This year’s federal budget reveals a deficit nearly double what the Liberals projected a year ago, as Prime Minister Mark Carney’s government prioritizes capital investments over operational programs and services. The budget tabled Tuesday estimates a $78.3-billion deficit for the current fiscal year — the amount by which government spending exceeds revenues — with the shortfall declining gradually to $56.6 billion by 2029–30. By contrast, Ottawa’s fall economic statement last year had anticipated a $42.2-billion deficit for this year.
That earlier estimate preceded the imposition of tariffs by U.S. President Donald Trump on Canada and other countries, a development Ottawa says disrupted economic forecasts and elevated uncertainty. The federal government says the trade dispute with the U.S., together with unclear future trade rules, has put pressure on Canada’s economy and added downside risks to its outlook.
Deficit growth reflects focused fiscal strategy
Although the new deficit is substantially larger than last year’s projection, economic analysts say it aligns with expectations given recent policy choices. The Office of the Parliamentary Budget Officer predicted in late September that this fiscal-year deficit would widen sharply to $68.5 billion. TD Securities reached a similar conclusion that government spending commitments would push the 2025–26 deficit above $60 billion amid a shift toward a more expansionary fiscal posture.
TD senior economist Francis Fong described the plan as a “hard-nosed budget” compared with past Liberal budgets under Justin Trudeau. He noted the government is concentrating resources on a limited number of priorities — competitiveness, trade diversification, defence and housing — instead of a broader slate of new programs.
“Carney’s still swinging for the fences in terms of trying to fundamentally reorient the Canadian economy,” Fong said. “That’s an expensive proposition and hence we see the deficit blow out partly as a consequence of that.”
Federal debt forecasts show range of possible outcomes
The budget sets this year’s federal debt-to-GDP ratio at 42.4% and anticipates a deficit-to-GDP ratio of 2.5% this year, falling to about 1.5% over five years. To reflect lingering uncertainty, the plan also presents downside and upside economic scenarios.
Under the downside scenario — driven by prolonged trade uncertainty, heightened geopolitical tensions and unclear U.S. tariff plans — Ottawa projects the budgetary balance would worsen by roughly $9.2 billion per year on average. The federal debt-to-GDP ratio would rise to about 45.3% by 2028–29 before edging lower to roughly 45.2% by 2029–30.
In an upside scenario where trade policy uncertainty eases more quickly, the budgetary balance would improve by about $5 billion per year on average, and the debt-to-GDP ratio would stabilize in the near term and decline to 42.2% by 2029–30. That more optimistic path depends in part on Canada reducing internal trade barriers, boosting competition, and successfully diversifying trade ties beyond the United States.
Government defends higher deficit amid economic uncertainty
Federal Conservatives earlier this week urged the Liberals to cap this year’s deficit near $42 billion. Finance Minister François-Philippe Champagne countered that the level of economic uncertainty confronting Canada is unusually high.
“When your largest trading partner fundamentally reshapes all of its trade relationships, there are two responses,” Champagne told the House of Commons. “You can slash the deficit, hunker down, hope for the best, wait and see if the ‘trickle down’ ever comes. That approach, to balance the budget this year, would have to eliminate vital social programs and all the capital investments needed for Canada’s future. We choose a different path.”
Budget promises $1 trillion in generational investments
Ottawa describes the budget as a plan for “generational” investments, outlining major commitments over five years: $25 billion for housing, $30 billion for defence and security, $115 billion for major infrastructure, and $110 billion aimed at boosting productivity and competitiveness. The government says these measures are intended to catalyze additional public- and private-sector investment across provinces, territories, municipalities and Indigenous communities.
“Budget 2025 is a plan to catalyze investments from provinces, territories, municipalities, Indigenous communities and the private sector,” the finance minister said, arguing that those efforts will help drive up to $1 trillion in total investment within five years.
The budget also changes how the annual deficit is presented by separating capital and operating spending. Capital spending — investments in long-lived assets such as infrastructure and housing — is accounted for separately from operating expenses, which include wages, transfer payments and program spending currently under review.
Capital spending to drive private investment, but questions remain
Ottawa says capital investments will represent about 58% of this year’s projected deficit and will rise to account for the entirety of the deficit from 2028–29 onward, as day-to-day spending is brought closer to revenue levels. The government frames this shift as essential to stimulating $500 billion in additional private-sector investment over five years.
Critics question whether private capital will follow. Francis Fong warned the budget relies on the assumption that once infrastructure and incentives are in place, private firms will respond. “This felt like a ‘build it and they will come’ kind of a budget,” he said, noting the plan does not fully address firms’ ongoing challenges with tax and regulatory compliance — the kinds of structural changes that would make trading and investing in Canada more attractive.
Budget aims to cut $60B, streamline public service
Alongside new investments, the government says a spending review will deliver roughly $13 billion in annual savings by 2028–29, contributing to a broader plan to reduce spending by $60 billion over five years. Those savings are expected to come from restructuring operations, consolidating internal services and “rightsizing” program delivery.
By 2029–30, Ottawa projects capital investments will have grown by 8.4% while direct program spending will decline slightly. The budget also proposes reducing the size of the public service, aiming to align the federal workforce with population growth. The government argues a leaner public service would be more productive and better positioned to deliver priority programs.
Related coverage
- Cryptocurrency exchange Cryptomus fined a record amount by regulatory authorities
- Inflation climbed to 2.4% in September, driven by gasoline and grocery costs
- Stock market updates: corporate expansions and merger talks move markets
- Quarterly earnings and investor news across major Canadian companies