Budget 2025 has a very different tone from most of the Trudeau government’s budgets. There is much less talk of middle-class Canadians and their plight, far less emphasis on the need to implement new social programs and expand existing ones, and less attention paid to environmental concerns and issues of identity politics. Instead, the Carney government’s first budget is unquestionably a document focused on the economic challenges we face as a country, the need to do more public investment, the imperative of inducing the private sector to spend more on productivity-enhancing investments, and the clear priority of bolstering our sovereignty by re-building our national defenses. For this economist and voter, these changes are long overdue and very welcome.
Despite this important change in focus, however, the budget does not live up to the hype and rhetoric we have heard over the past several weeks. And this is probably a good thing. The budget is not laced with “austerity” and “sacrifices”, and nor does it contain “transformative” changes and “generational” shifts. Budget 2025 is nothing like Budget 1995. Instead, the budget offers a pretty solid, but unspectacular change in direction.
As usual, the budget uses an average of private-sector forecasts for its best guess of future GDP growth and inflation, and this modest projected growth—almost exactly 4 percent per year in dollar terms—means that the government can continue running small budget deficits with only a slight resulting increase in the debt-to-GDP ratio. The projected budget deficit for 2025-26 is $78.3 billion, more than double last year’s number but still only 2.5 percent of GDP. The deficit is projected to decline to just under $60 billion by 2029-30, and by then it will be only 1.5 percent of GDP. With the projected underlying economic growth and the planned budget deficits, the implied path of the debt-to-GDP ratio, which currently sits at 41.2 percent, gradually rises to just over 43 percent within five years. The federal government is using its fiscal power to address some of the economic concerns we face, and is doing it in a modest and responsible way.
But there are nonetheless some red flags in Budget 2025. Total budgetary revenues are projected to rise by $70 billion over the 5-year planning period, but they will fall slightly as a share of GDP, from 16.6 percent last year to 15.8 percent in 2029-30. This is a welcome change, but does the government really have a credible plan to deliver these numbers? Without announcing any significant reform in the tax system, this may be difficult. On the other side of the ledger, the government’s total expenditures are also planned to increase, by roughly $100 billion over the planning period, but expenditures will actually fall as a share of GDP, from 15.9 percent last year to 15.4 percent by 2029-30. Again, this downward path is a welcome change. But can the government really resist the spending temptation and deliver this level of fiscal responsibility? This is especially doubtful when we recognize that a large amount of the advertised increase in defence spending—enough to honour our new NATO commitments—has not yet shown up in the budget numbers. A larger and more comprehensive expenditure review would help the government to identify the low-priority programs whose elimination would free up the fiscal space it so badly wants to use.
The overall problem with Budget 2025 is that the high-level numbers on spending, revenues, and deficits may be too good to be true. If the Carney government is able to stick even close to the numbers shown in this budget, it will represent a significant and welcome turn in the government’s fiscal mindset. But if spending ends up being significantly more than promised here—which I think is very likely—then all bets may be off on those small planned deficits and the gently rising debt-to-GDP ratio. In this case, Mark Carney’s fiscal record won’t look that much different from his predecessor’s.
About the Author 
Chris Ragan is an Associate Professor and the founding Director of 51łÔąĎÍř's Max Bell School of Public Policy. A former Chair of Canada's Ecofiscal Commission and member of the federal Advisory Council on Economic Growth, he writes and speaks widely on macroeconomic policy and fiscal reform.
