U.S. midterm results add new dynamic to Canada's trade and budget challenges

Voters in the United States handed Democrats control of both the House and Senate in midterm elections, a result that raises the odds of budget fights and closer oversight of industries important to Canada. The political shift south of the border comes as Canada and the U.S. resume trade talks and Ottawa prepares to table a federal budget titled "Masters of Our Destiny" on Thursday. The budget is expected to feature a major productivity measure and account for massive recent spending commitments, even as the country's deficit and debt load are projected to grow. The Democratic victories could amplify scrutiny of the tech industry's data-centre buildout, an issue that has also drawn opposition in Canada. However, key economic levers affecting Canada remain under presidential authority. "This is basically an imperial presidency that operates by executive orders," said Jesper Koll, a director at Monex Group, expressing doubt the election would significantly impact U.S. policymaking. The Trump administration's tariffs on Canadian goods, applied using executive authority, are not expected to be undone by the new Congress.

Those tariffs include Section 232 levies on steel, aluminum, autos and lumber, as well as 50-per-cent duties on about $28 billion of Canadian products like some vehicles, alcohol and dairy. Canada's main goal in the renewed trade negotiations is to lower tariffs on autos, steel, aluminum and wood products, though officials concede they will not disappear entirely. Finance Minister Chrystia Freeland said on Wednesday that the United States is "asking less" and "offering more" in talks aimed at a deal, which she says are making progress. It remains unclear whether the issues that sank a potential deal in August have been resolved. The biggest sticking points were U.S. tariffs on medium- and heavy-duty trucks, which affect Ford and General Motors plants in Ontario, American pressure over Canada's rules requiring streaming services to promote Canadian and French-language content, and wording Ottawa feared would limit its ability to sign other trade deals. The Trump administration has spent weeks warning Canada against meddling in U.S. elections, and its reaction to the Democratic wins could become a distraction or a pretext for tougher tariffs.

On the domestic front, the federal budget is likely to include the Productivity Mega Deduction, a measure announced in September that will cost $36 billion over five years. It expands rules that let companies write off eligible capital investments immediately. Finance Minister François-Philippe Champagne told a Toronto business audience on Monday that the budget would go further for small- and medium-sized businesses and simplify their taxes, but he did not provide specifics. The budget must also account for multibillion-dollar commitments to new icebreakers, submarines, major projects and housing made over the past year.

The government has less fiscal room than higher oil prices and revenues might suggest, as most of that money has already been committed to recent initiatives. The Parliamentary Budget Office projects a $63.3 billion deficit this fiscal year. Interest on the debt is now the fastest-growing federal expense, and the PBO expects the debt-to-GDP ratio to reach 42.6 per cent by 2030-31, up from 41.1 per cent. The agency expects the deficit to rise to 2 per cent of GDP in 2027-28 before easing. Attention now turns to the implementation of budget measures and the ongoing trade negotiations. Investments of the scale promised in the budget take years to pay off, which will likely lead to more scrutiny of the government's ability to turn big commitments into action before the next election. For the trade file, focus is shifting to 2028 and the leadership races that will follow Trump's presidency, which will indicate whether the tariffs are his personal policy or a lasting American one.

With files from The Globe and Mail