Canada’s 2025 budget focuses on capital projects to boost long-term growth – MoneySense

But that estimate was released before U.S. President Donald Trump’s tariffs on Canada and countries around the world, upending economic forecasts. Ottawa said the fallout from the Canada-U.S. trade war and uncertainty over future trade rules have weighed heavily on Canada’s economy while creating risks to its outlook.

Deficit growth reflects a targeted fiscal strategy

Although the latest deficit is well above last year’s estimate, experts say it is broadly in line with expectations.

The Office of the Parliamentary Budget Officer predicted in late September that the deficit for the current budget year would rise “sharply” to $68.5 billion. A TD Securities report that month also said the government’s announced spending commitments were likely to push the 2025-2026 deficit above $60 billion, amid a shift toward a “more expansionary fiscal policy.”

TD senior economist Francis Fong called it a “tough budget” compared to those of previous Liberal governments under former Prime Minister Justin Trudeau. That’s because it focuses on “just a few key areas” for spending – competitiveness, trade diversification, defense and housing – rather than a wider range of different initiatives.

“Carney is still trying to push the boundaries when it comes to fundamentally reorienting the Canadian economy,” Fong said in an interview. “That is an expensive proposition and that is why we see the deficit partly disappearing as a result.”

Federal debt projections show a range of possible outcomes

The Liberals’ budget set this year’s federal debt-to-GDP ratio at 42.4%. Ottawa said it expects a deficit-to-GDP ratio of 2.5%, which would fall to 1.5% in five years.

Tuesday’s budget also includes alternative economic forecasts in both downward and upward scenarios.

In the first case, trade uncertainty would persist beyond 2026, amid escalating geopolitical tensions, ambiguous US tariff plans and ongoing difficulties in negotiating trade deals. That would cause the budget balance to deteriorate by an average of about $9.2 billion per year, while the federal debt-to-GDP ratio is expected to rise to 45.3% in 2028-2029 before falling to 45.2% in 2029-2030.

In the positive scenario, the budget balance would improve by an average of about $5 billion per year and the federal debt ratio would stabilize in the short term before falling to 42.2% in 2029-2030. That optimistic alternative depends on trade policy uncertainty subsiding faster than expected, in part due to Canada’s efforts to streamline internal trade, strengthen competition and build relationships with global partners other than the US.

The government is defending a higher deficit amid economic uncertainty

Earlier this week, federal Conservatives urged the Liberals to limit the budget deficit to $42 billion this year. But Finance Minister François-Philippe Champagne said Tuesday that the persistent level of economic uncertainty “is higher than what we have seen and felt for generations.”

“When your largest trading partner is fundamentally reforming all its trading relationships, there are two responses. You can cut the deficit, hunker down, hope for the best, wait and see if the trickle down ever comes,” Champagne said in his remarks in the House of Commons. “This approach to balancing the budget this year would eliminate critical social programs and any capital investments needed for Canada’s future. We are choosing a different path.”

Budget promises $1 trillion in generational investments

Ottawa is promising generational investments in key projects: $25 billion for housing, $30 billion for defense and security, $115 billion for major infrastructure and $110 billion to boost productivity and competitiveness over five years.

“Budget 2025 is a plan to catalyze investment from provinces, territories, municipalities, Indigenous communities and the private sector,” Champagne said. “With this plan, we will see a total of $1 trillion in investment in this country in five years.”

The Liberals’ 2025 budget makes a significant change to the presentation of the annual deficit as it divides the budget into capital and operating flows. Anything related to the creation of capital goods is considered capital expenditure, such as infrastructure and housing. Operating expenses consist largely of government salaries, transfers and program expenses — costs the Liberals have examined as part of a spending review.

Capital spending to boost private investment, but questions remain

The federal government said capital investment would make up 58% of this year’s projected deficit, but would rise to 100% from 2028-29, when daily operating expenses are brought in line with revenues. “This necessary shift is critical for the government to achieve its target of catalyzing $500 billion in additional private sector investment over the next five years,” the budget said.

While the budget is optimistic about boosting private investment through increased capital spending, Fong says it’s unclear whether those dollars will indeed follow suit. He said the budget does not adequately address the “fundamental difficulty” companies in Canada face when it comes to complying with taxes and regulations.