Economists question whether Canada's fiscal path remains sustainable
Canada’s budget deficit will more than double this year as prime minister Mark Carney unveils $280 billion in spending over five years to counter US tariffs, boost defence, and diversify trade, according to his first budget tabled Tuesday.
The deficit for 2025–26 will reach $78.3 billion, up 116% from $36.3 billion last year, Reuters reported. Finance minister François-Philippe Champagne presented the budget to Parliament, describing it as a response to an era of “significant change” not seen since the fall of the Berlin Wall.
“To weather the storm of uncertainty, we will not lower our sails,” Champagne said during his budget speech. “We will raise them – to catch the winds of economic change.”
Defence and infrastructure lead spending surge
The spending plan represents a major test for Carney’s minority government. The budget’s fate likely rests with the New Democratic Party, which holds seven seats. NDP interim leader Don Davies said members would study the budget carefully before deciding their position.
The budget allocates $115 billion to infrastructure and $110 billion to productivity growth over the next five years. Defence spending will receive $81.8 billion – the largest military funding commitment in decades – as Canada works toward meeting NATO’s 2% GDP target this year and 5% by 2035.
Response to tariffs and economic pressure
Canada’s economy faces significant pressure from US president Donald Trump’s tariffs, which include a blanket 35% levy on Canadian goods not covered by free trade agreements, along with sector-specific tariffs on steel, aluminum, lumber, and automobiles.
To mitigate the impact, the budget sets aside $5 billion over five years to support affected sectors, including $1 billion for the steel industry transition.
To fund the increases, the government plans $60 billion in savings through a comprehensive review program, BBC reported. The budget projects cutting 16,000 public service positions this year and 40,000 total by 2028–29 – roughly 10% of the federal workforce.
Economists raise fiscal concerns
Critics question the fiscal prudence of the approach. “It is hard to call the budget prudent,” Robert Kavcic, senior economist at BMO Capital Markets, told Reuters. “It is only prudent because everybody’s worst case was a massively high deficit.”
The Fraser Institute criticized the plan more sharply in a Nov. 4 analysis. “When you pull back the curtain, all the rhetoric and accounting changes are just a way to obscure the fact the Carney government will spend more, run larger deficits and accumulate more debt than was previously planned by the Trudeau government,” analysts Jake Fuss and Grady Munro wrote.
The institute noted that from 2025–26 to 2028–29, the Carney government plans deficits totalling $265.1 billion – more than double the $131.4 billion the previous Trudeau government had projected for those years.
Outlook
The government aims to balance its operating budget by 2028–29 while maintaining a declining deficit-to-GDP ratio, Reuters reported. The ratio is expected to reach 2.5% for the year ending March 2026, up from 1.2% last year, before dropping to 1.5% within five years.
The budget projects GDP growth of 1.1% in 2025–26 and an average of 1.6% through 2028–29.
“This is not a generational budget, but it is a good start,” economist Robert Asselin told Reuters. “They are achieving the right signal between investment and fiscal discipline, but we need more budgets to be assured they are on the right path.”
