2025 federal budget

Introduction

On Tuesday, November 4, Finance Minister François-Philippe Champagne delivered the Carney government’s first budget to Canadians, implementing the Carney government’s shift towards an increased focus on investment in the Canadian economy. Delivered amid shifting geopolitical dynamics and profound disruption in Canada–US relations, the budget aims to chart a new course of growth and investment in Canada.

In our analysis, we consider the government’s economic and fiscal approach, its plan to strengthen the Canadian economy, its investments in defense, and its approach to reducing expenditure. We conclude with five key steps for the government to take in the coming months.

Overall, the budget represents a significant shift from the previous decade of liberal government, prioritizing investment over operating expenditure in order to support growth. Questions remain about whether the moves in budget 2025 are sufficiently bold to cash out the government’s ambitions. At the same time, delivering it will take decisive leadership, sufficient resourcing, and significant engagement with business and policy communities. 

Economic and fiscal analysis

No doubt the question on many people’s minds: the deficit will rise to $78 billion or 2.5% GDP, with an anticipated reduction to $56.6 billion by 2030. Against a backdrop of persistent trade uncertainty, the federal government’s budget assumes that economic growth will remain slow in 2026, with GDP projected to increase by 1.2%, changed little from the 1.1% gain projected for 2025. The economy is projected to pick up more meaningfully starting in 2027 with growth averaging close to 2%, driven by government capital spending and private investment recovery.

The budget lays out an ambitious plan that significantly expands spending in an effort to counter increased US protectionism. It commits $230 billion in new expenditures over the next five years, partially offset by $60 billion in savings projected from the government’s comprehensive expenditure review. Overall, program spending is set to rise by an average of 3% annually between 2024–25 and 2029–30.

With tens of billions in new spending, it is no surprise that the federal government is looking at larger deficits. The 2024 fall statement projected a budget deficit of $42.2 billion this fiscal year. The 2025 budget now pegs that deficit at $78.3 billion with deficits exceeding $50 billion for the next five years. Some of that erosion is due to economic conditions that have deteriorated since last year, but the bulk is from new spending. Overall, higher deficits are translating into more debt. As a result, debt servicing charges as a share of federal revenues are expected to increase from 10.5% last fiscal year to 13% by 2029–30. While not trending in the optimal direction, Canada’s fiscal position remains manageable. The federal government’s debt relative to the size of the economy is still the lowest among G7 countries, and interest costs, while higher than in recent years, remain well below historic peaks.

Nonetheless, given the increases in spending and deficits, the federal government has once again changed its fiscal anchor. The fiscal anchor is a target that government articulates to reassure markets, rating agencies, and the public that its finances remain responsible. In recent budgets, the federal government committed to reducing the debt-to-GDP ratio over time and had anchored the deficit-to-GDP ratio at 1%. Abandoning that target, the government has now committed to reducing the deficit-to-GDP ratio over time from 2.5% and balancing the operating budget by 2028–29. However, it is worth noting that the new classification of spending away from operating to the capital budget is broad and includes many categories that were previously included in the operating budget, such as tax incentives to corporations. Altogether the federal debt-to-GDP ratio is projected to rise to 43.1% from 41.2% today, but this remains below its recent peak seen in 2020–21. 

Build ambition meets delivery realities

Budget 2025 embraces a vision to build at increased speed, scale, and scope. Planned federal infrastructure investments are expected to reach $115.2 billion over the next five years.

The budget earmarks $213.8 million over five years for the Major Projects Office (MPO) and includes in its mandate reviewing and reforming regulatory processes, coordinating private-sector financing, provincial and territorial partners, and accelerating nation-building projects across Canada.

The budget supports First Nations, Métis, and Inuit participation in Crown consultations through the Federal Initiative on Consultation, proposing $10.1 million over three years. However, no new investments to the Indigenous Loan Guarantee Program were announced as urged by First Nations.

The budget also promises $10 billion in new money for the Canada Infrastructure Bank (CIB), boosting its total funding to $45 billion. The government also commits to expanding the CIB’s mandate so that it can invest in any infrastructure projects fast-tracked through the MPO, regardless of sector or asset class. With focus on housing and access to clean water, the CIB would increase investment targets by at least $2 billion for Indigenous infrastructure.

Budget 2025 introduces a new Build Communities Strong Fund, a $51-billion investment over ten years with an additional $3 billion annually in ongoing funding thereafter. Focusing on economic growth, job creation, and inclusive development, the fund aims to empower provinces, territories, and municipalities to build future-ready communities across Canada.

Budget 2025 makes significant infrastructure investments. However, it doesn’t address the country’s construction labour shortage, a key barrier to building at the scale and speed envisioned. On housing, despite the country’s poor performance on targets to double the rate of housing construction, Budget 2025 offers little beyond previously announced measures. Significant challenges also remain in collaborating with provinces, territories, and Indigenous partners to deliver on these build goals. The MPO and Build Canada Homes (BCH) must be given the appropriate operational capacity to deliver on their ambitious mandates. Until these issues are addressed, Canada’s build agenda risks falling short of its transformative promise. 

Investing in key drivers of productivity and growth

At its core, the 2025 federal budget is focused on strategic investment.

On competitiveness, the budget provides a forward-looking view on the development of Canada’s energy and resource sectors, including releasing Canada’s Climate Competitiveness Strategy. The strategy redoubles commitments to supporting green technologies. It also suggests a potential path to ease tensions between the federal and provincial/territorial governments and industry on Canada’s approach to resource sector growth and climate targets—offering tax incentives and long-requested regulatory changes, including a possible end to the federal emissions cap, in exchange for long-term commitments to industrial carbon pricing and net-zero targets. The budget also reintroduces accelerated tax write-offs for LNG plants while increasing climate targets to qualify and emphasizes Canada’s critical mineral potential with over $2 billion in new investments.

On talent, the budget promises to advance Canada’s global competitiveness through a $1.7-billion International Talent Attraction Strategy and Action Plan and to reorient Canadian immigration to meet the talent needs of key industries, while also looking to enhance foreign credential recognition to support them.

To support Canadian sovereign AI infrastructure and quantum computing, the budget promises $1.3 billion over five years. Additionally, it proposes measures to further protect Canadian intellectual property rights and enhance Scientific Research and Experimental Development tax incentives.

Underpinning these efforts are policies designed to make Canada a more competitive environment for investment. This includes the Productivity Super-Deduction, which implements all five previously announced measures to support private-sector investment and introduces immediate expensing for manufacturing and processing buildings and accelerated capital cost allowances for low-carbon liquefied natural gas facilities, as well as $1.75 billion in funds to support high-growth companies.

Budget 2025’s increase in focus on supporting investment represents a significant shift for the Government of Canada, and presents an opportunity for business to partner with government. To be sure, much work is needed to deliver on this ambition. On resource and climate, large questions remain about regulatory hindrances to resource extraction. Moving forward, Canada’s forthcoming AI strategy, talent acquisition initiatives, and implementation plans will need further specification to deliver on their potential. The failure of Budget 2025 to act on the liberal platform commitment to a broader expert review of business taxation represents a significant missed opportunity to further enhance productivity and competitiveness. 

Strengthening domestic supply, expanding global markets

Facing destabilization of its primary trading relationship with the US, the government has identified an urgent need to diversify Canada’s trade relationships while protecting the most-affected domestic industries.

To mitigate the impact of US tariffs, the budget reaffirms the government’s $5 billion Strategic Response Fund, which supports impacted sectors, and it implements a reskilling package for workers and makes changes to employment insurance. It also launches a new Buy Canadian Policy, mandating federal and Crown agencies to prioritize Canadian suppliers to bolster the domestic market. A new Small and Medium Business Procurement Program will help smaller enterprises access federal contracts.

The government has also articulated a goal to double trade with countries beyond the US over the next decade, aimed at generating $300 billion for the Canadian economy. To help achieve this, Budget 2025 invests $5 billion over seven years in the Trade Diversification Corridors Fund and $1 billion over four years in an Arctic Infrastructure Fund.

Budget 2025 establishes a goal for Export Development Canada to increase its total business facilitated by $25 billion by 2030, and it focuses on deepening ties in the Indo-Pacific and Europe, promoting exports in industries like critical minerals and agriculture.

Trade infrastructure investments and a policy increasingly focused on high-potential regions and industries have been welcomed by business and have the potential for significant return on investment. Government and infrastructure partners will need to deliver consistent, improved performance at Canada’s ports and other key trade infrastructure. 

Safeguarding sovereignty

Investing in defence to protect Canada’s sovereignty and its security partnership with the US, while deepening its security relationship with its other closest allies, is a central theme for Budget 2025.

The budget invests $81.8 billion on a cash basis over five years in the Canadian Armed Forces. This includes $10.9 billion in establishing critical digital infrastructure, with a focus on next generation defense systems and cyber. This investment reaffirms the government’s commitment to reach the NATO target of 2% GDP spending this year, and recommits to the 2035 NATO target of 5%, without specifying funding commitments beyond 2030 to attain that goal.

Notably, Budget 2025 launches Canada’s $6.6 billion Defence Industrial Strategy to connect increased defense expenditure to growth in Canada’s domestic defense industry, and a new Defense Investment Agency designed to accelerate and improve defense procurement.

Each of these strategies represents a significant delivery challenge on the defense file. Each also represents an important opportunity for businesses and stakeholders to collaborate with government. 

Spending less, delivering more?

The government is committing to spending less to invest more. Its Comprehensive Expenditure Review aims to reduce inefficient spending and transform government operations and the public service.

Through this review, the government expects to achieve savings of $13 billion annually by 2028–29 which represents savings on a nearly $550 billion budget of about 2.4%. As it currently stands, the expenditure review has achieved significantly less than the 15% reduction target on operating expenditures. Whether the exercise is complete or there will be a further round is not raised in the budget.

Key components of the plan include reducing or eliminating expenditure on programs deemed inefficient or unnecessary, cutting the public service by 40,000 positions (about 10%) over four years, and decreasing the use of consulting services by 20% in the next three years. A Digital Transformation Office was also announced to drive AI adoption across the government in pursuit of leaner, more efficient services.

It will take a significant effort to implement these savings without negatively impacting services and to successfully navigate the interaction with public-sector unions while avoiding disruption. At the same time, given the relatively modest savings projected, additional reviews or savings exercises may be required to keep the government on its new fiscal track that prioritizes investment over expenditure.

What comes next?

Pass the budget: With a minority in parliament, the government’s first task is to secure the votes necessary to pass its budget. The Liberals have 169 seats but need up to 172 votes. Nova Scotia MP Chris d’Entremont’s budget-day exit from the Conservative caucus and NDP musings about abstaining from the budget vote stand as signs that the government is likely to succeed in this first task.

Deliver, baby, deliver: Aligned with the prime minister’s “build, baby, build” ethos, the 2025 budget lays out a blueprint for significant, sometimes complex investments while establishing new agencies to deliver on various mandates. There is skepticism that the government’s delivery capabilities can match its build ambitions. For Canadian businesses and other orders of government, there is a significant opportunity to influence and collaborate with the federal government as it seeks to deliver on its bold objectives.

Spend less to support investing more: The government’s comprehensive expenditure review has relatively modest objectives—reduction of about $13 billion by the third year and a public service reduced by about 10% over four years. Nevertheless, delivering against those objectives will require significant effort from public-service leaders, especially amid pressure to achieve build ambitions.

Focus on the Canada–US relationship: Budget 2025 acknowledges the reality of a more challenging relationship with the US. At the same time, the cost of Canada’s worsened trade relationship with the US is very real. Budget 2025 confirms the government’s view that that relationship will not return to what it was, but improving its stability and predictability and reducing some tariff barriers remains one of the most impactful strategies available for improving Canada’s economic fortunes. We expect those efforts to remain front and centre.

The possibility of meaningful tax reform: The 2025 Liberal election platform committed to an expert review of the corporate tax system based on principles of fairness, transparency, simplicity, sustainability, and competitiveness. While moves in Budget 2025 to enhance or extend capital cost allowances and green economy ITCs are not unwelcome, a broader tax reform, including a significant focus on productivity and competitiveness, represents a significant and as yet unrealized opportunity to support investment, innovation, and growth. 

To learn more about the budget’s tax measures, access our in-depth analysis here.

Federal Budget 2025: Tax, Economic & Policy Perspectives