From the Fraser Institute

By Jake Fuss and Grady Munro

The Carney government will spend more, run larger deficits and accumulate more debt than was previously planned by the Trudeau government.

In the 1939 film the Wizard of Oz, Dorothy and her companions travel to the Emerald City to meet the famous Wizard of Oz who will solve all their problems. When first entering the Wizard’s chambers, the group sees a giant ghostly head that meets their expectations of the “Great and Powerful Oz.” However, later on in the film (much to their disappointment) we learn that the Wizard is nothing more than an ordinary man operating a machine behind a curtain.

Canadians might feel a similar kind of disappointment about the Carney government’s first budget tabled on Tuesday. Prime Minister Carney promised a “very different approach” than that of his predecessor regarding Ottawa’s finances, and at first glance the budget appears to be this new approach. But when you pull back the curtain, it’s simply an escalation of the same failed fiscal policies Canadians have suffered for the last decade.

For context, the Trudeau government’s approach to government finances was record-high levels of spending, persistent deficits and massive debt accumulation. The Trudeau government created a fiscal mess, and as a “responsible fiscal manager” the Carney government has promised to clean it up.

To that end, the Carney government now separates spending into two categories: “operating spending” and “capital investment.” Capital investment includes any spending or tax expenditure (e.g. tax credits and deductions) that contribute to the production of an asset (e.g. infrastructure, machinery or equipment). Operating spending includes everything else, and is supposed to represent “day-to-day” government spending.

The government plans to balance the “operating budget”—meaning it will match operating spending to revenue—by 2028/29, while leaving capital investments to be financed through borrowing. Importantly, when calculating the operating balance, the government counts revenues that are foregone due to tax expenditures that are considered to be capital investments.

To help find the savings needed to balance its operating budget by 2028/29, the government initiated a “Comprehensive Expenditure Review” this past summer—the budget reveals the review’s results. Part of the review included a long overdue reduction in the size of the federal public service, as the government will cut 16,000 positions this year, and reach a total reduction of almost 40,000 by 2028/29 compared to levels seen two years ago. As a result of this spending review, the budget projects spending in 2028/29 will be $12.8 billion lower than it otherwise would have been.

This is the fiscal picture the Carney government is focusing on, and the one it undoubtedly wants Canadians to focus on, too. When taken at face value, balancing the operating budget, initiating a spending review, cutting the federal bureaucracy, and focusing on greater investment would certainly appear to be a different approach than the Trudeau government—which made no meaningful effort to balance the budget or restrain spending during its tenure, grew the bureaucracy, and allowed business investment to collapse under its watch.

But here’s the problem. When you pull back the curtain, all the rhetoric and accounting changes are just a way to obscure the fact the Carney government will spend more, run larger deficits and accumulate more debt than was previously planned by the Trudeau government.

Both operating spending and capital investment (which represents either additional spending or foregone revenue) impact the bottom line, and by separating the two the Carney government is simply obscuring the true state of Ottawa’s finances. If we ignore the government’s sleight of hand and instead compare total government spending against the revenues that are actually collected, the true size of the budget deficit this year is expected to equal $78.3 billion. Not only is that considerably more than the “operating” deficit the government is focusing on, it’s also nearly double the $42.2 billion deficit that was originally planned by the Trudeau government.

The story is similar for years to come. While the Carney government claims it will balance the operating budget by 2028/29, the overall deficit will be $57.9 billion that year. Over the four years from 2025/26 to 2028/29, overall deficits under the Carney government will equal a combined $265.1 billion. In comparison, the Trudeau government had only planned to run deficits equaling a combined $131.4 billion during those same four years—meaning the Carney government plans to borrow more than twice as much as the Trudeau government.

Driving this increase in borrowing is a combination of lower revenues and higher spending. From 2025/26 to 2028/29, the Carney government expects to collect $70.5 billion fewer revenues than the Trudeau government had previously projected. This difference likely comes down to a combination of the economic impact of U.S. tariffs along with various tax measures implemented by the Carney government that lower revenues (including cancelling a proposed increase to capital gains taxes and cutting the bottom federal personal income tax rate).

On the flip side, the Carney government plans to spend $63.4 billion more in total than the Trudeau government due to the introduction of considerable new spending commitments (notably on defence and housing), and the expectation of higher interest payments on its debt. The reality that spending is only set to rise under the Carney government stands in stark contrast to the prime minister’s rhetoric regarding “austerity” and the “ambitious savings” found by the government’s so-called spending review.

Higher spending and larger deficits will help grow the mountain of federal debt. By 2028/29, the Trudeau government had originally projected that total government debt would reach $2.6 trillion—which, based on the budget forecasts, would represent 72.2 per cent of the overall economy. The Carney government’s fiscal plan now puts total federal debt at $2.8 trillion by 2028/29, or 78.6 per cent of the overall economy. For perspective, the last time total federal debt pushed 80 per cent of the economy was during the 1990s when Canada teetered on the brink of a fiscal crisis.

Finally, the government’s approach to spending and the deficit doesn’t seem to be in line with what Canadians wanted to see from this budget. A poll conducted prior to the budget showed that 69 per cent of respondents felt it’s important for the government to balance the budget, compared to just 27 per cent who supported continued deficit spending. In fact, three out of five respondents felt that too much government spending has contributed to the rising cost of living and inflation—the issue they’re most concerned about.

Like a certain Wizard, Prime Minister Carney has made grand promises to fix many of the serious problems facing Canada. At first glance, the Carney government’s first budget may appear to deliver a new plan that will get federal finances back in order. Just pay no attention to the man behind the curtain.

Jake Fuss

Director, Fiscal Studies, Fraser Institute

Grady Munro

Policy Analyst, Fraser Institute

From the Fraser Institute

By Kenneth P. Green

The Carney government will table its long-awaited first budget tooday. The vote on the budget is expected to be a confidence vote, so the stakes are high. Everyone is speculating about what’s to be in it. CBC, the Toronto Sun and Global News are all reading the tea leaves. And I hate to miss a tea party.

The budget is, naturally, going to have major implications for Canada’s economic indicators of debt, deficit, spending, governmental expansion/contraction, and so on. I’ll leave all that macroeconomics to my colleagues at Fraser Institute. But Prime Minister Carney has made some specific claims in my areas of specialty (environment, natural resources and regulation), and has made noises about Canada becoming an “energy superpower” and “building things” again. He’s also, in speeches leading up to the budget, re-affirmed that the Trudeau-era climate-change-centric, carbon-emission-control mindset is unchanged. The wording has changed, but the focus and predicates remain. Now though, rather than pounding on terms such as carbon, greenhouse and climate change, it’s all about Canadian policy being “responsible,” “sustainable,” “moral” and “equitable.”

Here’s what I’ll look for in the budget.

First, will the government dismantle or reform bills C-48, C-69 and the oil and gas emission cap—the three-pronged trident of death for major oil and gas development in Canada? Without this, it will be difficult to take any of his talk of energy superpower or natural resource trade renaissance seriously.

Second, will the government renounce or seriously reform the economically irrational, unattainable and crippling “net-zero 2050” anti-carbon agenda and shift Canada’s climate policy from emissions abatement to something potentially more attainable, such as adaptation and resilience building? Will it free Canada’s carbon natural resource economy to be the engine of Canadian prosperity and international competitiveness once again? Or keep Canada’s carbon (oil and gas) economy (and manufacturing economy) on a path toward extinction?

Third, will the government reset the tone of Canadian culture and defuse some of the adversarial relations with resource-rich provinces by acknowledging that Canada’s natural-resource economy has been, is now and must continue to be a cornerstone in Canada’s total economy? Or will it stick to the “net-zero” extinction process for carbon emissions, which will also be an extinction process for anything that requires substantial energy generation, and for the development of natural resources as the primary wealth engine of Canada? Will the government end the disdain for the role of Canada (and notably some of Canada’s western provinces) as a natural-resources export economy?

The budget will offer a window into the mind of Prime Minister Carney on the matter of natural resources in Canada’s economy and society. With global changes undermining the international carbon control regime and idee fixe, and with an understanding that Canada is on an economic precipice, there’s an opportunity here. Let’s hope Carney works to unshackle one of Canada’s greatest engines of economic progress—its energy and natural resource production, transformation, transportation, consumption and exportation.

Canadians could use the boost in quality of life that Canada’s natural resources could bring to current and future generations.