Posthaste: Canadians should brace for bigger federal budget deficit than they thought

Canadians are in the dark about Ottawa’s finances as they wait for the budget to be unveiled in the fall, but economists say they should probably brace for a

bigger deficit than has been projected. How much bigger? Quite a bit, according to BMO Capital Markets.

“Suffice it to say that both the Parliamentary Budget Officer’s March baseline ($46.8 billion deficit) and the Liberal platform ($62.3 billion) are likely underestimating the size of the FY25/26 shortfall,” said Robert Kavcic, senior economist with BMO Capital Markets

in a recent note. A lot has changed since Prime Minister Mark Carney won the election, and BMO now estimates the federal deficit could climb towards $80 billion or about 2.5 per cent of GDP.

First there are the knowns. Measures in the Liberal platform to offer relief to Canadians are already coming into play, such as the July 1 personal income tax cut, cancellation of the

capital gains inclusion rate hike and GST relief for some new home buyers. Then there are the unknowns. The sudden cancellation of Canada’s

digital services tax after U.S. President Donald Trump broke off trade talks will cost the government about $7 billion in lost revenue, BMO estimates.

Defence is another “major shift.” The increase in defence spending to 2 per cent of GDP this fiscal year and 5 per cent by 2035 means $8 billion more in incremental spending in the 2025/26 fiscal year, said Kavcic.

The de-escalation of the trade war with the U.S. and possibility of a deal is good news and means the federal government can likely trim the $3 billion it had earmarked for direct support to those affected by tariffs.

On the flip side, the $20 billion Ottawa put down as retaliatory tariff revenue will also likely fall short. “Given the pause in some measures, and a looming trade deal likely to scale back some others, that figure could come in $10-to-$15 billion lower,” said Kavcic.

During the election campaign, Carney said he would slow growth in government spending to about 2 per cent annually, down from 9 per cent under Justin Trudeau. And there are already signs the government is working on it.

Finance Minister Francois-Philippe Champagne reportedly sent a letter to cabinet members this week urging them to find ways to cut program spending by 7.5 per cent for the 2026-27 fiscal year, which begins next April.

Kavcic said government program spending climbed steadily under Trudeau to about 16 per cent of GDP by 2024/25. Before that, it was relatively stable at about 13 per cent of GDP.

“Now, it’s unlikely we’re going to see spending retrench back to those levels, as cuts will more likely be back-filled with updated policy priorities,” he said.

But if an $80-billion deficit makes your eyes water, the economist offers some context that might help.

“While a wave of red ink is rolling over Canada’s budget, it still pales in comparison to the tsunami south of the border,” he said.

Trump’s One Big Beautiful bill is set to raise the U.S. deficit above $2 trillion next year, more than 6 per cent of GDP.

There is also reason to hope that the pro-growth policies behind Canada’s deficit — tax relief and infrastructure spending — will boost the economy and have longer-term payoffs, he said.

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Send us your summer job search stories

Find out more Recently, we published a feature on the death of the summer job as student unemployment reaches crisis levels. We want to hear directly from Canadians aged 15-24 about their summer job search.

Send us your story, in 50-100 words, and we’ll publish the best submissions in an upcoming edition of the Financial Post.

You can submit your story by email to fp_economy@postmedia.com under the subject heading “Summer job stories.” Please include your name, your age, the city and province where you reside, and a phone number to reach you.

McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s

Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his

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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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