What to expect from Mark Carney’s fiscal update amid high deficits and rising risks

”(Carney) has changed the direction of fiscal policy in the country. And there are significant risks around that,” said Page, who is now head of the Institute for Fiscal Studies and Democracy at the University of Ottawa. 

“I think the prime minister says you have to be prepared to take these risks because of this environment.”

Any discussion of that “environment” starts with Donald Trump. The U.S. president has flipped the global trade table with his aggressive tariffs. The future shape of continental trade is in doubt ahead of talks on the Canada—United States—Mexico Agreement (CUSMA) that Carney says Trump violated with his steep duties on Canadian steel, aluminum, autos and more.  

Carney’s Liberals got elected last year on a promise to address this crisis. And their budget last November reflected their response. A broad middle-income tax cut forecast to cost more than $27 billion over five years, more generous business deductions to encourage investment, a surge of $81.8 billion over five years to rearm the military, and pledges to speed up major projects like ports, pipelines, mines and more — all of it billed as a way to bolster Canada’s economic independence.

The result was much more red ink. The deficit for the 2025-26 fiscal year was slated to hit $78.3 billion, more than double the year before. And despite an ongoing effort to find $60 billion in internal cuts, overall spending is projected to climb more than $50 billion further over the next four years as the Liberals promise to stop using borrowed money for government operations. 

One of the big questions for Tuesday’s economic update is how events in recent months have impacted the fiscal situation. The U.S.-Israeli war with Iran, which choked off oil shipments and sent energy prices skyrocketing, risks juicing inflation and dragging economic growth the longer the conflict continues, according to the International Monetary Fund’s world outlook report this month.

Canada’s economic growth is projected to slow this year, from 1.7 per cent in 2025 to 1.6 per cent, before rebounding to 1.9 per cent next year, the IMF predicted. But the fund also reported that higher oil prices might buffer Canada from the shock of the Middle East war, since the country is one of the world’s biggest fossil fuel exporters.  

Asked this week whether the spring update will show a shrinking deficit, Carney said the news will have to wait till Tuesday. But he stressed that Champagne, his finance minister, is “very prudent,” and suggested the update will demonstrate how non-U.S. exports — which the Liberals have promised to double by 2035 — are increasing, along with flows of foreign investment into Canada. 

“We’re just getting started. You’re going to see more. But the momentum is there,” Carney said. 

The opposition Conservatives, under Pierre Poilievre, argue Carney has failed to live up to his own rhetoric. In recent weeks, Poilievre took aim at Carney’s economic credibility — a core part of his political persona, as a former central banker for Canada and the United Kingdom.

The party also contends that Carney’s Liberals are failing to truly clear the path for economic development and to tackle cost-of-living struggles. The government’s decision to pause a federal tax on gasoline until Labour Day, which a finance official told the Star would cost $2.4 billion, fell short of the Conservatives’ call to remove all taxes on gas — including federal sales tax — for the rest of the year.  

In an effort to rein in spending, Carney’s Liberals pledged in last year’s budget to reduce expenditures across dozens of federal departments and agencies by about $24 billion in cash over the next three years. A Star analysis of 90 departmental plans published in March found bureaucrats are largely on track, and have identified at least $21.5 billion in reductions by the 2028-29 fiscal year. The government’s publicly-available tracker of job losses says more than 17,000 positions will be eliminated through this spending review, with Carney arguing the civil service grew too fast in the years before he took office. 

Public sector unions are sounding the alarm, with the Canadian Association of Professional Employees (CAPE) warning of “massive job cuts” and “degrading public programs.” Sean O’Reilly, president of the Professional Institute of the Public Service of Canada, noted that Carney had previously promised to cap — not cut — the size of the civil service. 

“It just bothers me that for them it’s numbers on a spreadsheet to balance the books, whereas really these are real people serving Canadians day in, day out,” O’Reilly said. 

For David Macdonald, senior economist at the Canadian Centre for Policy Alternatives, there are still major questions about which programs will be most impacted by these cuts. That’s because much of the information reported in the departmental plans remains vague, often citing operational efficiencies through measures like the adoption of artificial intelligence.

Macdonald sees this as part of a “sea change” in government, where funding is shifting from various areas of government to the military. 

Page, the former parliamentary budget officer, believes the Carney Liberals will need to find more savings to keep their promise to “balance” operational spending by 2028-29. They also might need to find new revenue streams, in light of the pledge through the North Atlantic Treaty Organization (NATO) to spend 3.5 per cent of economic output on defence by 2035 — which Page estimates requires at least another $45 billion. 

Such considerations are part of the risks that Champagne and Carney are taking with their spending plan for the moment of crisis they believe the country faces, Page said. The pressure is on, including through the spring update, to start showing that it is working. 

Returning to his metaphor of the prime minister’s mark on fiscal policy, Page said “the hand has been lifted … but I don’t think it’s really hit the paper yet.”

On Tuesday, the country will get closer to finding out what that means.