Federal Budget 2026 (FCC)

Introduction

“. . . there are times in the progress of a people when fundamental challenges must be faced, fundamental choices made—a new course charted. For Canada, this is one of those times.” - Finance Minister Paul Martin, Budget Speech, February 27, 1995

Three decades on, Prime Minister Mark Carney and Finance Minister François-Philippe Champagne face a considerably different landscape as they deliver their government’s second budget, Masters of Our Destiny: Budget 2026. But both the challenges faced and the choices made are fundamental to where a Canada under extreme stress is headed.

Chrétien and Martin were dealing with a historically severe fiscal crisis. This government is wrestling with an unprecedented multiplicity of threats related to geopolitics, cross-border relations, internal trade barriers, productivity and investment, the energy transition, national unity and identity, the rise of AI, and a public trust-sapping affordability crisis, all of which must be addressed with a disciplined fiscal approach.

The glue that binds these challenges is nothing less than the state of Canadian sovereignty. The budget opens with an unusual eight-page cover letter from Prime Minister Mark Carney and Finance Minister François-Phillipe Champagne, in which they argue their handiwork “reinforces Canadian sovereignty through tough, prudent decisions to manage government spending, through ambitious measures to drive an investment supercycle that builds Canada strong, and through bold measures to diversify our trade and technologies, so no one can dictate our choices.” The words sovereign and sovereignty suffuse every aspect of the budget, appearing 114 times in the context of everything from electricity grid expansion (“We know that the nations that master electricity will own the 21st century") to identity (“Culture is foundational to a strong, proud, and sovereign Canada”) to affordability ("Sovereignty begins chez vous, in your home. It lives in the choices Canadians make every day: how we heat our homes, how we get to work, how much we pay for banking and broadband, and how we manage our grocery bills and essential expenses.")

In this policy brief, Deloitte’s Future of Canada Centre looks at four themes running through the budget:

1. Its economic and fiscal context
2. Its impacts on investment, growth and competitiveness
3. Its attention to people and affordability
4. Its plans for Canada’s defence and security

Budget 2026 lands mid-stream in the process of strengthening Canada's economy and sovereignty. The government is beginning to shift its strategic focus from policymaking to implementation while the country is still adjusting to the new suite of threats and opportunities emerging over the past two years. Many of its initiatives amount to re-announcements and the budget tries to strike a balance between lauding the country's resilience and warning of continued headwinds.

This careful calibration is notable in the budget's efforts to bring the economic arguments of GDP impacts right into people's homes. It speaks of the affordability crisis in terms of "a boost and a bridge." The boost puts money into pockets right now, such as through a one-time increase in the Canada Grocery and Essential Benefits Supplement. The bridge represents the longer-term belief that an improved economy will raise all boats and "deliver affordability relief today while building a stronger and more independent economy for tomorrow."

Fortunately for the government, it has had considerable fiscal room to finance these ambitions. Windfall revenues, driven largely by the Iran war’s impact on oil prices, have materially improved the fiscal outlook since the Spring Economic Update. That improvement, however, has largely been recycled into new spending.

1. Economic and fiscal update

Stronger revenue growth has left the federal government in a better fiscal position than expected earlier this year, largely due to higher oil prices. Since the Spring Economic Update, the outlook has improved by roughly $148 billion between 2026-27 and 2030-31, with stronger revenues accounting for most of the gain. Before accounting for new measures, the cumulative deficit over that period would have been about $137 billion, less than half what had previously been expected. The government has chosen to use almost all of that fiscal room for additional spending, announcing roughly $152 billion in new measures over the same period.

As a result, federal spending is expected to rise from $565.7 billion in 2025-26 to $682.1 billion by 2030-31, an increase of about 21%.

With much of the improvement in the fiscal outlook going toward new spending, the deficit is expected to rise from $39.3 billion in 2025-26 to more than $62 billion in each of the next two years, before falling to $52.9 billion by 2030-31. That is almost exactly where the government expected the deficit to be in the Spring Economic Update before the windfall. The government's financing needs are also considerably larger than the headline deficit suggests. Once non-budgetary transactions, including capital investments and loans, are taken into account, annual financial requirements average roughly $153 billion over the next five years. This higher borrowing will add considerably to the cost of servicing the federal debt, creating greater pressure to constrain spending over time. Public debt charges are expected to increase from $53.5 billion this year to a record $85.5 billion by 2030-31, consuming about 13.6 cents of every dollar of the enlarged pie of federal revenue.

While the government’s increased spending on infrastructure, housing, and measures to encourage business investment have the potential to boost growth over the longer term, the economy remains soft in the near term. Real GDP is expected to grow by just 1.0% in 2026 and 1.7% in 2027, with U.S. tariffs and trade uncertainty continuing to weigh on activity. The question is whether these measures can eventually translate into improved productivity gains and stronger economic growth.  

2. Investment, growth, and competitiveness

At the heart of Budget 2026 is a doubling down on efforts to address Canada’s productivity and growth challenges by seeking to catalyze an “investment supercycle” through greater investment, entrepreneurship, innovation, and competition. The centrepiece of the government's growth agenda is the $36 billion Productivity Mega Deduction, which allows businesses to immediately deduct the full cost of a broad range of new capital investments upfront. Complementing this are changes to government investment vehicles, including combining the Business Development Bank of Canada and Export Development Canada into a single development bank, refining the mandates of the Infrastructure Bank and Canada Growth Fund, and beginning to operationalize the new Canada Strong Fund, which will take minority equity positions in companies the government is already supporting.

The budget also seeks to encourage entrepreneurship through the Canada Growth Incentive, which will provide entrepreneurs, founders, and investors with a tax exemption on up to $15 million in capital gains earned from successful investments in qualifying Canadian businesses. The budget also enhances capital gains rollover provisions, allowing proceeds from successful ventures to be reinvested in other eligible Canadian small businesses while deferring tax, helping to recycle capital into the next generation of Canadian companies.

With so much attention over the past 20 months on resources, innovation emerges as a key pillar of the budget. It includes $930 million in proposed investments to expand the Scientific Research and Experimental Development (SR&ED) program, extending support to some commercialization activities, and helping Canadian firms bring new technologies to market. Meanwhile, the government is pursuing efforts to promote greater competition in key sectors, including through proposed reforms in financial services and telecommunications.

The budget continues to reinforce the importance of energy and natural resources as drivers of economic growth and sovereignty. New investments include nearly $4 billion over 10 years for electricity infrastructure expansion as well as renewable energy and priority electricity-sector projects, which adds new funding for the Smart Renewables and Electrification Pathways Program (SREP). It also reinforces the government’s growing emphasis on nuclear energy, with $518.5 million over five years to advance nuclear supply chains. This broader focus on energy infrastructure is reflected in the budget’s cover photo, which depicts hydro dams and transmission lines in Newfoundland and Labrador. Electricity expansion is compared with the transcontinental railway of the 21st century, connecting Canadians east-west (and northwards). In mining, the budget proposes more than $400 million to renew the Canadian Critical Minerals Strategy, complemented by extended eligibility for the Mineral Exploration Tax Credit (METC) and Critical Minerals Exploration Tax Credit (CMETC), which now covers antimony, a critical component in defence applications. The forestry sector will also receive $6.5 billion in proposed investments over six years to boost productivity, increase output, support research and commercialization, and establish a new Forestry Sector Accelerator to help finance large-scale facilities and modernize existing operations.

3. Investing in people and affordability

Affordability emerges as a key priority in Budget 2026, with the government pairing the boost of immediate household relief with a longer-term message about a bridge to tomorrow. This bridge, the budget implies, ultimately leads to more income growth rather than the cost side of the affordability equation. In the immediate term, the Canada Groceries and Essentials Benefit Supplement would receive another 50% increase in early 2027, but with funds only budgeted for one year. Meanwhile, relief also takes the form of a lower threshold for 1.9 million low-income workers to qualify for the Canada Workers Benefit. Together, these measures direct added relief toward Canadians most exposed to rising living costs while they wait for the bridge.

Additionally, the budget proposes $11.2 billion over four years, followed by $17.8 billion in future funding, toward the lofty goal of “ending homelessness within 10 years,” along with $13 billion over ten years to increase the capitalization of Build Canada Homes for non-market housing. The scale of investment is significant, but translating federal dollars into new units remains the larger delivery challenge, as we also identified in last year’s budget.

Budget 2026 also signals greater stability in Canada’s immigration targets. Permanent resident admissions would stabilize at 380,000 annually from 2027 to 2029, along with 370,000 new temporary resident arrivals. Compared with recent efforts to reduce previously projected admissions, this approach places greater emphasis on transitioning people already in Canada into permanent residence, while reforming the Temporary Foreign Worker Program to better respond to regional labour-market needs.

Investments in reconciliation span housing, infrastructure, education, and essential services. The budget proposes $32 billion over ten years for First Nations housing and infrastructure, including $18.5 billion for a new First Nations On-Reserve Infrastructure Program, together with $5.8 billion for on-reserve education and $2.9 billion for the Non-Insured Health Benefits Program.

The focus on people and communities also extends to Canadian identity and culture. The government will consult on a new tax credit for Canadian artists, providing relief on up to $45,000 in income from original works, alongside broader support for Canadian books and digital content.

Ultimately, the impact will depend on whether these commitments translate into more affordable lives, stronger communities, and a greater capacity for Canadians to shape their economic, social, and cultural future.

4. Defence and security

Budget 2026 builds on the government’s security and sovereignty agenda with new investments across defence and intelligence. A number of the measures have already been announced, including $7.6 billion over five years for Operation REASSURANCE (Canada’s largest overseas mission to deter Russian aggression on NATO’s eastern flank) and $2.3 billion over five years for the Defence Drone Initiative with Ukraine. The government also announced without details that it will provide an additional $6 billion over 10 years to the Canadian Security Intelligence Service to bolster “sovereign intelligence” by reducing reliance on foreign partners and deepening and diversifying security relationships around the world.

Budget 2026 also shows Canada on track to reach 4.1% of GDP in defence spending starting in 2027-28, maintaining that level through 2030-31 as the country works toward its 5% NATO commitment by 2035. Defence accounts for a significant share of the government’s spending in the coming years, but broader fiscal pressures are also mounting. Across all areas of government, program expenses are projected to rise by more than 10%, from $542.7 billion in 2026-27 to $600.2 billion by 2030-31. At the same time, the government says it will assert greater control over spending by reducing its rate of growth from more than 8% annually over the past decade to less than 2%, and maintaining that discipline over the budget horizon. Upholding this discipline amid significant new investments in defence and other priorities will require increasingly difficult trade-offs, including identifying areas where spending can be constrained or reduced.

What’s next

The Carney government's next budget task will be to introduce budget implementation legislation and get it passed. Given that it currently holds a majority in the House of Commons—with six more by-elections now scheduled for December 7—it will likely succeed.

In the meantime, the government will be expected to show progress and deliver on its stated ambitions of attracting investment, growing the economy, and enhancing strategic autonomy. It is expected to add to its portfolio of bilateral trade agreements during a scheduled visit to Ottawa in December by Indian Prime Minister Narendra Modi and to continue work on a new arrangement with the European Union. Also, trade talks are apparently back on with the Trump administration, although it is not yet clear what, if any, impact recent mid-term elections will have.

Perhaps the most surprising area of Budget 2026 is its heavy emphasis on affordability and identity after 20 months devoted largely to economic matters. That growth agenda is being supplemented not replaced, but the budget indicates a growing attention by the Carney government to the pocketbook priorities of Canadian households as well as their aspirations for their country.

As the federal government implements more of its policy agenda, there remain significant openings for Canadian businesses and other orders of government to participate in the retooling underway of a stronger, more resilient, and more sovereign Canada.