Canada Budget Sees Larger Deficits, Slower Growth
Canada’s budget has seen the deficit for 2025-26 revised up to C$78.3bn from C$42.2bn in the December 2024 statement, which will now be 2.5% of GDP versus 1.3%, still a level that is quite small compared to many other developed countries. The deficit is projected to slip after that, reaching C$56.6bn or 1.5% of GDP in 2029-30, though this is still twice as large as expected in December 2024.
The revisions to the deficit come in part from lower revenues as US tariffs hit near term Canadian growth, with GDP now seen rising by 1.2% in 2026 and 1.1% in 2025 versus previous forecasts of 2.1% and 1.9% respectively. This will mark a permanent downgrade of Canada’s potential, with GDP still seen rising by around 2.0% from 2027 through 2029, the downgrades to 2025 and 2026 not being offset by upgrades to latter years.
The increase in the 2025-26 deficit from the December forecast sees $7.1bn coming from in economic and fiscal developments, C$9.0bn coming from policy actions taken before this budget, and C$20.1bn from measures taken in this budget. Increased spending is seen in infrastructure, productivity and competitiveness, defense and housing, partially offset by savings in the civil service, tax collection and foreign aid.
The ruling Liberals are three votes short of a majority and will need some opposition votes, or at least abstentions, to pass the budget. If the budget is rejected that would force an election. The opposition Conservatives are likely to oppose the increases to the deficit while the Bloc Quebecois cannot be counted upon to support the Federal government. The Leftist New Democrats have cooperated with the Liberals in the past but may find cuts to the civil service hard to stomach. Prime Minister Carney may have to find three willing to vote against their party to pass the budget and avoid an election.