Federal Budget
November 04, 2025 | 17:24
One Big Belated Budget
Economics
Economics
Economics
Economics
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Overview: Short of TransformationalThe highly anticipated 2025 budget lands in the middle of a trade dispute, and at a time when the economy is struggling to grow. Against that backdrop, the newly elected federal government has tabled a budget full of spending, tax relief, a push for private-sector investment, more efficient government operations, and significantly deeper deficits. Broadly, this is an economically favourable pivot from the deficit budgets run by the prior government, but also comes with what looks like a substantial structural deficit down the road. We’ll stop short of calling it transformational; and we’ll also stop short of pulling the fiscal alarm. The FY25/26 budget deficit is estimated at $78.3 billion (2.5% of GDP), about in-line with what was expected, before narrowing somewhat to $65.4 billion (2.0% of GDP) for FY26/27. There is no path back to balance in the forecast from these levels, and deficits persist above $50 billion by FY29/30, or around 1.5% of GDP, even when the economy returns to sturdy potential growth. Net new stimulus runs at roughly $20 billion (or about 0.6% of GDP) for FY25/26 and $22 billion for FY26/27, including the many policy measures already announced in recent months (e.g., personal income tax reduction and increased defence spending). Relative to what was already announced ahead of Budget Day, we judge that there’s roughly $4 billion (0.1% of GDP) in incremental new announcements for FY25/26 and somewhat more for FY26/27. The important takeaway here is that there is indeed a large wave of stimulus hitting the economy, but we already knew about the vast majority of it, and therefore won’t be scrambling to sharply revise up our growth forecast in the wake of this budget. |
Looking out over the five-year projection horizon, there is almost $90 billion of net new stimulus including recently-made announcements. Of that total, roughly $36 billion is in the form of tax relief; $63 billion is in defence; $13 billion is in direct infrastructure; $28 billion is in other government spending; all of which is offset by $51 billion in government efficiency savings. Additionally, Ottawa is banking on an acceleration in private-sector investment with the aid of fast-tracked approvals across a range of projects/industries—that’s certainly encouraging, but success there will depend highly on execution. Steep fiscal tollThe budget deficit is estimated at $78 billion in FY25/26 (2.5% of GDP), a sharp increase from $36 billion now expected for FY24/25 (public accounts still pending). That’s also a sharp deterioration from the $42 billion expected in the 2024 Fall Economic Statement, which was the last official projection from Ottawa. The economy has performed relatively well since that point, leaving the vast majority of the shift on the back of some tax relief and much larger spending. |
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For FY26/27, the budget deficit is estimated at $65 billion (2.0% of GDP). Revenues are projected to rise a solid 3.2% to $523 billion in FY26/27, led by broad gains in tax receipts, following a dip in the current fiscal year. Meantime, program spending is projected to rise a tame 0.6% after surging 7.2% in FY25/26, reflecting the many government priorities. That said, a detailed department-level efficiency effort is commendable after years of outsized growth in government operations and, if hit, the savings will be enough to offset much of the increase in defence spending. The debt-to-GDP ratio will rise to 43.1% in the coming fiscal year, from 42.4% in FY25/26, before holding above 43% through FY28/29. |
A new wrinkle is Ottawa’s presentation of separate operating and capital budgets. Note that the long-standing accounting remains in place and will be the focus for markets, so this is largely a cosmetic exercise. The operating deficit is pegged at $33 billion in FY25/26, $9 billion in FY26/27, and will be balanced by FY28/29. Two quick notes on this aspect of the budget: First, this appears to be the basis for fiscal targets, along with a declining deficit-to-GDP ratio. Also, it’s unclear how wide the net of ‘investment’ has been cast, but the sense is that a number of expenditures have been labeled as such to get pushed into the capital spending category, allowing operating targets to be achieved. The PBO has also noted as such, and it reinforces that this is mostly cosmetics. |
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Reasonable Economic Assumptions |
The budget projections are based on the private-sector consensus, but it’s a somewhat precarious one given the current unsettled state of tariffs and trade negotiations. Suffice it to say there is risk to this outlook, in both directions. The budget is based on real GDP growth of 1.1% this year (BMO Economics is at 1.2%), and 1.2% next year (1.4%). This marks a below-potential run rate into 2026 before past rate cuts and (presumably) some certainty on the trade front lend a hand. Ottawa expects nominal growth at 3.5% this year and 3.0% 2026 (we’re at 3.5% for both years). Medium term real GDP growth runs around the 2.0% mark, although potential growth could be challenged by slower population growth and ongoing productivity challenges—we’ll see if the latter can pick up the slack. |
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Meantime, interest rates now sit very close to what we would deem neutral, and the assumptions underlying this budget don’t diverge much from our current outlook. The 10-year yield is pegged at 3.3% this year, while the Bank of Canada is presumed to be on hold at current levels for the foreseeable future, with 3-month yields averaging around 2.5% going forward. Debt Management StrategyOttawa’s borrowing requirements will take a step down in FY26/27. Gross bond issuance is expected to dip to $298 billion, down $18 billion from the current year. After accounting for maturities, that pegs net issuance at $151 billion. As previously announced, treasury bill issuance will run strong at $291 billion in FY26/27, down slightly from $293 billion in the current fiscal year. Government will continue to focus on 3-, 6- and 12-month bills. For bonds, most of the issuance will remain concentrated at the shorter end, with $110 billion expected for the 2-year, $80 billion for the 5- and 10-year, and $24 billion for the 30-year. Aside from the steady 30-year, issuance levels are down slightly across the board in FY26/27. Benchmark sizes are mostly unchanged, with only the 30-year rising modestly. Ottawa will also keep the Green Bond program at $4 billion annually. And, the Canada Mortgage Bond annual issuance limit will be lifted from $60 billion to $80 billion, starting in 2026, with the increase tied to multi-unit housing. The current pace of government CMB purchases will be maintained at $30 billion annually. Ottawa also notes that it will increase the maximum amount that can be borrowed from $2.1 trillion to $2.5 trillion. Summary and Market ImpactThis is a big budget that opens up very large federal deficits for Canada, and leaves a meaningful structural deficit down the road. However, market expectations have already anticipated these shortfalls, and it could have been worse. Talk on the Street had been as high as into the $90 billion-to-$100 billion range for the budget deficit (although we estimated $75 billion). At the same time, the policy underlying these deficits is more palatable than those of the past decade. That is, they are built less on social spending and bigger government, and more on pro-growth measures while squeezing out some government efficiency. For a country starving for productivity growth, tax relief and a major infrastructure push are hard to dislike, although execution on the latter will matter a lot. The bond market impact should be muted given pre-budget expectations, with perhaps some relief that the numbers weren't worse. Bond issuance will be slightly lower in FY26/27, and not out of line with expectations. Most immediately, the stimulus announced in this budget will now get incorporated into the Bank of Canada’s near-term outlook in the January MPR. However, that’s probably already reflected in market pricing, and the vast majority of the dollars in this budget have already been known. |
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As such, the Canadian dollar likely doesn’t move a lot on this. Canada’s relative fiscal advantage has shrunk somewhat, but remains in place. And, strong execution on the investment side could actually help longer-term productivity growth. For the time being, near-term inflation trends and the evolution of the trade dispute will matter more for both yields and the loonie. The equity market will zero in on the push to drive private-sector investment. Many industries will benefit from accelerated CCA rates, and we’ll see government push in areas like critical minerals and nuclear. The climate plan also opens the door to eliminating the oil & gas emissions cap alongside development of carbon capture. |
Appendix: Highlights of Major MeasuresMeasures in this budget come with a $20 billion price tag for FY25/26, although the vast majority had been announced before Budget Day. The total cost remains around that range in the following couple of years and roughly $15 billion in the out years. Here's a rundown of the notable measures: A focus on accelerating large-scale private-sector capital investment through the Building Canada Act, which will seek to fast-track major infrastructure projects and speed up the approval process. In addition to the original list of projects recently published, focus areas will be in critical minerals, Atlantic wind energy, carbon capture (Pathways), Port of Churchill and high-speed rail in the Toronto-Quebec City corridor. Affordability measures top $33 billion in the next five years and include the previously announced Middle Class Tax Cut and automatic tax filing for low-income Canadians. The tax cut came into force on July 1, 2025 and lowered the marginal rate by 1 ppt to 14% for the lowest income tax bracket. Looking ahead, other cost-of-living measures include a review of fees for some banking services such as Interac e-Transfers and ATMs. The budget also proposes to raise the amount immediately available from cheque deposits by $50 to $150. $1.5 billion over five years in a Productivity Super-Deduction, including: reinstating accelerated capital cost allowances for low-carbon LNG facilities and the Accelerated Investment Incentive; and, immediate expensing for manufacturing and processing buildings that are used before 2030. The government says this super-deduction will reduce Canada’s marginal effective tax rate by more than two percentage points. Most direct support for tariff-impacted workers and businesses has already been announced and totals $12 billion over five years. There are specific programs for agriculture, forestry, and steel industries, as well as enhanced EI benefits and skills training. Efforts to improve trade diversification will aim to double non-U.S. exports over ten years. Measures to boost the housing supply top $13 billion over the five-year period, including the previously announced Build Canada Homes and support for apprenticeship training for homebuilders. The government has already proposed removing the GST for first-time buyers of homes up to $1 million and reducing the GST for first-time homebuyers between $1 million to $1.5 million. More than $50 billion in government savings are booked over the horizon, including $44 billion from the review of operational department spending. The government also plans to cut the size of the public service by about 10% from the FY23/34 peak by FY28/29. Just over $1 billion over five years will be recovered on net through tax changes, including some offset from removing the Underused Housing Tax and the luxury tax on aircraft and vessels. A new 2026-2028 Immigration Levels Plan targets 380k permanent residents per year, down from 395k in 2025. Temporary resident targets will be cut from 674k this year to 385k in 2026 and 370k in the following two years. There are additional initiatives to recognize some work permit holders and Protected Persons as permanent residents in the next two years. The budget establishes a Foreign Credential Recognition Action Fund (starting in FY26/27) and an International Talent Attraction Strategy and Action Plan to attract skilled workers over the coming years. General infrastructure investments average roughly $2.5 billion per year in net new spending starting in FY26/27. The money will flow through the new Build Communities Strong Fund with a portion allocated to provincial and territorial governments (including a stream specifically for health care infrastructure). A total of over $60 billion over five years in defence spending: most of the funds ($56 billion) are going to the Armed Forces including “generational” pay increases and support for health care, and investments in physical and digital infrastructure. The government is also creating a new Defence Investment Agency to streamline procurement. The budget reaffirms prior commitments for additional spending in federal law enforcement and border security, addressing a key ask by the White House in ongoing tariff negotiations. A Climate Competitiveness Strategy costing a total of $0.6 bln over five years, largely supporting critical minerals projects and expanding eligibility for the Critical Mineral Exploration Tax Credit. There are also some tweaks to the industrial carbon tax system, including a commitment to develop a plan post-2030 to achieve net-zero by 2050. While the budget doesn’t explicitly repeal the oil and gas emissions cap, it does open the door to do so given other emission-reducing initiatives. There are some measures aimed at increasing competition in the telecom and financial sectors, the latter sporting a modest price tag of $17 million over five years and including:
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