Over the past year, the federal government has shifted its focus toward strengthening business investment after a decade of weak growth. Reforms to project assessments and a more welcoming approach to energy development are all steps in the right direction. Budget 2026 builds on that progress, most notably through the Productivity Mega Deduction and new support for entrepreneurs. While the Budget takes important steps to improve Canada’s competitiveness, Ottawa’s fiscal position continues to be a concern.
A windfall, but no fiscal anchor
The federal government still lacks a clear fiscal anchor to guide its spending and tax decisions. The 2026/27 budget deficit is projected at $62.3 billion, or 1.8 per cent of GDP. That is slightly below the $65.3 billion forecast in April, but $23 billion more than last year's deficit.
Ottawa’s fiscal outlook looks a lot better than it did in April, but projected deficits remain high. Stronger nominal growth, higher oil prices, and other changes to the government's forecasts have given Ottawa about $158 billion more room over the next five years. However, almost all of it, about $152 billion, will go toward new spending and tax measures rather than reducing deficits.
Interest costs are climbing
Interest payments are the fastest-growing major expense in the budget and are projected to rise 42 per cent over five years. This year, Ottawa will spend about $60 billion on interest payments, or around 11 cents of every dollar in revenue. That is more than it transfers to provinces for health care and more than what it raises in GST. By 2030/31, interest costs are expected to reach $85 billion, taking up around 14 cents of every dollar in revenue.
"We welcome the government's efforts to encourage business investment through a more competitive tax system," said Jairo Yunis, BCBC's Director of Policy. "But Ottawa also needs a credible plan to manage its own finances. With borrowing costs rising, the government should be reducing deficits and leaving itself more room to respond to future economic shocks."
Productivity Mega Deduction
The Productivity Mega Deduction allows businesses to deduct the full cost of eligible investments in machinery, equipment and technology right away, rather than over several years. This measure will now be permanent for about two-thirds of business capital assets.
At a cost of $36 billion over five years, it is a meaningful reform. It is broad, permanent and largely balanced across sectors, exactly the kind of approach BCBC has long called for. After a decade of weak business investment, it gives companies a stronger incentive to invest and expand in Canada.
"Business investment is how workers become more productive, which in turn supports higher wages," said Yunis. "Allowing companies to write off new machinery, equipment and technology right away is one of the most important pro-growth tax changes Ottawa has made in years."
Additional commentary
Budget 2025 dropped the government's previous commitment to a declining debt-to-GDP ratio. Its new target is to balance the "day-to-day operating budget." However, this target is misleading because Ottawa's definition of capital investment includes tax credits, production subsidies, and transfers to other governments which would normally fall under operating spending.
Ottawa should set a clear timeline to balance the budget, use standard public sector accounting rules to define capital investment, be transparent about how it categorizes spending and slow the growth of program spending.
Over the next five years, Ottawa will need about $765 billion in new borrowing, more than two and a half times its projected deficits of $289 billion. This is because the government also needs to borrow money for initiatives such as the Canada Strong Fund, loans to Crown corporations, and military equipment purchases which are not fully reflected in the reported deficits.
The public service is down about 36,000 positions, or nearly 10 per cent, from its 2023/2024 peak. But Budget 2026 adds little in new savings, and about $1.8 billion a year in promised savings has yet to be identified. With departmental spending continuing to rise, Ottawa should be more ambitious in reviewing programs to ensure value for money.