Budget 2025 goes big on capital spending, deficit projected at $78.3B

OTTAWA — Presenting a plan for major infrastructure and industrial investments intended to shape Canada’s future, Prime Minister Mark Carney’s first-ever federal budget focuses on driving economic growth and making the country more self-sufficient, while projecting a deficit that is billions of dollars bigger than forecast a year ago.

Framed as a plan to create an economy “by Canadians, for Canadians,” the budget – titled “Canada Strong” – outlines how the government intends to steer the country through the current storm of uncertainty with “bold” capital investments, while reducing day-to-day operational expenditures.

With the U.S. trade war reshaping the global trading system and a weaker economy adding pressure, economists say Finance Minister Francois-Philippe Champagne’s debut budget is focused on the long-run, with pro-business measures meant to increase productivity and inject certainty at a time where it’s in short supply globally.

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An extension of this though, is that there is very little in the budget tailored towards everyday Canadians’ cost of living concerns. Still, the government insists the measures they intend to advance will boost average wages and create revenue that helps support health care and lower taxes.

With this budget – tabled in the House of Commons on Tuesday afternoon – the Liberals are choosing to prioritize “generational investments” over slashing the deficit, which the government says would have come at the expense of social programs.

As a result, the federal deficit is projected to be $78.3 billion in 2025-26, a marked increase from the deficit forecast in last December’s fiscal update, which projected it to be $42.2 billion in 2025-26.

In 2026-27 the deficit is projected to be $65.4 billion, and the budget forecasts the deficit will continue to slightly decline over the three years following, to $56.6 billion by 2029-30.

The 2025 federal budget includes $32.5 billion in net-new capital spending over five years, and projects a $1.7 billion surplus in the federal government’s operating budget by 2028-29. Overall, the 406-page document details $141 billion in new spending, offset by $51.2 billion in savings, amounting to a total net new spend of $89.7 billion.

Speaking with reporters inside the budget lockup, the finance minister sought to make the case that Canada has what the world wants – from critical minerals to AI – and that in his view, this budget sets the foundation for the country to harness its existing strengths, bolster key Canadian industries, and reach new markets.

“Today we’re delivering an investment budget, the kind of budget that will make Canada more resilient, more prosperous,” Champagne said.

“We need to meet this moment… We will play to our strengths, take bold actions, and secure Canada’s future. We owe it to this generation and future generations.”

EY Canada’s tax policy leader Fred O’Riordan told CTV News he found this budget showed “more fiscal discipline than previous budgets of the former Liberal government.”

“There was less spending scattered through the budget document and more focus on spending that would create investments and improve productivity in the Canadian economy,” he said.

This massive spending document – the first look at the state of federal finances in close to a year – comes on the heels of the Bank of Canada signalling an end to its rate cutting cycle, barring “evidence of a materially altered economic outlook.”

Tracking to maintain a declining deficit-to-GDP ratio over the five-year horizon, while upholding Carney’s pledge to balance day-to-day operating spending with revenues by 2028-29, are the fiscal anchors this budget rests on.

“As a share of the deficit, capital investment will grow from 58 per cent in 2025-26 to 100 per cent from 2028-29 onwards,” the budget states.

Big ticket spending

Overall, the budget commits to spending $280 billion over five years on capital investments in new infrastructure, productivity and competitiveness measures, defence and security, and housing.

This is what the government is characterizing as its “generational investments,” though a considerable amount of this spending has been reallocated from pre-announced pockets of funding.

Mostafa Askari, chief economist at the Institute of Fiscal Studies and Democracy at the University of Ottawa, said with this budget, the government is pivoting from focusing on social safety nets, to spending that helps the economy.

“This is very clear in this budget, that all the focus is on capital spending and how we can incentivize firms and private sectors to invest more in Canada,” he told CTV News.

On the infrastructure front, the Liberals are earmarking $115 billion over five years, including a dedicated “Build Communities Strong Fund” to support a range of local infrastructure projects.

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The productivity and competitiveness portion of this plan includes $110 billion in spending going towards regional economic development initiatives; emerging technology support for sectors such as artificial intelligence, quantum, and electric vehicles; the unveiling of a new “productivity super deduction”; and additional research and development incentives.

When it comes to defence and security, the budget includes $81.8 billion over five years to “rebuild, rearm, and reinvest” in the Canadian military. This includes the $9 billion Carney announced in June when he committed to reach NATO’s target of two per cent of GDP spending this year, and $6.6 billion over five years, to strengthen Canada’s defence industry through the “Defence Industrial Strategy.”

To achieve the NATO target, it appears in this budget that the Liberals have opted to adopt a new definition of what counts as defence spending, seeing other security expenditures included, for example.

Helping offset a portion of this new spending, is a plan to save $1.1 billion over four years by divesting fleets that are reaching the end of their service life, saving on costly repair and sustainment costs.

And on the housing front, Champagne is committing to “supercharge” homebuilding, outlining $25 billion in spending plans, pulling largely from existing programming, which includes $13 billion over five years for the prime minister’s “Build Canada Homes” plan.

The budget also outlines the government’s plans to accelerate new nation-building projects, but does not announce any new specific project funding beyond what is being set aside to strike the Major Projects Office and accompanying Indigenous consultation efforts.

Similarly, there is mention of the measures the government has already taken to support the industries being hit by U.S. tariffs, but little new beyond some additional measures targeted at agriculture, fish, seafood, and forestry sectors and the debut of a new trade diversification strategy to double oversees exports within the next decade.

Arguably interconnected with the big project push and the need to export more beyond the U.S., the budget also promises $5 billion for a new trade diversification corridor fund, meant to strengthen supply chains.

“There are some large expectations made about the level of capital this budget can bring in. It will be up to businesses to see if this will be enough and spur the ambitious level of return on investment the government hopes for,” said Canadian Chamber of Commerce public policy chief Matthew Holmes.

And while welcoming some of the immediate expensing measures for industry, Canadian Manufacturers and Exporters president Dennis Darby expressed hesitation about the amount of growth the budget will generate stating: “deeper tax reform, substantial red-tape reduction are needed to shift Canada from managing risk to driving growth.”

Public service cuts coming

Coming alongside the investment portion of this budget, are detailed plans to spend less on day-to-day government operations.

This summer, cabinet ministers were asked to find up to 15 per cent operational savings over the next three years, and the budget includes the results of that comprehensive expenditure review.

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The Liberals say they will rein in government spending, to the tune of $60 billion over five years. In 2026-27 the planned cuts will result in an estimated savings of $9 billion, rising to $10 billion in 2027-28 and $13 billion in 2028-29.

This spending reduction will be achieved through “restructuring operations and consolidating internal services and rightsizing programs to realise efficiencies,” the budget states.

Among the examples of how this will be done, is through leveraging technology, modernizing back-office administrative functions, limiting discretionary travel spending and the use of external consultants.

The Liberals are also forging ahead with pre-signalled cuts to the public service, aiming to shed 28,000 jobs by 2028-29.

Of these, the government plans to eliminate 16,000 positions in coordination with the spending review, and shedding an additional 12,000 jobs through attrition, which includes offering voluntary leave and early retirement incentive packages.

There is also talk of “recalibrating government programs” and “streamlining” their delivery, though the budget makes good on Carney’s commitment to maintain funding for key social programs including childcare, dental care, pharmacare, and old age security.

Changes meant to improve access to the Canada Disability Benefit, and long-term funding for the school food program are also highlighted in this budget, as are commitments to provide new money to the Department for Women and Gender Equality for a range of initiatives.

Though, there are outright cuts to other programs. Among the items detailed in the 2025 budget are the outright axing of the Trudeau-era tree-planting program, “aligning” the medical cannabis benefit with market prices, and “returning” international development assistance spending to pre-pandemic levels.

New immigration, climate targets

As illuded to in Carney’s pre-budget address, the fiscal roadmap for the years ahead includes new targets on two fronts.

On immigration, the budget lays out an initial “Immigration Levels Plan” to stabilize the number of permanent resident admission targets at 380,000 annually for the next three years.

The budget also confirms plans to reduce the target for new temporary resident admissions, and increase the number of economic migrants, with more specifics and considerations around tariff-impacted sectors coming in the immigration minister’s coming annual report.

The overall target over three years is higher than the previous government’s target of admitting 395,000 permanent residents in 2025, getting down to 365,000 by 2027.

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Linked to the immigration shift, is a new $1.7 billion “International Talent Attraction Strategy” that aims to incentivize the world’s best and brightest to “chose Canada to innovate, invent and grow our industry.”

The document also outlines the Liberals’ highly anticipated “Climate Competitiveness Strategy,” which the government has framed as being focused more on “results” than “objectives.”

The Liberals say broadly they intend to maximize “carbon value for money,” and are pivoting their approach from past governments to prioritize measures they see as resulting in the most impactful emissions reductions, at the lowest cost to Canadians.

What this includes in practice, according to the budget, is strengthening – not scrapping – the industrial carbon pricing system by working with provinces and territories to set a multi-decade industrial carbon price trajectory that targets net-zero by 2050.

There are also a trio of key tax credit commitments: implementing a clean electricity investment tax credit; extending the availability of full credit rates for the carbon capture, utilization, and storage investment tax credit; and expanding the list of critical minerals eligible for the clean technology manufacturing investment tax credit.

Other measures to encourage investment include $2 billion for a “critical minerals sovereign fund,” which will help unlock natural resources that are crucial for the development of new technologies.

There are also measures to make developing “low-carbon” liquefied natural gas (LNG) more cost-effective through tax incentives — something that comes at a time when partners in Asia and Europe are anxious to get more of that fossil fuel from Canada.

As for the goal to reduce emissions to 40 per cent below 2005 levels by 2030 — another Trudeau-era policy – the budget includes no clear indication as to whether the government is still aiming to meet that target, opening speculation that it could be dropped.

“Effective carbon markets, enhanced oil and gas methane regulations, and the deployment at scale of technologies such as carbon capture and storage would create the circumstances whereby the oil and gas emissions cap would no longer be required as it would have marginal value in reducing emissions,” the budget states.

Will all this pass?

This budget is the first of a new fiscal reporting cycle, which going forward will see federal budgets tabled in the fall and followed up by economic updates in the spring.

This timing change is meant to provide more certainty for construction season, and predictability for provinces and the private sector, according to the Finance Department.

The last time the House of Commons received a detailed accounting of the country’s coffers was last December, amid apprehension of a looming trade war with the United States, but before U.S. President Donald Trump imposed any tariffs on Canadian goods.

That fiscal update was also delivered amid political turmoil between then-prime minister Justin Trudeau and his then-finance minister Chrystia Freeland, a relationship breakdown that arguably culminated in Carney taking the reins of the long-governing Liberal party months later.

The big question now is, will this document lead to new political upheaval, or will the prime minister be able to press ahead and pass his big plans?

The federal budget is a key matter of confidence for any government, and with Carney’s Liberals just three seats shy of a majority, they will need either the support or abstention of MPs from outside their party in order to have the numbers needed to pass it.

How those votes fall in the days and weeks ahead will determine whether Carney’s minority falls, and whether this country could be thrust into a winter election.

On Monday, while trying his hand at cobbling how own budget-day shoes, Champagne said he expects the opposition parties to be supportive of this package, as in his view it meets the moment and has something to offer Canadians from all walks of life.

Whether Conservative Leader Pierre Poilievre, Bloc Quebecois Leader Yves-Francois Blanchet, and interim NDP Leader Don Davies agree, is another matter.

Poilievre had called on Carney to keep the federal deficit under $42 billion and quickly declared his party will not support this economic plan. Though in a late-breaking development, one of his MPs, Chris d’Entremont resigned from caucus on Tuesday, opening up one potential vote that could fall in the government’s favour.

And after the Bloc’s so-called “non-negotiable” big-ticket demands didn’t get met, Blanchet told reporters he doesn’t foresee his party voting in favour of it, either.

Green Party Leader Elizabeth May also told reporters that at this point she will “absolutely” vote against the budget, but expressed optimism about negotiating amendments before it comes to a vote.

In an interview on CTV Power Play with Vassy Kapelos on Tuesday, Davies couldn’t yet say whether the NDP caucus would support the budget.

“We don’t yet,” he said. “We plan on studying the budget, really understanding it tonight, and then we’ll meet tomorrow morning and start having our political discussions.”

For his part, ex-central banker-turned prime minister Carney has signalled he’d be prepared to fight an election over this budget, calling it “historic.”

With files from CTV News’ Spencer Van Dyk