(Bloomberg) -- Prime Minister Justin Trudeau’s government ran a deeper deficit than projected and broke a fiscal objective outlined by his finance minister, who resigned the day she was set to unveil new spending and revenue estimates.
A C$62 billion ($43.5 billion) deficit in the last fiscal year blew past former Finance Minister Chrystia Freeland’s pledge to keep the shortfall at or below C$40.1 billion. She quit just hours before she was scheduled to present the so-called fall economic statement, accusing Trudeau of “costly political gimmicks” and failing to keep the “fiscal powder dry” ahead of a Donald Trump presidency.
In the economic statement ultimately released later Monday, the government blamed last year’s larger shortfall on C$21.1 billion in higher-than-expected Indigenous contingent liabilities — money set aside to pay out communities’ claims — as well as allowances for Covid-19 supports including business loans.
Canada will run a C$48.3 billion deficit in 2024-25, according to the document, which is around 1.6% of the country’s gross domestic product. The Finance Department expects a C$42.2 billion shortfall in 2025-26.
Monday’s 270-page budget document outlined key new expenditures including C$1.3 billion for border agencies over six years, an attempt to avert Trump’s threat of 25% tariffs unless the flow of migrants and fentanyl over the crossing is halted. Dominic LeBlanc, the public safety minister named Freeland’s replacement, has been overseeing that file.
The Trudeau government also announced an extension of tax breaks on business investment that were first introduced in 2018 after Trump’s tax cuts. Extending the tax breaks through 2030 will cost Canada C$17.4 billion and aims to address fears around the country’s competitiveness as a second Trump administration nears.
The government also said it plans to amend legislation to allow it to restrict imports to and exports from countries that “harm Canada.” This likely sets the stage for the country to retaliate against Trump’s tariffs by adding export taxes to potash and oil heading to the US.
Canada is also planning more tariffs against China to “combat unfair Chinese trade practices.” New levies are expected to be applied to imports of some solar products and critical minerals early next year, as well as to semiconductors, permanent magnets and natural graphite in 2026.
Trudeau’s nearly decade-long fiscal legacy has been characterized by running deficits that have helped boost consumption and expanded social expenditures, but not markedly increased economic growth in the medium or long term amid a dearth of business investment and a productivity crisis. The document includes no plan to balance the budget.
It also shows program spending rising. Since the April budget, the federal government added a net total of C$23.3 billion in new spending or tax measures between 2024 and 2030.
Rebekah Young, an economist with Bank of Nova Scotia, said Freeland’s departure and uncertainty about the future of Trudeau’s government renders the fiscal update a “placeholder.”
“This new spending plan should likely be faded for a host of reasons. The most obvious reasons are the uncertainties stemming from political developments,” she said, as the day’s events call “into question how much of the document — if any — is retained.”
The document shows a declining debt-to-GDP ratio over the medium term, falling from 42.1% last year to 38.6% by 2029-30 due to upward revisions to growth projections. The government expects the nominal size of the economy to average 4.1% growth between 2024 and 2028, 0.1 percentage points higher on average than assumed in the 2024 budget.
The declining debt-to-GDP ratio, while not as quick as previously expected, means the government expects to uphold one of its fiscal anchors, Randall Bartlett, senior director of Canadian economics at Desjardins Securities, said in a report to investors. “As a result, when compared to other major advanced economies, Canada remains one of the cleanest dirty shirts in the fiscal laundry basket,” he said.
However, he questioned the government’s ability to keep that promise over time, noting that Desjardins’ more bearish outlook starting in 2026 accounts for likely tariffs on US imports, slower population growth and an impending flood of mortgage renewals — looking a lot more like the downside scenario forecast in the budget update.
In its assumptions for economic growth, the government used private-sector forecasts from September – before the US election and Trump’s tariff threats — but said they were “adjusted to incorporate” upward revisions from Statistics Canada that boosted the size of the economy. In October, the government announced it would slash immigration targets, which economists, including Bank of Canada Governor Tiff Macklem, expect to slow economic growth next year.
“Foundational economic forecasts are already stale and could reasonably be blown out of the water in a couple of weeks with the change in regime south of the border,” Young said.
Canada’s debt is projected to rise to C$1.44 trillion by 2030. Public debt charges will rise to C$69.4 billion, from C$53.7 billion in 2024-25.
Expected bond issuance in 2024-25 rose 6% to C$241 billion. Treasury bill issuance rose 8% to C$295 billion.
(Adds quotes from economists starting in paragraph 11. A previous update added more details in the final four paragraphs.)
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