Carney’s first budget doubles Canada’s deficit in attempt to counter US trade rift

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By Promit Mukherjee, David Ljunggren and Maria Cheng

OTTAWA (Reuters) -Canada’s budget shortfall will more than double this year as Prime Minister Mark Carney pours billions of dollars to fight U.S. tariffs, boost defense spending and diversify trade, his maiden budget proposal showed on Tuesday.

Canada’s economy is experiencing a tectonic shift. A raft of tariffs from U.S. President Donald Trump are crippling the steel, auto and lumber sectors, forcing the government to invest in heavy financial support. At the same time, to appease Trump, Carney has dropped some tax measures and retaliatory tariffs that could have brought a revenue windfall, resulting in a gaping hole between revenues and spending.

The budget is a major test for Carney’s minority government. Budget votes have triggered elections in Canada before and the Liberals’ fate likely hinges on the small left-leaning New Democratic Party, which has just seven legislators, lacks a leader and is short of money. If the party abstains, Carney will survive. The NDP said in a statement members would study the budget carefully and say more in the coming days.

“To weather the storm of uncertainty, we will not lower our sails,” Canada’s Finance Minister François-Philippe Champagne said while presenting his budget to parliament.

“We will raise them – to catch the winds of economic change,” he added.

Champagne said the budget will invest over C$280 billion over the next five years into infrastructure, defense, housing and enhancing productivity and competitiveness, with almost C$40 billion flowing before March 2026.

CHOOSING TO INVEST INSTEAD OF HUNKERING DOWN 

Infrastructure and productivity growth are the two main spending buckets of the budget, attracting C$115 billion and C$110 billion respectively, the budget document showed. 

While the government says that these investments will help unlock private capital of around C$500 billion, it will also bloat the government deficit. 

Its deficit or budgetary shortfall for the year 2025/26 will shoot up to C$78.3 billion from C$36.3 billion last year, up by 116%. However, it is still near the lower end of what economists had expected.

“You can slash the deficit, hunker down, hope for the best, wait and see if the ‘trickle down’ ever comes,” Champagne said, adding that this approach to balancing the budget would lead to no capital spending and sacrificing social programs. 

Instead, the government is choosing to invest more but be responsible, he said.

Champagne said Canada was on the right track and would emerge from the current trade and economic crisis.

“We’re going to be okay. These investments will make sure that Canada will prosper in this very different world economy,” he said.

Economists said the main aim of the budget was primarily two-fold: to be pro-growth and still be fiscally prudent.

“It is hard to call the budget prudent. It is only prudent because everybody’s worst case was a massively high deficit,” said Robert Kavcic, senior economist at BMO Capital Markets.

He said even if the investments lead to growth in the future, Canada will still be stuck with a massive structural fiscal deficit for several years.

LOOKING FOR SAVINGS UNDER REVIEW PROGRAM 

Champagne proposed two main fiscal anchors for the government: to balance the operating budget by 2028/29 and maintain a declining deficit to GDP ratio.

Its deficit to GDP is expected to be at 2.5% for the year ending March 2026, up from 1.2% last year, but tapers down to 1.5% in the next five years, the document showed.

The government plans to bring in up to C$60 billion of savings under its comprehensive review program started in July in a bid to shrink its public service sector. The government will also improve tax collection and cut foreign aid, the budget said.

The government plans to cut 16,000 people from its workforce this year and a total of 40,000 by 2028/29, the budget said.

“It would appear on first review that there are measures in this budget that we welcome and indeed have advocated for,” NDP interim leader Don Davies said.

However, he criticized the government’s move to cut the federal workforce.

Carney had previously promised “generational investments” to spur growth and pay for defense and housing, but had also said that there would be difficult choices and sacrifices to make.

However, economists said that the government played it safe with the budget and avoided harsh measures besides a roughly 10% cut in the federal workforce over the next five years. 

The budget projected GDP growth of 1.1% in 2025/26 and an average growth of 1.6% till 2028/29.

“This is not a generational budget but it is a good start,” said Robert Asselin, an economist.

“They are achieving the right signal between investment and fiscal discipline, but we need more budgets to be assured they are on the right path,” he said.

(Reporting by Promit Mukherjee; Editing by Caroline Stauffer and Deepa Babington)