But that estimate was issued before U.S. President Donald Trump’s tariffs on Canada and countries across the world, which turned economic forecasts upside down. Ottawa said the effects of the Canada-U.S. trade war and uncertainty over future trade rules have weighed heavily on the Canadian economy, while creating risks to its outlook.
Deficit growth reflects focused fiscal strategy
While the latest deficit comes in well above last year’s estimate, experts say it’s broadly in line with expectations.
The Office of the Parliamentary Budget Officer projected in late September that the deficit for the current fiscal year would increase “sharply” to $68.5 billion. A report that month by TD Securities also said the government’s announced spending commitments would likely drive the 2025-26 deficit above $60 billion amid a shift to a “more expansionary fiscal policy.”
TD senior economist Francis Fong called it a “hard-nosed budget” compared with 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, defence, and housing—rather than a broader range of various initiatives.
“Carney’s still swinging for the fences in terms of trying to fundamentally reorient the Canadian economy,” Fong said in an interview. “That’s an expensive proposition and hence we see the deficit blow out partly as a consequence of that.”
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Federal debt forecasts show range of possible outcomes
The Liberals’ budget pegged 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% over five years.
Tuesday’s budget also includes alternative economic forecasts in both downside and upside scenarios.
In the former, trade uncertainty would persist beyond 2026 amid escalating geopolitical tensions, ambiguous U.S. tariff plans and continued challenges in negotiating trade agreements. That would cause the budgetary balance to deteriorate by an average of approximately $9.2 billion per year, while the federal debt-to-GDP ratio would be expected to rise to 45.3% by 2028-29 before falling to 45.2% by 2029-30.
In the upside scenario, the budgetary balance would improve by an average of approximately $5 billion per year and the federal debt-to-GDP ratio would stabilize in the near-term before falling to 42.2% by 2029-30. That optimistic alternative hinges on trade policy uncertainty easing more quickly than anticipated, including through Canada’s efforts to streamline internal trade, bolster competition, and build relationships with global partners other than the U.S.
Government defends higher deficit amid economic uncertainty
Earlier this week, the federal Conservatives urged the Liberals to cap this year’s deficit at $42 billion. But Finance Minister François-Philippe Champagne said Tuesday the ongoing level of economic uncertainty “is higher than what we have seen and felt for generations.”
“When your largest trading partner fundamentally reshapes all of its trade relationships, there are two responses. You can slash the deficit, hunker down, hope for the best, wait and see if the ‘trickle down’ ever comes,” said Champagne in his remarks in the House of Commons. “That approach, to balance the budget this year, would have to eliminate vital social programs and all the capital investments needed for Canada’s future. We choose 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 defence and security, $115 billion for major infrastructure, and $110 billion to drive productivity and competitiveness over five years.
“Budget 2025 is a plan to catalyze investments from provinces, territories, municipalities, Indigenous communities and the private sector,” said Champagne. “With this plan, in five years, we will see $1 trillion in total investments in this country.”
The Liberals’ 2025 budget makes a key change to the presentation of the annual deficit, as it divides the budget into capital and operating streams. Anything related to creating capital assets is considered capital spending, such as infrastructure and homes. Operational spending is largely made up of government salaries, transfers, and program spending—costs the Liberals have been examining under a spending review.
Capital spending to drive private investment, but questions remain
The federal government said capital investment would account for 58% of this year’s projected deficit, but rise to 100% from 2028-29 onward, when day-to-day operational spending would be brought in line with revenues. “This necessary shift is key to the government realizing 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 driving private investment through boosted capital spending, Fong said it’s unclear if those dollars will indeed follow. He said the budget didn’t adequately address the “fundamental difficulty” that firms in Canada face when it comes to tax and regulatory compliance.
