Deficit soars to $78.3 billion as Carney budget bets big on 'investment' spending while slashing public service

In a dramatic twist, the Liberals also moved one step closer to ensuring the budget would pass. Shortly after it was presented, an MP broke ranks with the Pierre Poilievre-led Conservatives to join the Liberals Tuesday evening.

Even so, whether the budget wins Commons approval will only become clear in the coming days as Carney’s minority government stakes its survival on a document that books more than $141 billion in new federal spending over the next five years, a plan Finance Minister Francois-Philippe Champagne described as an ambitious once-in-a-generation “investment” budget. The word “austerity” never appears.

The Conservatives, Bloc Québécois and the lone Green MP vowed immediately to vote against it unless the budget is substantially amended. But shortly after it was introduced, the Star confirmed that Nova Scotia Conservative MP Chris d’Entremont quit his caucus to sit with the Liberals, bringing the government party’s seat count in the House to 170. 

That means the Liberals only need two more votes to pass the budget and avoid a second federal election in less than a year. By Tuesday night, the NDP’s seven MPs had not said how they would vote, with interim leader Don Davies saying the party will take time to decide. Some of its MPs could also abstain. 

Elsewhere, however, the opposition panned the budget. Poilievre slammed its failure to slash taxes and decried the additional spending as driving up inflation and the cost of living. Conservatives will propose an amendment that “will get rid of the industrial carbon tax, cut the wasteful spending to bring down debt, inflation and taxes,” he said.

The budget booked billions in new spending, with the largest portion — more than $59 billion over the next five years — going to defence, as the Carney government bolsters the military to meet new commitments to the North Atlantic Treaty Organization. Billions more are earmarked for housing, trade-boosting infrastructure like ports and rail lines, and other initiatives including $5 billion over three years for hospital construction. 

The finance minister said new spending is offset by more than $58 billion in reduced government spending over five years, including a cut to foreign aid by $2.7 billion in the next four years.

The Liberals’ plan will slash the public service by 10 per cent, eliminating some 40,000 jobs over the next three years. It will trim the growth of pensions for disabled RCMP veterans — a measure for which it booked $5.8 billion over four years — and it will save $4.4 billion over four years by reducing a federal subsidy for medical cannabis for veterans and RCMP officers.

Nevertheless, Champagne projects a significant budget deficit of $78.3 billion this year alone. That’s almost double what the Liberal government under Justin Trudeau projected in the December 2024 fiscal update, and exceeds the projection of a $68.5-billion deficit from the independent Parliamentary Budget Officer, who warned in September that Canada’s fiscal track was “stupefying” and “unsustainable.”

The budget plots out higher deficits and debt in relation to the size of Canada’s economy, blowing past the former government’s pledge to restrain deficits beyond 2026-27 to one per cent of gross domestic product (GDP), now projecting the deficit will equal two per cent of GDP that year. The overall debt-to-GDP ratio will be also hit 42.4 per cent this year, the budget said, more than the 41.5 per cent projected last fall. 

The new fiscal “anchors” are defined as the decision to stop using borrowed money to pay for day-to-day operational spending within three years, and instead use it for “capital investments” that grow the economy, as well as a declining debt-to-GDP ratio in the coming years.

At a news conference during a media lock-up before he tabled the budget, Champagne insisted the nearly doubled deficit is “well within the range that people had expected.”

Champagne touted a new suite of measures that would effectively reduce taxes below the levels in the United States and other G7 peers for businesses that put up money for manufacturing and clean energy production. The government claims this “productivity super deduction” — along with a suite of investment tax credits introduced and expanded in recent years — will spur $1 trillion of private and public sector spending across Canada over the next half-decade.

“This is a game-changer,” Champagne told reporters Tuesday. 

As promised, the budget does not cut federal funding to provinces, but much of the new spending — including $5 billion over three years for new hospitals — is “matching funds” dependent on provincial spending. Also as promised, it doesn’t cut benefits to most individuals, but it will see 40,000 public service jobs eliminated by attrition, voluntary layoffs and direct job cuts over the next three years.

It does not extend new funding for pharmacare expansion, but protects money for health, dental care and the current drug coverage for those provinces that have already signed on.

The budget calculates Carney’s decision to cancel an increase to capital gains taxes resulted in $23.5 billion of lost revenue over five years, and the decision to scrap a new tax on large digital companies meant the loss of $6.8 billion over five years.

“It’s a budget that (Stephen) Harper could support,” said David Macdonald, chief economist at the Canadian Centre for Policy Alternatives, referring to the former Conservative prime minister who cut government costs and the public service.

Yet the budget paints a picture with many economic uncertainties.

Neither the document nor Champagne’s budget speech mentioned Donald Trump by name, but the U.S. president’s oversized impact on the global economy, rifts in supply chains and Canada’s dominant trading relationships were cast as a “generational shift,” not just a transition.

“The full impact of tariffs and trade uncertainty are still unfolding, and risks remain on multiple fronts,” says the budget, pointing to a consensus among private sector forecasters that the greater risks to the economy are on the downside, not the upside.

“Greater autonomy is and continues to be the best approach to achieve real resilience,” Champagne argued in his speech to Parliament when he tabled the budget. 

On defence, the biggest focus of new spending, more than $56 billion over five years is meant to bolster the Canadian military with salary increases, maintenance and repairs of capabilities and infrastructure, upgrades to cyber defence and spending for new capabilities like armoured vehicles, long-range precision strikes and domestic ammunition production.

Another $3 billion over five years will bolster Canada’s military presence in Latvia, where it leads a group of NATO allies to deter further aggression from Russia after the 2022 invasion of Ukraine.

The Carney government outlined a much-touted climate competitiveness strategy that didn’t unveil many new measures. Instead, it will lean heavily on a suite of expanded clean technology investment tax credits and as yet unspecified improvements to Canada’s industrial carbon pricing systems.

The budget also laid out new immigration targets, saying Canada will take in slightly more permanent residents in 2027 than the previously reduced plan the Liberals had outlined, but it will shift the emphasis toward newcomers who will boost the country’s economy. Meanwhile, it greatly slashed the numbers of temporary residents, mainly in the category of international students, reducing their numbers by more than half.