The Carney government’s first budget didn’t focus on “gimmicky,” narrowly targeted social programs as previous budgets had, and instead laid out an ambitious plan to lift the Canadian economy with a focus on investments in housing, infrastructure and defence, economists say.
“This was a very serious effort to try to shift the economy, to make it more productive, to build up infrastructure, to support the defence industry, and, yes, support businesses through this transition,” says Doug Porter, chief economist and managing director at BMO, referring to the U.S. instituting significant tariffs on its trading partners, especially Canada.
“Whether it works or not, it’ll take time (to tell),” he adds.
New economic focus
“This budget put the economy at the forefront, which hasn’t always been the case (compared to) the last 10 years, (when) sometimes the economy was seen as a little bit of an afterthought.”
“Everything isn’t going to work out just perfectly, but the fact that (boosting the economy) is the way they’re aiming for is important,” Porter says, giving the budget “a passing grade.”
Capital spending and cuts
The 2025 Federal Budget, released Nov. 4, lays out capital spending of about $280-billion over five years and outlines $60-billion in cuts to program spending and the public service over five years.
The budget spells out a slew of spending on infrastructure and other capital projects including: $84-billion in spending on defense in the next five years; capital investments of nearly $60-billion; $51-billion over 10-years for the Build Communities Strong Fund for local infrastructure; $5-billion over seven years for a Trade Diversification Corridors Fund to build up ports, and rail infrastructure; $13-billion over five years for the Build Canada Homes initiative; $1-billion over four years for the Arctic Infrastructure Fund.
In addition, the Canada Infrastructure Bank got an additional $10-billion for a total of $45-billion to invest in “nation-building” projects, referred by the Major Projects Office.
Federal Finance Minister François-Philippe Champagne said the investments in the budget could encourage $1-trillion in private-sector investment.
Infrastructure projets
The overall impact of infrastructure spending “can be quite impactful” but will depend on how quickly municipalities and other partners come forward, says Cynthia Leach, assistant chief economist at RBC. “It’s really going to depend on how ready these projects are and how everyone can come to the table to move forward,” she explains.
“Infrastructure could be very stimulative for the economy,” she adds.
“It’s going to matter more (how it fuels) near-term economic growth, but also if it’s infrastructure that has the potential to enhance productivity,” such as defence construction that can serve multiple purposes and help businesses, too. “That could really have a long-term benefit to businesses and the economy.”
“It really matters how that defence spending interacts with the rest of the economy, fosters innovation and helps build up Canadian defence companies to be “champions for global defence supplies.”
Fostering innovation
The budget also made improvements to the Scientific Research and Experimental Development tax incentives (SR&ED) to spur more research and development in Canada.
Capital spending
Another key initiative is a “productivity super-deduction” that will allow businesses to speed up write-offs of new capital investments on manufacturing, processing equipment, clean-energy generation, technologies that boost productivity and research and development.
“This productivity super deduction, it’s actually a relatively small amount of new money at the margin (but) I think that could be helpful,” says Leach.
While companies can amortize that cost over the life of that investment, being able to do it faster, “it’s really about the time value of money,” Leach says. “So, it’s an efficient tool to provide that investment stimulus.”
The uncertainty in the economy and not the cost of borrowing is causing some companies to hold back on new investments, Leach suggests.
“That’s the logic, as it were, in big government spending – not just in business-focused measures, but overall – how can government, through infrastructure, through defence, through other things, create a more vibrant economic situation near term, so businesses feel more confident to invest into that,” she says.
Leach says all these moves are to boost the economy overall, and that can trickle down to improve affordability.
“Stronger real growth in the economy improves affordability generally,” she says, but it can take a longer time horizon.
“It can be a much stronger, durable, and sustainable way to address affordability challenges.”
Overall economic impact
Porter says BMO expects Canada’s economic growth to pick up next year due to the supportive spending by the government and the potential for those measures to encourage investment.
“We think we can generally avoid a recession (since) we are going to have a lot of support from government spending here, whether it’s direct or indirect.”
One big question mark is how well the government can successfully allocate billions in defence spending dollars to ensure they boost our defence capacity while also helping the domestic economy.
“That’s not an easy needle to thread,” Porter says, particularly as defence procurement in the past has been “an unwieldy process.”
The budget comes in with a $78.3-billion deficit this fiscal year – falling to $56.6-billion in 2029-30. The deficit-to-GDP ratio will total 2.5 per cent of gross domestic product, gradually falling to 1.5 per cent in 2029-30. The debt-to-GDP ratio is at 42.4 per cent. The budget also outlined $60-billion in cost-saving measures, including reducing the federal government workforce.
“I would like to see that deficit slowly decline over time, as they’re projecting,” Porter says.
But while a deficit at 2.5 per cent of the economy “is a serious sized budget deficit, (it’s) not concerning, especially given the situation we find ourselves in.”
After the release of the budget, BMO is sticking to its forecast for just over one per cent in gross domestic product growth after inflation next year, which takes into account the increase in defence spending as well as measures to boost housing and incentivize capital spending.
