Federal budget to reveal impact of energy shock and new spending

OTTAWA · The Liberal government will table its second budget under Prime Minister Mark Carney on Thursday, revealing the impact of a global energy shock and recent spending promises. The budget, titled "Maitre Chez Nous" or Masters of our Destiny, is expected to shift federal spending toward an aggressive infrastructure agenda. Fiscal analysts will scrutinize the document for signs that Ottawa is keeping its debt on a sustainable path. The Parliamentary Budget Officer expressed skepticism last month that the government will meet its fiscal anchors.

Randall Bartlett, deputy chief economist at Desjardins, said it is difficult to estimate Ottawa's deficits because the government is often unclear about spending timelines and classifications. "I think whether governments are borrowing to spend on operating expenses or capital investments does make a big difference," Bartlett said. "However, the federal government's definition of capital versus operating is unclear, erroneous and, quite frankly, self-interested." The government has pledged to lower the deficit as a share of the economy and balance the operating budget by 2027-28, but the PBO forecasts it could be a year late.

Since April's economic update, the federal government has added about $50 billion in planned spending over the next decade. Major commitments include the Pacific Link oil pipeline, a new "productivity mega-deduction" tax incentive and future defence spending to meet NATO targets. Higher global oil prices, counter-tariffs on U.S. imports and stronger nominal GDP have boosted federal revenues. Bartlett expects near-term deficits to be lower due to this energy windfall but warned the revenues are not sustainable. "As oil prices start to fade going forward, when that tide goes out, we're going to see who's not wearing their swimsuit," he said.

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Finance Minister Francois-Philippe Champagne defended the government's approach, arguing that Canada's strong fiscal position allows it to support workers. "If you want to be strong, you have to support people in industries and sectors and regions which have done nothing wrong," Champagne told reporters in Montreal. He said having the strongest fiscal position in the G7 provides the means to weather difficult times and build for the future. Colin Busby of the C.D. Howe Institute agreed Canada is not in the same situation as peers like the U.K. or France but cautioned against complacency.

"The current trajectory that Canada is on, we have to be cautious that in five or ten years' time, we could become like them if we don't correct course," Busby said. The government projected a deficit of $65.3 billion for 2026-27 in its spring statement, falling to $53.2 billion by 2030-31. The PBO's latest outlook forecasts this year's deficit at $63.3 billion, but sees it fluctuating and reaching $67.8 billion by the end of the decade. The office estimates that without the new spending commitments since spring, annual deficits would have been $4.6 billion lower.

Bartlett said additional spending could put Ottawa on a more precarious fiscal footing, though Canada's sovereign credit rating is not yet at risk. He argued the government has used up much of its fiscal leeway, limiting its ability to respond to future economic shocks. "There's a real challenge for the federal government at this point, because it has painted itself into a bit of a fiscal corner as to what it can announce further going forward," Bartlett said. Busby said he is looking for a stronger commitment from Ottawa to find savings, dismissing last year's $60 billion five-year savings target as "timid."

Busby questioned whether the government is ensuring value for money from existing programs as it funds new, big-ticket items. Many fiscal watchers, including the PBO and the International Monetary Fund, continue to view the debt-to-GDP ratio as a key marker of sustainable borrowing. Desjardins forecasts this ratio will rise when the oil windfall fades starting in 2027-28 before declining later. The budget will be released on Thursday.

With files from The Canadian Press and BNN Bloomberg