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 Frontier Centre for Public Policy

By Jay Goldberg

Between bad trade calls and looming deficits, Canada is driving money out just when it needs it most

Canadians voted for relative continuity in April, but investors voted with their wallets, moving $124 billion out of the country.

According to the National Bank, Canadian investors purchased approximately $124 billion in American securities between February and July of this year. At the same time, foreign investment in Canada dropped sharply, leaving the country with a serious hole in its capital base.

As Warren Lovely of National Bank put it, “with non-resident investors aloof and Canadians adding foreign assets, the country has suffered a major capital drain”—one he called “unprecedented.”

Why is this happening?

One reason is trade. Canada adopted one of the most aggressive responses to U.S. President Donald Trump’s tariff agenda. Former prime minister Justin Trudeau imposed retaliatory tariffs on the United States and escalated tensions further by targeting goods covered under the Canada–United States–Mexico Agreement (CUSMA), something even the Trump administration avoided.

The result was punishing. Washington slapped a 35 per cent tariff on non-CUSMA Canadian goods, far higher than the 25 per cent rate applied to Mexico. That made Canadian exports less competitive and unattractive to U.S. consumers. The effects rippled through industries like autos, agriculture and steel, sectors that rely heavily on access to U.S. markets. Canadian producers suddenly found themselves priced out, and investors took note.

Recognizing the damage, Prime Minister Mark Carney rolled back all retaliatory tariffs on CUSMA-covered goods this summer in hopes of cooling tensions. Yet the 35 per cent tariff on non-CUSMA Canadian exports remains, among the highest the U.S. applies to any trading partner.

Investors saw the writing on the wall. They understood Trudeau’s strategy had soured relations with Trump and that, given Canada’s reliance on U.S. trade, the United States would inevitably come out on top. Parking capital in U.S. securities looked far safer than betting on Canada’s economy under a government playing a weak hand.

The trade story alone explains much of the exodus, but fiscal policy is another concern. Interim Parliamentary Budget Officer Jason Jacques recently called Ottawa’s approach “stupefying” and warned that Canada risks a 1990s-style fiscal crisis if spending isn’t brought under control. During the 1990s, ballooning deficits forced deep program cuts and painful tax hikes. Interest rates soared, Canada’s debt was downgraded and Ottawa nearly lost control of its finances. Investors are seeing warning signs that history could repeat itself.

After months of delay, Canadians finally saw a federal budget on Nov. 4. Jacques had already projected a deficit of $68.5 billion when he warned the outlook was “unsustainable.” National Bank now suggests the shortfall could exceed $100 billion. And that doesn’t include Carney’s campaign promises, such as higher defence spending, which could add tens of billions more.

Deficits of that scale matter. They can drive up borrowing costs, leave less room for social spending and undermine confidence in the country’s long-term fiscal stability. For investors managing pensions, RRSPs or business portfolios, Canada’s balance sheet now looks shaky compared to a U.S. economy offering both scale and relative stability.

Add in high taxes, heavy regulation and interprovincial trade barriers, and the picture grows bleaker. Despite decades of promises, barriers between provinces still make it difficult for Canadian businesses to trade freely within their own country. From differing trucking regulations to restrictions on alcohol distribution, these long-standing inefficiencies eat away at productivity. When combined with federal tax and regulatory burdens, the environment for growth becomes even more hostile.

The Carney government needs to take this unprecedented capital drain seriously. Investors are not acting on a whim. They are responding to structural problems—ill-advised trade actions, runaway federal spending and persistent barriers to growth—that Ottawa has yet to fix.

In the short term, that means striking a deal with Washington to lower tariffs and restore confidence that Canada can maintain stable access to U.S. markets. It also means resisting the urge to spend Canada into deeper deficits when warning lights are already flashing red. Over the long term, Ottawa must finally tackle high taxes, cut red tape and eliminate the bureaucratic obstacles that stand in the way of economic growth.

Capital has choices. Right now, it is voting with its feet, and with its dollars, and heading south. If Canada wants that capital to come home, the government will have to earn it back.

Jay Goldberg is a fellow with the Frontier Centre for Public Policy.