Federal Fiscal Repair Begins: Statement on Federal Budget 2025
Today’s federal budget begins the difficult process of repairing Canada’s finances and economic fundamentals over the medium term. The near term will be bumpy, however. Budget 2025 projects a deficit of $78.3 billion (2.5% of GDP) for 2025/26, nearly double the $42.2 billion (1.3% of GDP) projected in the 2024 Fall Economic Statement. Excluding the pandemic, it is the largest deficit as a share of the economy since the Global Financial Crisis.
The increased deficit is driven by tax cuts (carbon, personal income, digital services), higher defence spending, and slower economic growth. The federal debt-to-GDP ratio will rise to 43.3 per cent by 2027-28. Interest payments on federal government debt are $55.6 billion this fiscal year. Effectively, every dollar of GST revenue the government collects is now needed to pay interest on debt.
Fiscal anchors
The budget abandons previous fiscal anchors – guideposts to discipline overall spending and revenue decisions – namely, to reduce the debt-to-GDP ratio over time and keep future deficits below one per cent of GDP. Its latest anchor will be to balance the “day-to-day operating budget” within three years, supported by a new framework that divides spending between operating and capital purposes. However, we worry the definition of “capital investment” is overly broad and open to accounting chicanery. The government also commits to reducing the overall deficit-to-GDP ratio, albeit after a massive rise this year (from 1.3% to 2.5%). To restore confidence in its fiscal management, it will be critical that the the government sticks to its latest fiscal anchors.
Capital expensing
BCBC recommended in our open letter to incoming federal MPs and pre-budget submission that Canada should introduce generous, broad-based, and permanent accelerated depreciation of capital assets across sectors and asset lives. Accelerated depreciation allows companies to write-off assets faster than an asset’s effective life, which promotes investment. While the government has made the 2018 measures permanent, overall, the measures remain narrow, modest, and mainly benefit short-lived assets. The $1.5 billion budget cost over five years indicates that they are unlikely to materially improve Canada’s ability to attract long-term business investment. While the change is a step in the right direction, we continue to ask for a broader set of measures to make Canada more competitive for investment in long-lived assets.
Oil and gas emissions cap
BCBC had called for a more pragmatic approach to domestic emissions management. Canada’s proposed oil and gas emissions cap would have acted as an implicit production cap to hobble our largest export sector. We welcome the government’s recognition that the cap is unnecessary under its new Climate Competitiveness Strategy.
Spending review
We welcome the Comprehensive Expenditure Review and acknowledgement that the federal public service has ballooned in size and cost far beyond what taxpayers can afford. The $60 billion in planned savings and reduction of roughly 40,000 public service positions over the next five years are important first steps in restoring fiscal discipline and efficient delivery of core government functions.
Transparency and timing
Finally, the government initially announced it would not produce a budget at all this year, for what would have been the second time in six years. We are aware of no other democratic country where the national government is unable or unwilling to table an annual budget. This budget comes seven months into the 2025/26 fiscal year, indicating a woeful lack of fiscal transparency. Looking ahead, the proposed shift to a fall budget cycle is welcome. It should improve alignment with the Main Estimates and overall fiscal transparency – but only if the government sticks to its new timetable consistently.