Prime Minister and Liberal Leader Mark Carney speaks at a press conference at the Port of Montreal in Montreal on March 28, 2025. Photo by ANDREJ IVANOV/AFP via Getty Images
Ottawa is embarking on a cost-cutting exercise amid ramped-up defence spending and mounting debt, and the talk of the town is which sectors could potentially be trimmed down.
The Liberals won the election on a pledge to rebuild the armed forces while at the same time not cutting social programs, and they are now trying to find efficiencies along those lines.
Finance Minister François-Philippe Champagne recently sent letters to cabinet members requesting they put forth “ambitious savings proposals” that would lead to operational spending falling by 7.5 percent for the 2026–27 fiscal year. That would be followed by 10 percent cuts in the following year and 15 percent in 2028–29.
Jack Mintz, president’s fellow of the School of Public Policy at the University of Calgary, says Ottawa will likely need to make cuts to the civil service, which has “grown by an extraordinarily large amount” in the last decade. He said letting go of government employees will result in pushback, while cutting contractors and consultants would be easier to do.
“It will be challenging to decide [where to cut],” says Mintz, noting that failure to act will mean adding significantly to Canada’s debt.
“We also have to remember that there are a lot of promises that [Prime Minister Mark] Carney has already made on some other factors that involve spending, besides national defence, and so there’s potential for pretty significant deficits, I think, over the next several years. Luckily Canada’s still got some fiscal room, but we keep using it up year by year.”
Between 2007 and 2024, the federal public service increased by 32 percent, with the number of full-time federal public servants growing from 335,000 to 441,000.
Former Parliamentary Budget Officer (PBO) Kevin Page said he is supportive of Ottawa cutting spending through analyzing direct program spending as well as grants and contributions. He said beginning this process early also sends the “right signal” to financial markets and bond-rating agencies that may be concerned about Canada’s debt levels.
After the Liberals were re-elected in April, the Fitch credit rating agency expressed concerns about the new government’s fiscal plan and warned that increased structural deficits would put pressure on Canada’s credit profile.
Government Spending
During the last federal election, the Carney Liberals promised to rein in government spending and cap the size of the federal government. The Liberals said they would review government spending to emphasize outcomes per dollar spent while also using artificial intelligence to make government more efficient.
Carney also pledged to separate the federal government’s spending into operating and capital budgets and to balance the operational budget within three years. The Liberals have said this would create a “more transparent categorization” of expenses, while the Conservatives have called it “budget trickery” to hide new spending.
The Liberals promised in their platform to spend $129 billion from 2025–26 to 2028–29, including new housing initiatives valued at $11.8 billion, lowering the tax rate at a cost of $22 billion, and getting rid of the capital gains tax expansion at the cost of $12.5 billion over the four years.
But that was before Carney announced Ottawa would spend an additional $9.3 billion on Canada’s military to meet the current NATO commitment of spending 2 percent of GDP on defence this fiscal year. NATO allies agreed in late June to aim to reach 5 percent of GDP by 2035.
While the government has not released a budget this year, a recent report by C.D. Howe said Canada could hit an average yearly deficit of $78 billion over the next four years, adding nearly $225 billion to Canada’s federal debt. Current Parliamentary Budget Officer Yves Giroux recently estimated that this year’s federal deficit could reach between $60 billion and $70 billion.
The Fall Economic Statement of late 2024, the most recent official estimate, projected a deficit of $42.2 billion for fiscal 2025–26.
It is very early in the cost-cutting process, but some ministers said last week that social programs are not in jeopardy.
Defence Minister David McGuinty said he hasn’t been part of any discussions about “significant social services cuts.” Foreign Affairs Minister Anita Anand identified the Canada Child Benefit, national child care, and Old Age Security as the “cornerstones” of Liberal policies.
The prime minister himself has said there will be no cuts in transfers to the provinces for programs related to health care and social services, and that pensions, Old Age Security, and newer programs like child care and pharmacare will also not be touched.
Along with the cost-cutting exercise, the government launched in parallel a review of federal regulations, with departments and agencies expected to report back to Treasury Board President Shafqat Ali within 60 days with proposals to eliminate outdated regulations and eliminate duplication with provincial rules.
“I am well aware of the stress that is involved in undertaking these types of reviews,” Anand said. “At the same time, it is necessary for us to find those instances where red tape can be cut and where inefficiencies need to be addressed.”
Potential Solutions
Former PBO Page said the nature and size of the government’s spending review is “unprecedented in modern times,” as the public service has previously conducted smaller reallocative exercises in the last few decades. Page said that with Canada’s recent NATO commitments and fiscal anchors, the federal government must review grants and contributions to entities like businesses and non-profits in order to “have the scale required” to meet them.
While Page said that these reviews will be “difficult” and that public servants, stakeholders, and citizens will be opposed to job losses and the cutting of subsidies, “a large reallocative effort is essential.”
Mintz, also a senior fellow of the C.D. Howe Institute, said this is a time to improve productivity in the government by not introducing any new government programs and by making some cuts to existing ones and letting private sector employees go.
“There’s been so many commitments to new social programs over the past number of years,” he said. “With some of them, I think we have to be asking some serious questions about their value, particularly $10-a-day child care. I’ve never been convinced it was a good use of money.”
While Canada’s population grew by 17.3 percent from 2010 to 2023, the number of public servants rose by 26 percent. A past analysis by Mintz said that if the growth of Canada’s government employees had matched its population growth in the last decade, Canadian taxpayers would have saved $10 billion annually.
According to Mintz, Ottawa will likely look at inefficiencies in government and cut smaller programs such as heritage grants. But he said that with “big ticket” items like health care, the government may be limited to merely being able to reduce the speed of its growth as opposed to making larger cuts.
Mintz said the government will be unlikely to make cuts to social programs that people rely on, such as health care and pensions. “Those will likely be off the table,” he said, adding that if those programs were cut, Carney would risk having the other parties in the House of Commons “ganging up on them” with a non-confidence vote.
During the last election, the Conservatives had a different proposal for cutting federal spending, with a plan stating that for every new dollar spent on administrative costs, two dollars must be cut elsewhere. They also planned to reduce the number of government employees through attrition by not refilling “lower priority” positions when workers retire, and cutting consultants to save $10 billion per year.
The Public Service Alliance of Canada has raised concerns over the Liberal government’s plans to reduce federal spending, saying in a July 8 statement that those plans look like “austerity” and will harm Canadians relying on public services. The union has called on Ottawa to instead get rid of consulting contracts and stop the return-to-office mandate.
Carney has said that his government aims to “spend less and invest more,” adding that he wants to improve government efficiency and “catalyze more private capital so we can build the strongest economy in the G7.”
Matthew Horwood is a reporter based in Ottawa.