Federal Budget 2026

Highlights

• Much to the surprise of fiscal forecasters, federal deficits are anticipated to be broadly in line with those projected in the Spring Economic Update (SEU) starting in the 2027–28 fiscal year (FY28), after improving modestly this year (graph 1). That said, the federal deficit as a share of nominal GDP is expected to deepen in FY27 before shrinking thereafter, calling into question whether the federal government will meet its fiscal anchor of a falling deficit-to-GDP ratio.
• Higher revenues on the back of elevated oil prices and inflation are largely to thank for the better fiscal outlook, improving the total tax take by nearly $120B over the next five year. However, the sustained higher revenue outlook seems out of step with the projection of nominal GDP—the broadest measure of the tax base—suggesting the revenue outlook may prove aspirational.
• New revenue measures were mostly already announced, including $36.1B over five years for the Productivity Mega Deduction and $2.9B this year for the temporary reduction in the federal fuel excise tax. The new Canada Growth Incentive ($0.7B) might be one of the most interesting fresh measures rolled out, as it could encourage entrepreneurship in Canada, reward serial entrepreneurs and also facilitate SME business successions, in addition to further closing fiscal competitiveness gaps to the United States. When combined with smaller revenue measures, tax cuts and deductions tally up to about $42B in lost net revenue over the next five years.
• New spending measures since the SEU are expected to total almost $110B over the next five years starting in FY27. The largest measures include support for Indigenous Peoples’ housing, infrastructure, health and education ($26.6B over five years); supporting Canadian workers and businesses ($11.5B); and putting Canada on a path to end homelessness in 10 years ($11.2B). Offsetting these are modest new savings from government efficiency and money already baked into the fiscal framework, most notably in defence. But that pales in comparison to the more than $60B in lower direct program expenses thanks to higher interest rates reducing future obligations (despite the long-term interest rate forecast being broadly unchanged from the SEU 2026).
• With smaller deficits now and similar-sized deficits in the future, the level of the federal debt (accumulated deficits) is forecast to be lower than in SEU 2026, albeit still reaching nearly $1.6T by FY31. That said, a sustainable debt position today can’t be taken for granted. With little fiscal room left, a continued climb in long-term interest rates, re-escalation in the trade war or some other negative external shock could put the federal debt-to-GDP ratio on an unsustainable path.