Canada Braces for Larger Deficit as Carney Prioritizes Investment
Prime Minister Mark Carney is expected to significantly increase Canada’s budget deficit as the government ramps up spending on military and infrastructure projects. Economists surveyed by Bloomberg predict a C$70 billion ($50.6 billion) deficit for the current fiscal year – over 2% of GDP and 66% higher than the government’s December forecast.
Carney confirmed plans for a “substantial” deficit,exceeding last year’s C$48 billion shortfall,citing the negative economic impact of the ongoing U.S. trade war, which has reduced revenues and necessitated support for industry and workers. He maintains the increased spending will ”build a much stronger Canada moving forward.”
While debt levels remain manageable compared to other G7 nations, 11 of 12 economists surveyed anticipate a rise in Canada’s federal net debt as a percentage of GDP over the next two years. This comes after Carney outlined billions in new expenditures following his recent election victory, focusing on defense, affordable housing, and mitigating the effects of U.S. tariffs.
The upcoming October budget, jointly presented by Carney and Finance Minister Francois-Philippe Champagne, is framed as a balance of “austerity and investment.” The government is simultaneously pursuing cost-cutting measures, including a Cabinet directive to find 15% savings and reforms to federal procurement processes.Concerns over public sector bloat – reaching a record high in 2024 – are being addressed through attrition, though some agencies anticipate job cuts.
A key element of the budget will be a separation of operating expenses and capital investments. Economists are divided on the impact of this change, with four predicting negative consequences for clarity, five anticipating no impact, and three viewing it positively. Critics, like Stuart Paul of Bloomberg Economics, argue the move is “just marketing,” as “investment” items still represent expenditures requiring financing and could obscure the true size of the fiscal shortfall. Carney insists on full transparency regarding investment classifications.