Budget 2025 hinges on high expectations for the business community

Prime Minister Mark Carney released the long-awaited Budget 2025 at a time when Canada faces below-potential economic growth. The structural challenges that have long defined Canada’s economy, most notably weak productivity and sluggish investment, pre-date Carney’s tenure. Still, this budget acknowledges that the country is in need of a clear course correction.

Attracting investment has been a perennial challenge for Canada, made even more difficult by a dramatic shift in U.S. tax and trade policy. Budget 2025 represents a step in the right direction, with a renewed focus on economic growth, but expectations are very high.

The budget introduces $89.7 billion in new spending over five years, alongside an additional $36 billion in commitments since the 2024 Fall Economic Statement. Combined, total new spending reaches $125.7 billion—roughly $15–20 billion annually. While overall expenses continue to rise, the government anticipates meaningful savings through operational restraint and efficiency gains.

Fiscal Anchors and Outlook

Budget 2025 set out the government’s two fiscal anchors: a declining deficit-to-GDP ratio and a balanced operating budget by 2028. The deficit which reaches $78 billion in 2026, improves modestly over the forecast horizon and somewhat in line with the Parliamentary Budget Officer’s projection. However, the coveted debt-to-GDP ratio remains largely unchanged, deteriorating slightly over the next five years. This combination suggests a strategy focused more on fiscal stabilization than true debt reduction.

Balancing the (Operating) Budget

Budget lines were recategorized into capital and operating expenses, with the goal of prioritizing spending that can “catalyze” investment. Capital outlays are projected to grow from 58% to 100% of the total deficit by 2028, reflecting a significant reorientation of fiscal priorities.

The government has also introduced a comprehensive expenditure review that cuts 5% of direct program expenses—about $13 billion annually or $60 billion over five years. These savings will come from program reviews and public sector workforce reductions of 40,000 positions by 2028, bringing the core federal workforce to around 330,000. While the slowdown in operational spending growth is commendable, major transfers to provinces and individuals will continue to grow rapidly. Overall expenditures are expected to rise, driven by higher public debt charges, which will reach $76 billion by 2029 (roughly 2% of GDP).

Carney’s Capital Plan

Despite the rhetoric to double annual federal capital investments to $60 billion, Budget 2025 only adds $32.5 billion in capital spending over five years (roughly 1% of GDP). The majority of this spending is directed toward defence modernization, aligning Canada more closely with its NATO target of 2% of GDP. Broader infrastructure investment remains modest, with most projects funneled through the Major Projects Office, the Canada Infrastructure Fund, and the Canada Growth Fund.

The government’s commitment to a “one project, one review” approach to streamlining regulations is a positive signal for investors seeking faster regulatory timelines (especially in mining, oil and gas), but this commitment was in prior statements and will depend on execution.

The measures in the budget are supposed to “catalyze” somewhere between $500 billion in private-sector investments, while enabling $1 trillion over the next five years, which is quite optimistic in its expectations that the opportunities are there.

New Industrial Strategy: Investment and Trade

A centerpiece of Budget 2025 is the introduction of a “Productivity Super-Deduction” aimed at stimulating private-sector investment. This measure accelerates write-offs for machinery and equipment, clean technology assets, and LNG projects through enhanced Capital Cost Allowances (CCAs). The goal is to encourage business reinvestment and strengthen productivity, particularly in the manufacturing sector.

The budget also maintains the Scientific Research and Experimental Development (SR&ED) program as a cornerstone of Canada’s innovation policy. However, the new tax measures are relatively narrow, offering significant benefits to capital-intensive industries while remaining time-limited (sunsetting between 2030 and 2033) unlike the permanent investment incentives introduced in the United States.

Beyond tax measures, the government announced the creation of a Critical Minerals Sovereign Fund, adjustments to Export Development Canada’s trade framework, and new investments in trade corridors. Together, these initiatives seek to strengthen Canada’s industrial base and diversify its export markets.

Time Will Tell

Overall, Budget 2025 reflects a measured increase in capital spending anchored by two fiscal commitments: a declining deficit-to-GDP ratio and a balanced operating budget by 2028. The government aims to redirect public spending toward investment and productivity while achieving savings within the public service.

The real test, however, lies ahead. Whether the new investment incentives can unlock $500 billion to $1 trillion in private-sector activity will determine the budget’s success. Persistent affordability pressures and ongoing policy uncertainty may make it difficult to rally households and businesses behind an agenda intended to pull Canada out of what is a “generational” rut.

Charts

Sources: Business Data Lab, Department of Finance Canada, Parliamentary Budget Office.