities to bring affordable units to market even faster. For those moving forward with housing-enabling infrastructure, Hemson Consulting is observing that these municipalities are relying more heavily on debt for their capital projects and extending the payback time.

2. What about labour availability?

A June 2025 report by the Canadian Federation of Independent Business (CFIB) highlights that businesses are struggling to find workers with the right skills and qualifications. Provincial regulatory hurdles, like licensing and certification rules, need to be addressed to allow for greater worker mobility across the country. This situation will only get worse as nation-building projects like mining, shipbuilding, and defence compete for similar talent.

3. What’s the right approach to capital delivery in uncertain times?

Many water utilities have already reduced the size and scope of projects out for tender as a strategy to contain costs and risks associated with multi-year construction. CWN is supporting water utilities in their efforts to reduce costs and deliver projects in a timely way by adopting alternative project delivery strategies that share risk. Utilities find that alternative project delivery is most useful when launching large, complex projects.

4. To what extent can we extend the life of existing assets?

Municipal utilities should reevaluate the right balance between investment in maintenance and state-of-good-repair, which usually is underfunded compared to new capital projects. By building a compelling business case at budget time for a significant increase in proactive maintenance, municipal utilities could delay asset replacement and reap significant savings.

Final thoughts

These are just some of the key questions and strategies we are hearing from water utility leaders and other experts in our network. In this challenging economic and fiscal climate, getting the fundamentals of financial sustainability right is more critical than ever. Challenging traditional planning assumptions, reviewing and refining approvals and procurement processes, and working closely with suppliers, consultants, and construction companies is key to navigating the road ahead.

About the Reflections blog series

Reflections is a monthly blog series authored by CWN’s CEO Nicola Crawhall. This series is designed for decision-makers navigating the complex water-related challenges. It helps leaders stay ahead of change and make informed decisions that shape the future of water in Canada.