Canada: Budget 2025

Highlights

• As we anticipated External link., the Government of Canada is projecting its deficit to increase substantially in the 2025–26 fiscal year (FY26), widening to $78.3B from $36.3B last year (graph 1). That’s $36.1B larger than planned in the Fall Economic Statement 2024 (FES 2024). Deficits are expected to be smaller thereafter but to remain substantially larger than projected previously.
• Spending is the primary culprit behind the larger deficits, with program spending topping previous forecasts. Defence is the largest contributor, although increased investment in infrastructure and housing, as well as measures to support tariff-impacted industries, also played a role. This increase came in spite of expected savings from a comprehensive expenditure review which, at $60B over five years, fell short of expectations.
• Revenue measures to boost investment also helped to expand the deficit, but these were a welcome change in direction from the past. However, these too fell short of the ambitious expectations the Government of Canada built up prior to Budget Day. Many of these were previously announced, leaving the Productivity Super‑Deduction ($1.5B) as the latest revenue announcement. Combining tax cuts with the weaker outlook for the economy and labour market has put revenues on a downward trajectory as a share of GDP—a very different path from the FES 2024.
• As a result of larger deficits and a softer outlook for nominal GDP, the federal debt-to-GDP ratio is expected to rise over the next couple of years before stabilizing and then tracking lower. However, lowering debt as a share of economic activity is no longer a fiscal anchor for the Government of Canada. Neither are debt servicing costs, as measured by public debt charges as a share of revenues, which is also expected to rise over the outlook. Instead, reducing deficits as a share of GDP is one of the federal government’s new fiscal anchors, and the budget checks that box. The same is true for the “operating” balance, which is expected to return to surplus within three years, thereby meeting the second of the new fiscal anchors. That said, we anticipate rating agencies will be satisfied that the fiscal forecast was in line with expectations, and that a debt downgrade is unlikely in the near term as Canada continues to have one of the best fiscal positions among advanced economies. Bond yields fell after the budget was published.