Parliamentary Budget Office cuts growth forecast, warns of rising debt

OTTAWA · The Parliamentary Budget Office has lowered its economic growth projections for Canada, pointing to new tariffs and trade uncertainty with the United States. The federal budget watchdog now forecasts real GDP growth of 0.9 per cent for this year and 1.5 per cent in 2027, down from its June estimates of 1.1 per cent and 1.6 per cent. It also projects a budgetary deficit of $63.3 billion for the 2026-27 fiscal year, which will peak at $70.2 billion the following year. Deficits are now expected to be $3 billion higher per year on average over the next four years compared to the June outlook.

"Canada faces a more challenging economic and fiscal outlook than we projected in June," Parliamentary Budget Officer Annette Ryan said in a news release. "Additional trade measures and ongoing uncertainty are weighing on growth in real output, what we produce as a country." The trade measures followed the collapse of Canada-U.S. trade talks at the end of August. Ryan warned that federal borrowing is growing faster than the deficit, a situation she said is obscured by government accounting practices.

She explained that loans to Crown corporations and capital purchases like military equipment are financed through borrowing but recorded as assets, not expenses. This means they do not add to the deficit figure even though they increase the national debt. "Federal borrowing will significantly exceed cumulative budgetary deficits over the projection period," Ryan said. "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 federal debt will rise to $1.67 trillion in 2030-31 from $1.3 trillion in 2025-26.

READ MORE: Small business owners hope federal budget brings tax cuts, tariff relief

READ MORE: Federal budget aims to boost competition in banking sector

Conservative MPs highlighted the PBO's warnings in the House of Commons. Deputy leader Melissa Lantsman called the report "scathing" and asked if the government would now rein in spending. Finance Minister François-Philippe Champagne defended the government's record, citing Canada's triple-A credit rating and stating, "We have fiscal discipline." He urged the Conservatives to "stop talking down the Canadian economy and work with us to build Canada strong."

The debt-to-GDP ratio is projected to increase to 42.6 per cent by 2030-31 from 41.1 per cent. "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." The report notes that an increase in the deficit-to-GDP ratio would conflict with one of the government's fiscal anchors, though it expects Ottawa will still balance its operating budget by 2028-29 as planned. The PBO and the International Monetary Fund have called for the debt-to-GDP ratio to be reinstated as the primary fiscal anchor.

The cost of servicing the federal debt is now the government's fastest-growing expense. Public debt charges are projected to reach $83 billion by 2030-31, a large increase from $24.5 billion in 2021-22. The debt service ratio, measuring these charges against total revenue, is expected to climb to 13.6 per cent from 10.5 per cent over the same period. For each Canadian, the cost of debt servicing is forecast to rise to $1,952 in 2030-31 from $640 in 2021-22.

Looking ahead, the PBO assumes the Bank of Canada will begin raising its policy rate in early 2027, reaching 2.75 per cent by midyear to anchor inflation expectations. It forecasts annual inflation will average 2.8 per cent in 2026 due to higher energy prices, easing to 2.4 per cent in 2027. Ryan said the long-term outlook depends on whether recent government investments boost productivity and economic capacity. The assessment comes ahead of the federal budget scheduled for Nov. 5.

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