Viewpoint: The Canadian Federal Budget — a (deficit-funded) focus on investment

The Canadian Federal Budget — a (deficit-funded) focus on investment

The Canadian economy was facing economic challenges associated with underinvestment and comparatively lacklustre productivity growth before the aggressive shift in U.S. trade policy added to the pressures by constraining exports and related capital investments.

Against this backdrop, the newly elected federal government has decided to try and take steps to support the economy through a broad slate of measures that will result in significantly larger fiscal shortfalls, which will create a larger (and more costly) debt burden as per the sweeping fiscal plan set out in the Federal Budget¹ tabled late on November 4 (clocking in at 493 pages!).

The net impact of lower projected revenues and higher spending is that, despite the better starting point (thanks to a lower deficit for 2024/25 than assumed in the last fiscal update² from the end of 2024, reflecting better-than-assumed revenues), the fiscal outlook shows deficits that are wider by a cumulative C$155 billion through 2029/30 — the previously assumed C$42 billion deficit for the current fiscal year is now projected to be almost twice that at C$78 billion, and fiscal shortfalls are expected to exceed C$50 billion over the forecast horizon. For context, these represent the largest deficits in history in dollar terms³ outside of the pandemic, though, peaking at just 2.5% of nominal gross domestic product, they are fairly trivial compared to the deficits run through the 1970s and 1980s⁴ (as well as relative to the budget gap stateside⁵ of 6% of GDP).

Federal government fiscal balance projections
(billions of Canadian dollars)

Source: Guardian Capital, based on data from the Department of Finance Canada

Note that today’s Budget introduced a new accounting framework⁶ that differentiates between operating and capital spending and instituted “fiscal anchor” to maintain a balanced operating budget, something that is expected to be accomplished by 2028/29 (from its C$33 billion deficit in the current year), thanks to a “comprehensive expenditure review”, for which the government provided a detailed breakdown⁷ of its intentions to curtail program spending (including a reduction in the ranks of the civil service via attrition and other voluntary means) — and factors into the government’s outlook being consistent with its other “fiscal anchor” of maintaining a declining deficit-to-GDP ratio.

On the capital spending side, the Budget proposes nearly C$300 billion worth of new projects over the next five years (much of which has already been announced), of which C$115 billion is focused on infrastructure (including trade & transport and core public infrastructure such as water, wastewater and transit), C$110 billion on “driving productivity and competitiveness” through supporting investments in emerging technologies, innovation and scientific research, C$30 billion for defence to get Canada on track to meet NATO’s 5% Defence Investment Pledge⁸ by 2035, and C$25 billion for homebuilding. Additionally, the government is seeking to further support private sector investment via regulatory reforms, changes to industrial policy and tax competitiveness.

On the topic of tax, while the Budget included no changes to corporate income tax rates, it does introduce measures allowing for immediate expensing for manufacturing and processing machinery & equipment, equipment related to clean energy generation and conservation, patents, data network infrastructure and computers, and capital expenditures for scientific research and experimental development. There is a slew of other tax credits tied to clean energy as well, but while the document does not actually repeal the emissions cap for the oil & gas sector, it does suggest that the door to do so is open.

There are no new changes to income tax rates on the personal side as well nor are there changes to capital gains inclusion rates. The Underused Housing Tax is removed as of the 2025 tax year (this was a 1% federal tax on vacant or “underused” housing that has been in effect since 2022), GST was eliminated for first-time home buyers (previously announced), the luxury tax on aircraft and boats removed, and the Budget seeks to simplify and harmonize qualified investment rules across registered investment plans.

The higher deficits mean more debt, which, in turn, means that the old “fiscal anchor” of maintaining a declining debt-to-GDP ratio has become unmoored. The federal government’s accumulated deficit-to-GDP ratio is expected to climb from last year’s (lower than assumed) 41.2% to 42.4% in this fiscal year, 43.1% next year, before stabilizing at 43.3% and ultimately beginning to eventually drift lower. The cost of carrying this debt is expected to rise to 13% of revenues, more than double pre-pandemic levels, meaning taxpayers are getting less bang for their buck, though it is still materially below the 30% share of the early 1990s.

Federal government debt (accumulated deficit) projections
(percent of gross domestic product)

Source: Guardian Capital, based on data from the Department of Finance Canada

Accordingly, the Debt Management Strategy⁹ points to an increased issuance in the current year to a whopping C$609 billion (roughly equally split between bills and bonds), up from C$526 billion in the last fiscal year — C$471 billion is required to refinance maturing debt and C$138 billion is needed to finance the budget shortfall, C$30 billion to fund purchases of Canada Mortgage Bonds (CMB), and other requirements such as loans to crown corporations. For 2026/27, however, borrowing needs are expected to decline slightly due to a reduction in the deficit and less maturing debt. The total stock of outstanding bonds is expected to rise by C$281 billion to $1.4 trillion by the end of next year.

Federal government projected gross bond & bill issuance
(billions of Canadian dollars)

Source: Guardian Capital, based on data from the Department of Finance Canada

In addition to these bond and bill issues, the government will also increase its issuance of CMB from C$60 billion to C$80 billion starting next year to support its housing investments. All in, that is a lot of debt to be absorbed by markets.

The bottom line is that while the deficits and their costs are far from ideal, they were within the range expected by markets (if anything, there were toward the lower end of the “whispers” ahead of the release) and, as mentioned throughout the Budget document¹⁰, leaves Canada in a somewhat enviable position relative to its G7 peers and does not raise too much concern about the longer-run fiscal sustainability (nor should it trigger unwanted pushback that threatens the government’s minority status or changes in thinking at the Bank of Canada). Hence, there was not too much response to the Budget release in bond or currency markets.

As well, that the deficits are primarily due to (hopefully, productivity-enhancing) capital projects rather than program spending, as was the case in previous iterations of the government, the (substantial amount of) red ink is arguably more palatable and has the potential to create more significant long-term benefits for the Canadian economy — though, it is far from a sure thing.

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David Onyett-Jeffries
David Onyett-Jeffries is Vice President, Economics & Multi Asset Solutions, at Guardian Capital LP (GCLP). He provides macroeconomic guidance to GCLP and its affiliates. Additionally, he is a portfolio manager of GCLP’s multi-asset portfolios and funds and works closely with GCLP’s Directed Outcomes team.

¹ Government of Canada, Canada Strong Budget 2025, November 4, 2025, https://www.budget.canada.ca/2025/report-rapport/pdf/budget-2025.pdf
² Government of Canada, Department of Finance, Canada Publications and Reports, Fiscal Updates, 2024 Fall Economic Statement, Reducing Everyday Costs and Raising Wages, November 5, 2025, https://www.budget.canada.ca/update-miseajour/2024/report-rapport/toc-tdm-en.html
³ Government of Canada, Department of Finance, Canada Publications and Reports, Fiscal Updates, Fiscal Reference Tables December 2024, Fiscal Reference Tables 2024: Part 1 of 9, November 5, 2025, https://www.canada.ca/en/department-finance/services/publications/fiscal-reference-tables/2024/part-1.html
⁴ Government of Canada, Department of Finance, Canada Publications and Reports, Fiscal Updates, Fiscal Reference Tables December 2024, Table 2, Fiscal transactions(per cent of GDP), November 5, 2025, https://www.canada.ca/en/department-finance/services/publications/fiscal-reference-tables/2024/part-1.html#tbl2
⁵ The White House, President’s Budget, Information and Resources, Budget, Historical Tables, November 5, 2025, https://www.whitehouse.gov/omb/information-resources/budget/historical-tables/
⁶ Government of Canada, Department of Finance, Canada Publications and Reports, Budget 2025,Annex 2: Capital budgeting framework, Building Canada’s Productive Capacity, November 5, 2025, https://budget.canada.ca/2025/report-rapport/anx2-en.html#wb-cont
⁷ Government of Canada, Department of Finance, Canada Publications and Reports, Budget 2025, Annex 3: Comprehensive expenditure review: Planned reductions by organisation, November 5, 2025, https://www.budget.canada.ca/2025/report-rapport/anx3-en.html#wb-cont
⁸ North American Treaty Organization, What we do, Defence expenditures and NATO’s 5% commitment, August 27, 2025, https://www.nato.int/cps/en/natohq/topics_49198.htm
⁹ Government of Canada, Department of Finance, Canada Publications and Reports, Budget 2025, Annex 4:Debt management strategy, November 5, 2025, https://www.budget.canada.ca/2025/report-rapport/anx4-en.html#wb-cont
¹⁰ Government of Canada, Department of Finance, Canada Publications and Reports, Budget 2025, 5. Economic Strength Through Fiscal Discipline, November 5, 2025, https://budget.canada.ca/2025/report-rapport/anx2-en.html#wb-cont

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Published: November 5, 2025