The Top Line
This afternoon, Finance Minister François-Philippe Champagne tabled the 2025 Federal Budget. The Budget is the most significant vehicle to date for the Carney government to shape Federal spending and policy, and it did mark a change in approach from the prior Liberal government – albeit mostly in ways already well-telegraphed by Mr. Carney and his team.
Ultimately, Minister Champagne’s spending plan flows from the broad themes that Prime Minister Carney and his team have consistently communicated are shaping their approach to governing – mainly a staunch belief that there are imperatives to:
- Respond to the United States (U.S.) trade tariffs with relative fiscal restraint.
- Rapidly exploit more of Canada’s natural resources (e.g., critical minerals, clean and conventional power, and agri-food products) to drive economic growth; and
- Accelerate housing and infrastructure investments to create trade and affordability benefits.
In that context, and consistent with what the Carney government had long signalled was its intent, the Budget is very focussed on private sector development and national infrastructure issues. The near exclusion of major funding announcements pertaining to social services and policy is the most dramatic departure from the prior Liberal government; signalling that Prime Minister Carney is intent on reeling in investments in that area. Overall, Budget 2025 is focussed on big topics and programs, and avoids a ‘chicken for every pot’ approach to spending.
On top of that, the Budget also begins to lay-out the roadmap for reducing day-to-day Federal spending in the coming years. Ultimately, planned Federal spending reductions of $60 billion over five years are significant for the stakeholders and programs they will impact, but not shown by the Budget’s forecasting to be particularly material to Canada’s overall fiscal position.
Regarding that fiscal position, the Carney government remains consumed with addressing the blows to Canada’s economy from U.S. trade tariffs. Budget 2025 projects a persistent 1.8% reduction in GDP compared to the estimates in Fall Economic Statement (FES) 2024, until at least Q1 2027. In that context, the Government’s Budget messaging seeks to acknowledge and ease Canadians’ anxieties about the economy, affordability, and the changing job market. However, the Budget fully abandons the prior Carney assumption that Canada will achieve a new, stable, and predictable trading relationship with the U.S., and instead lays out a plan to adjust to the new reality of higher American tariffs and minimize their impact by diversifying trade and making long-term oriented infrastructure investments.
Of course, as a minority government, the Liberals require some opposition support or abstention on budget votes to avoid an election. Stakeholders should expect a lot of drama and posturing about that in the coming three weeks, but TSA expects the Budget will pass. Notably, the margin of Liberal error on budget votes shrunk by one today when Nova Scotia MP Chris d’Entremont crossed the floor to join the Liberals from the Conservatives.
A Deeper Dive
Budget 2025 is framed by a priorly announced new Capital Budgeting Framework, through which the Government will classify ‘capital’ and day-to-day ‘operational’ spending separately, with a plan to balance only operational spending (including major transfers to Provinces) during the time horizon of this budget (2024/25 to 2029/30).
However, the Liberals’ commitment to large ‘capital’ investments – a total of $32.5 billion to be spent on infrastructure and housing, beneficial tax treatments for business, and a new defence industrial strategy in the next 5 years – ensures that the path back to balanced Federal spending extends beyond 2029/30. In fact, the significant economic-oriented spending in the Budget suggests the Carney government sees a large role for itself in economic development going forward, just in a much different way than the prior Government. As of now, the financial markets’ approach to investment vs. operational spending tracking has been positive, but staying on the right side of that narrative could be key to the longer-term fiscal reputation of the Carney government.
The Return of Fiscal Anchors
In 2021, amidst its response to the COVID-19 pandemic, the Trudeau government stopped using budgetary fiscal guardrails (e.g., a deficit-to-GDP ratio). Budget 2025 re-establishes two such guardrails.
- Balancing day-to-day operating spending of the Government with Federal revenues by 2028-29 (though notably not ‘capital’ spending, which ensures a long-term Federal deficit); and
- Maintaining a declining deficit-to-GDP ratio over the time horizon of the Budget.
In that context, annual deficits will continue through 2029/30 and are projected to be significantly higher than the estimates for the same period in FES 2024. Projected deficits for the coming years start at $78.3 billion in 2025-26 and decline only to $56.6 billion in 2029/30. Altogether, that means the guardrail of a declining deficit-to-GDP ratio will be met on a technical basis only – with the base-case ratio floating between 42 and 43.1 percent during the Budget’s time horizon.
Major Projects and Critical Minerals
The already-operational Federal Major Projects Office (MPO) and associated natural resource and infrastructure projects continue to enjoy the spotlight in Budget 2025, as perhaps the signature policy of the Carney government.
Aside from the ‘major projects’ already announced, the Budget also highlighted several ‘major projects strategies’ that the Government views as well-placed for future investment through the MPO, namely: Critical Minerals, Wind West Atlantic Canada (Nova Scotia wind power and Maritime province interties), Pathways (carbon capture and storage network in Alberta), an Arctic Economic and Security Corridor, Port of Churchill (port expansion, new roads/rail, an energy corridor, and new icebreakers), and the Alto High Speed Rail line between Toronto and Québec City.
The MPO will also be instructed to coordinate private sector and Federal-Provincial-Territorial (FPT) financing for such projects. On that front, the Canada Infrastructure Bank (CIB) will see its capital envelope increase to $45 billion from $35 billion and the Canada Indigenous Loan Guarantee Corporation will begin working on new-build projects.
And falling partially under the umbrella of major projects, the Budget invests nearly $2.5 billion in critical minerals programs, showing that development of those resources continues to be a spending and messaging priority for the Carney government.
New Industrial Strategy
Likewise, on the economic front, Budget 2025 announces a new Industrial Strategy, primarily built around tax incentives allowing businesses to write off a much larger share of all new capital investments, including for manufacturing or processing buildings that are used for manufacturing or processing before 2030.
Also, within that strategy, the generosity of the Scientific Research and Experimental Development tax incentive program will be increased, $750 million will be allocated to support Canadian early-growth stage firms, and Export Development Canada will expand its supports by $25 billion by 2030.
A priorly announced Buy Canadian Policy complements that strategy, and the Budget notably indicates the Government will make Federal procurement under that policy exempt from review by the Canadian International Trade Tribunal.
Finally, Budget 2025 allocates $5 billion to create a Trade Diversification Corridors Fund and $1 billion to create an Arctic Infrastructure Fund for major civil-military projects in the North. Those spending envelopes support the Government’s economic strategy and straddle the line with community infrastructure investments in the Budget.
Housing and Infrastructure
On that note, Budget 2025 announces a major new FPT and Federal-Municipal infrastructure fund worth $51 billion over 10 years, starting in 2026-27, comprised of:
- A Provincial and Territorial Stream for housing-enabling (e.g., roads, water/wastewater), healthcare, and post-secondary schools infrastructure.
- A Direct Delivery Stream (requiring complementary private sector financing, including through CIB) to support regionally significant projects, large building retrofits, climate adaptation, and community infrastructure; and
- A rebranding of the Canada Community-Building Fund as the Build Communities Strong Fund, for local infrastructure projects.
Coupled with the already-announced Build Canada Homes, the substantial infrastructure investments in this budget mean that Provinces and Municipalities know the major funding programs available to them in the coming years, which had not been the case after the usual Spring Budget window was missed.
Climate Competitiveness
The Carney government has come under some of its most significant criticism for a perceived lack of commitment to climate policies at a time when the Government is driving substantial new resource and energy development. In part to counter that narrative, the Government promised a Climate Competitiveness Strategy and delivered it in this Budget.
Most significantly, the Strategy recommits to national industrial carbon pricing through:
- The establishment of a post-2030, multi-decade FPT industrial carbon price trajectory that targets net-zero by 2050; and
- Improvements to the application of the Federal benchmark carbon price and the harmonisation of the various FPT carbon credit markets.
The Strategy also signals the Government’s intent to finalize the methane reduction regulations, continue implementing the Clean Electricity Regulations and an associated investment tax credit (ITC), expand the timeline and eligibility for other ITCs (e.g., carbon, capture, use and storage and critical minerals), finalize Federal sustainable investment guidelines (by working with a non-governmental expert entity), and improve climate disclosure across the economy.
Elsewhere, the Budget offers scant detail on the future of the oil and gas sector emissions cap, (which is a major point of contention in Federal-Provincial relations), punts next steps for Federal policies on electric vehicles to “the coming weeks”, and indicates the Government intends to introduce flexibilities to Federal greenwashing legislation.
Overall, the Strategy is unlikely to satisfy Prime Minister Carney’s fiercest critics on climate issues and, conversely, will not shield his Government from ongoing Conservative attacks on industrial carbon pricing and other climate measures – leaving the Government with an uncertain path to policy and political success on this file.
Artificial Intelligence and Research and Development
Upon taking office, the new Liberal government appointed the first-ever Minister for Artificial Intelligence (AI) and appeared set to make AI policy a major feature of the Carney mandate. Since then, AI talk (from the Canadian government, at least) had faded into the background, but the Budget brings it back in a big way, including by:
- Allocating $925.6 million for public AI infrastructure enabling the CIB to invest in AI infrastructure, and committing to public-private partnerships with promising Canadian AI projects; and,
- Announcing public-private sector co-development of a made-in-Canada AI tool to be deployed across the Federal government.
The Carney government also pledges to be at the forefront of AI adoption and sees that as a key part of its Federal spending reduction plans (see below).
Banking, Investment, and Consumer Interests
While many of the measures require legislative approval and will take significant time to implement, Budget 2025 proposes several major changes to how capital flows through the banking sector, private investment channels, and amongst consumers, including:
- An FPT agreement for a Financial Services chapter for the Canada Free Trade Agreement;
- Loosening some rules on borrowing and portfolio investments by financial institutions and pension funds;
- Planned legislative amendments to support the growth of credit unions;
- Committing to passing key legislation to implement open banking by 2027; and
- Allocating $1 billion for a Venture and Growth Capital Catalyst Initiative, to support sectors such as the life sciences.
Overall, the Carney government hopes those measures help drive more private sector and consumer activity, and thus Federal tax revenues, making the job of balancing the Federal books and considering new public spending easier in the years ahead.
Comprehensive Expenditure Review
Finally, ahead of the Budget, the Carney government had established plans to reduce Federal spending, but few specific cuts were identified.
Budget 2025 presents initial details on that front – with further specifics to come in Budget 2026. Spending reductions will focus on modernizing government operations, streamlining program delivery, and refocusing some programs. High-profile spending reductions or re-directions announced today include:
- Returning international development assistance to pre-pandemic levels;
- Recalibrating all housing-related programs to focus on supply; and
- Renaming the Net-Zero Accelerator the Strategic Response Fund while shifting its spending to trade and economic resiliency rather than emissions reduction.
A Budget Annex presents high-level spending reduction and efficiency plans for each department and agency. Notably, the Government set a lower spending reduction target of 2% for some political and economic priority areas, including Indigenous programs and relations and the National Research Councils. Meanwhile, the Department of National Defence will see its spending envelope grow dramatically, including through a $6.6 billion procurement strategy.
Opposition Reaction
Official Opposition Leader Pierre Poilievre immediately indicated the Conservatives will oppose the Budget, while the NDP plans to further review the document before communicating its planned response in the coming days and the Bloc was leaning towards opposing. That not unexpected mix of reactions means we’ll have to wait up to three weeks to know the fate of the Carney government and the contents of this Budget.
What’s Next
At the beginning of Minister Champagne’s budget speech, he put forward the customary motion for approval of the Budget. Tomorrow, November 5, the first day of budget debate will occur, and the Official Opposition Conservatives and third-party Bloc Québécois will propose amendments to the Minister’s motion. Thereafter, debate about the Budget will occur over the next four sitting days of Parliament (November 5, 6, 7 and 17) and the vote on the Minister’s motion to approve the Budget will occur on Monday, November 17.
While that is an arcane procedure, each vote on those Motions is a confidence measure, so the minority Liberal government will require opposition support or abstention on them to retain power. Moreover, the three-week spread of that period (due to a Parliamentary break week for Remembrance Day) gives ample time for opposition parties to exert pressure, for the Carney government to court their support, and for election speculation to run rampant. As stated above, TSA ultimately expects the Budget to pass.
Finally, beginning with this Budget, the Government is transitioning to a fall budgeting cycle, meaning the next Budget will occur in Fall 2026 and a Spring Economic Update will supplant to former FES. For stakeholders, the key takeaways of that change are:
- If and once Budget 2025 has passed, the Government can table the first of the two Budget Implementation Acts (BIA), but the first BIA is unlikely to pass before Christmas.
- Initial legislative implementation of this and future budgets will likely bleed into February and March, closely followed by another opportunity to shape Federal spending through the May/June Spring update; and
Stakeholder planning, resource allocation, and early lobbying for future budget funding asks and preparing pre-budget submissions must now shift to the Summer – likely requiring advance forethought through the Spring – and will intensify in the Fall.
