Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Budget 2024 projects a deficit of $78.3 billion for FY2025-26, significantly larger than expected in the Fall Economic Statement (FES), but roughly in line with expectations. At 2.5% of GDP, the deficit is the largest since 2009, during the Global Financial Crisis, excluding the pandemic. As a result of the larger deficit over the next few years, the debt-to-GDP ratio is no longer expected to ease and is expected to rise to 43.3% of GDP by FY2027-28.
Most of the increase in the deficit is due to higher spending, with approximately 45% of the new spending over the budget projection coming from military spending and another 34% from measures aimed at addressing affordability, notably homebuilding and tax cuts.
The Budget also includes measures to boost productivity through tax incentives that support business investment. However, as we have written in the past, weak business investment is not only the result of a lack of desire to invest. As such, the Budget does not address the issue of how higher investment should be financed and some possible sources for the current weak business investment (see The Lost Decade(s): or how the oil boom masked Canada’s economic mediocrity and Canada’s housing obsession is cannibalizing productivity)
The Budget also states that the government will rely on new fiscal anchors: 1) balance the operating spending with revenues by FY2028-29, and 2) maintain a declining deficit-to-GDP ratio. This means that gone is the aim of a gradual reduction in the debt-to-GDP ratio. With the change in accounting brought about by the introduction of a differentiation between “operating expenses” and “capital expenses,” these new anchors could lead to some creative accounting practices to meet these anchors.
Overall, there were no significant surprises in the 2025 Budget, as most of the major spending announcements had already been previously announced. While some may worry about the size of the deficit and the increase in spending, Canada’s economic challenges require bold initiatives, whether to offset the impact of US tariffs on the economy, improve affordability, or boost productivity. Similarly, whether the government reaches the budgeted spending reductions remains to be seen and is subject to execution risks.
The Budget was advertised as “transformational”, but it is rather “transitional”, pivoting away from some policies of the previous government. It also signals a reorientation of the government’s focus toward improving the supply side of the economy, rather than focusing mostly on supporting the demand side. Whether the Budget will spur business investment remains to be seen.
For Alberta, some aspects of the Budget are likely to attract criticism, especially the fact that the oil and gas emission cap and the Clean Electricity Regulation remain in place. Moreover, the tax incentive primarily benefits the manufacturing sector, while the resource-related industries benefit more marginally.
Canada’s Finance Minister, François-Philippe Champagne, released the first Budget of the Carney government. The main headline numbers in the Budget are as follows:
- The fiscal deficit for FY2025-26 is expected to reach $78.3bn and only declines slightly in the following years to $65.4bn in FY2026-27, $63.5bn in FY2027-28, $57.9bn in FY2028-29, and $56.6bn in FY2029-30.
- The deficit for the current fiscal year is $36.1bn, higher than expected in the Fall and Economic Statement (FES) that was released last Fall and remains at least $30bn bigger than expected last fall over the whole projection period.
- Relative to GDP, the deficit for FY2025-26 is expected at 2.5% of GDP, the most significant deficit, outside of the pandemic, since 2009 during the Global Financial Crisis. With some reduction in fiscal balance and continued economic growth, the deficit is expected to ease gradually, reaching 1.5% of GDP in FY2029-30. Nevertheless, the measure will remain 0.9 and 1.2 percentage points (pp) higher over the projection period compared to the FES.
- As a result of the bigger deficit, the federal government debt is expected to reach 42.4% of GDP in FY2025-26 and to peak at 43.3% of GDP in FY2027-28 and FY2028-29, the highest since the early 2000s, before easing marginally to 43.1% in FY2029-30.
- The lack of reduction in the debt-to-GDP ratio over the projection horizon, compared to an expected decline in the FES, means that the debt-to-GDP ratio is expected to be 4.5 percentage points higher in FY2029-30.
The increase in the deficit primarily stems from higher spending, totalling approximately $141 billion over the projected period, offset somewhat by cost reductions amounting to $51 billion, resulting in a net increase in spending of $90 billion.
As a result of the increase in the debt level, public debt changes are expected to rise to 1.8% of GDP in FY2025-26 and then stabilize at 2.0% of GDP in FY2027-28 and thereafter. Relative to revenues, public debt charges are expected to account for almost 11% of revenues in FY2025-26, but are projected to continue rising, reaching 13% of revenues in FY2029-30. This means that for each dollar of fiscal revenue, 11 cents need to be used to service the public debt, rising to 13 cents. While the gradual increase in the debt-service ratio is concerning and the highest since 2007, it remains lower than in the 1990s when it reached 37% of revenues.
The Budget also relies on new fiscal anchors, which are to: 1) balance the operating spending with revenues by FY2028-29, and 2) maintain a declining deficit-to-GDP ratio. While these look reasonable on the surface, whether they are respected will depend on what is classified as an “operating expense” vs a “capital expense”, which could lead to some creative accounting.
There are five main themes in the Budget:
- Building a stronger Canadian economy. In this section, which includes the creation of the Major Project Office and an increase in infrastructure investments, the elements that catch our attention are the tax incentives to support business investment, with measures to allow businesses to write off the cost of their investments more quickly, with a particular focus on the manufacturing and LNG sectors. As a result, the government estimates that the corporate marginal effective tax rate in Canada will be lower than in the US, other G7 countries, and the average level of the OECD. All the measures total $13.3bn in spending over the next five years.
- Shifting reliance to resilience. A significant portion of the spending in this section is aimed at protecting, retooling, and pivoting industries affected by U.S. tariffs. The rest goes to supporting the growth and diversification of Canada’s exports, mainly through investment spending by creating a Trade Diversification Corridors Fund and an Arctic Infrastructure Fund. All measures total $16.5bn in spending over the next five years.
- Empowering Canadians. The main measures in this section are aimed at affordability, with support for homebuilding through the launch of the Build Canada Home and the removal of the GST for first-time homebuyers, as well as the already-announced tax cuts for the middle class and the cancellation of the carbon tax. All measures total $48.1bn in spending over the next five years.
- Protecting Canada’s sovereignty and security. Most of the increased spending in this section are military spending to reach Canada’s NATO commitments. The total expenses over the next five years are estimated at $62.9 billion.
- Creating a more efficient and effective government. The aim is to reduce the government’s operational costs. This includes a Comprehensive Expenditure Review, as well as a reduction in the Public Service of approximately 40,000 positions. The expected savings over the next five years total $51.2bn.
Overall, approximately 45% of the rise in expenses over the budget period is attributable to the increase in military spending, while 34% is due to improving affordability through homebuilding and tax cuts. Approximately half of these spending increases will be offset by reductions in government spending through efficiency gains and reduced headcount.
What is in the Budget for Alberta?
When taking a more Alberta-centric view of the Budget, certain items are likely to draw attention:
- The Budget reiterates the aim to reach net-zero by 2050 and no changes are made to the Clean Electricity Regulations. The regulation has been a source of criticism by the province and business associations.
- The oil and gas emission cap remains in place, with the government stating that an effective carbon market, enhanced oil and gas methane regulations, and the deployment of technologies such as carbon capture and storage at scale will create circumstances whereby the emission cap will no longer be required. The Government of Alberta and the industry have been firmly opposed to the emission cap, saying it will ultimately become a production cap.
- The various investment tax incentives are also likely to be criticized in Western Canada for allegedly benefiting the manufacturing sector disproportionately and not benefiting other industries, such as those related to natural resources.
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Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.