Parliamentary Budget Office cuts growth forecast, warns of rising debt

OTTAWA — The Parliamentary Budget Office has trimmed its outlook for economic growth for this year and next amid new U.S. tariffs and Canadian countermeasures.

In a revised outlook on Tuesday, the federal budget watchdog said it now projects real gross domestic product growth of 0.9 per cent for this year and 1.5 per cent in 2027.

The forecast is down from estimated growth of 1.1 per cent and 1.6 per cent, respectively, issued in June.

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“Canada faces a more challenging economic and fiscal outlook than we projected in June,” Annette Ryan, parliamentary budget officer, said in a news release.

“Additional trade measures and ongoing uncertainty are weighing on growth in real output, what we produce as a country.”

Trade talks between Canada and the U.S. broke down at the end of August followed by a new round of U.S. tariffs and Canadian counter-tariffs.

The PBO said it also now projects a budgetary deficit of $63.3 billion for the 2026-27 fiscal year, which will peak at $70.2 billion in 2027-28.

Relative to its June outlook, the deficits are $3 billion higher per year on average over 2026‑27 to 2030‑31, as new spending measures more than offset stronger revenues, the watchdog said.

“The PBO continues to maintain that debt-to-GDP ratio is an important benchmark for measuring fiscal health,” Ryan said. “It will rise steadily over the five-year horizon.”

She added: “Over the longer term, Canada’s economic and fiscal outlook will depend heavily on whether recent capital budget investments can translate into stronger productivity, economic capacity and prosperity.”

Accounting 'obscures' true scale of borrowing

Ryan warned that the federal debt is growing twice as fast as the growth in deficits because of the government’s increased use of Crown corporations and increased defence commitments.

“Federal borrowing will significantly exceed cumulative budgetary deficits over the projection period, because under accrual accounting, capital expenses and loans to Crown corporations are recorded as assets rather than liabilities,” Ryan said in a statement.

“This obscures the realities of cash debt and raises questions about whether the current fiscal framework provides a complete and transparent picture of Canada’s fiscal sustainability.”

The report shows the size of the federal debt will rise to $1.67 trillion in 2030-31, up from $1.3 trillion in 2025-26.

The debt as a percentage of GDP will reach 42.6 per cent, up from 41.1 per cent over the same time frame.

The deficit-to-GDP ratio is projected to increase slightly to 2 per cent in 2027-28 from 1.8 per cent in the current fiscal year, before declining to 1.7 per cent in 2030-31.

The PBO points out that an increase would be at odds with one of the government’s two fiscal anchors, which commits to maintaining a declining deficit-to-GDP ratio.

“On balance, the two fiscal anchors have imposed limited fiscal discipline on government spending and borrowing,” the report notes.

To further illustrate the impact of recent borrowing, the PBO said the debt service ratio, which measures public debt charges relative to total revenues, is projected to reach 13.6 per cent in 2030-31, up from 10.5 per cent in 2025-26.

Public debt charges are the fastest-growing federal expense, according to the report.

The cost of servicing the federal debt is projected to reach $83 billion by 2030-31, up from $24.5 billion in 2021-22.

On a per-capita basis, public debt charges are projected to reach $1,952 in 2030-31, up from $640 in 2021-22, which the PBO says reflects low population growth and a rising debt stock.

John Fragos, a spokesperson for Finance François-Philippe Champagne, responded to the PBO report by saying the government’s approach to balancing its operating budget and Canada’s strong credit rating shows the strength of its fiscal plan.

“This is evidenced not only by our sustained AAA credit rating, but also our net debt-to-GDP, which is the lowest in the G7,” he said.

Meanwhile, the PBO assumes the Bank of Canada will start raising its policy rate in early 2027 “to keep inflation expectations anchored,” reaching 2.75 per cent by midyear.

On inflation, the watchdog expects higher energy prices will keep the annual inflation rate raised in 2026, averaging 2.8 per cent, before easing to 2.4 per cent in 2027.

The report comes ahead of the 2026 federal budget, which is expected to be released soon. Yadude Books reported earlier this month that Canada's trade surplus ballooned in August as exporters raced to ship goods ahead of new U.S. tariffs.

With files from The Canadian Press, BNN Bloomberg and CBC News