A view of Centre Block on Parliament Hill in Ottawa, the seat of Canada’s government, in a file photo. (Matthew Little/The Epoch Times)
The federal government’s spending plans could result in the country hitting an average yearly deficit of $78 billion over the next four years, adding approximately $350 billion to Canada’s debt in what a new report calls a potential “deteriorating fiscal outlook.”
The country’s deficit will hit over $92 billion in 2025–26 because of the Liberal government’s recent pledge to boost military spending to hit the NATO target of 2 percent of GDP by the end of the fiscal year, the C.D. Howe Institute said in a July 3 report.
The Liberal government’s costed platform released during the last election forecasted that Ottawa would run average annual deficits of $56.2 billion over the course of four years from 2025–26 to 2028–29, adding a total of nearly $225 billion to Canada’s federal debt.
The government did not release a budget or economic plan this spring, instead promising to release a budget when Parliament resumes in the fall. However, Parliamentary Budget Officer Yves Giroux recently projected this year’s federal deficit could fall between $60 billion and $70 billion.
The C.D. Howe Institute’s potential fiscal outlook for Canada calculated the deficit by taking the Liberals’ costed platform, updating the economic assumptions using the more “optimistic” of the two scenarios outlined in the Bank of Canada’s April 2025 Monetary Policy Report (MPR), and factoring in likely policy changes and new spending items from the government.
The Bank of Canada’s MRP outlined two hypothetical scenarios. The first assumes that most tariffs imposed by the United States are “negotiated away,” except for tariffs on Canadian steel and aluminum assumed to be 25 percent, among a limited number of new tariffs. The second, more pessimistic scenario assumes that the limited tariffs in the first scenario persist and that the United States imposes 25 percent tariffs on Canadian motor vehicles and auto parts and 12 percent tariffs on other Canadian goods.
In actuality, the United States currently has 25 percent tariffs on goods not covered under the United States-Mexico-Canada Trade agreement, 25 percent tariffs on vehicles and parts, 50 percent tariffs on steel and aluminum, and 10 percent tariffs on energy and potash.
C.D. Howe said the end result of their calculations was a “marked deterioration” of Canada’s fiscal situation that is far removed from the government’s April 2024 budget projection of a $20 billion deficit by 2028–29. It portrayed its prediction of an average $78 billion annual deficit as an “optimistic scenario” that assumes fines and savings expected by the government are realized in full.
The report also noted that with NATO’s new pledge, declared in June, for countries to spend 5 percent of GDP on defence by 2035, Canada’s deficit could be $17.8 billion higher in four years, and by 2035, new defence commitments alone could add $68.4 billion to the deficit, the report said.
Prime Minister Mark Carney has said reaching this new 5 percent target is achievable because Ottawa is already investing in areas that fall under the 1.5 percent defence-adjacent category, related to items like critical infrastructure, civil preparedness, cyber defence, and bolstering of the defence industrial base. The other 3.5 percent of the pledge is related to core defence spending.
The report also criticized the government for splitting spending into the two categories of operating and capital, and only targeting a balanced budget for operating expenses. “The rationale for introducing a capital budget is unclear,” the report said, adding this would be a “serious blow to transparency and accountability.”
During the election, Carney said he would separate the federal government’s operating and capital budgets and make changes to each, allowing Ottawa to run a “small deficit on capital spending that aligns with our fiscal capacity” and balance the operational budget within three years. The Conservatives have accused the Liberals of trying to use an accounting “trick” to hide Canada’s fiscal situation.
C.D. Howe said the Canadian government needs to address the fiscal forecast by dropping more costly platform initiatives from the next budget or funding them through deeper savings from existing programs, such as the proposal to allocate over $10 billion to various infrastructure transfer funds, as well as over $3.1 billion in total for 64 small-scale platform measures each costing under $200 million.
The report also said the government should consider increasing the GST rate to raise additional revenue, because this would be the “least damaging option” for increasing taxes. It also suggested cutting federal transfers to the provinces and territories to fund programs that are not under federal jurisdiction, saying that while this would not be a popular decision, it would allow for a “healthier” country with more self-sufficient regional governments.
Matthew Horwood is a reporter based in Ottawa.