The projections include measures announced up to and including Aug. 11, as well as tariff-related industry supports Prime Minister Mark Carney unveiled earlier this month.Sammy Kogan/The Canadian Press
Interim parliamentary budget officer Jason Jacques is warning that the federal government’s fiscal standing is deteriorating to an alarming degree, and that the country’s public finances will be unsustainable without changes.
Mr. Jacques sounded the alarm during a parliamentary committee appearance on his office’s new fiscal and economic outlook. The PBO is projecting the federal deficit will balloon this fiscal year, and it has downgraded its outlook for the Canadian economy, which is weakening under the weight of prohibitive U.S. tariffs.
The PBO’s report says the federal deficit will increase to $68.5-billion in 2025-26 from $51.7-billion in 2024-25, reflecting both lower economic growth and increased government spending.
“The path that we’re on right now isn’t sustainable, and we might have more time than those other countries, but we’re going to end up in a very similar place, without changes,” Mr. Jacques said, as he noted that Canada’s fiscal standing remains stronger than many peer countries.
The top concern flagged by Mr. Jacques is that the debt-to-GDP ratio is projected to rise over the medium term, breaking the key fiscal anchor that the government of then-prime-minister Justin Trudeau aimed to maintain. The PBO found the ratio rising throughout the projection horizon that goes until 2030-31, increasing from 41.7 per cent in 2024-25 to more than 43 per cent.
“It should be very alarming,” Mr. Jacques said. “We don’t lightly use the word ‘unsustainable.’”
The projections include measures announced up to and including Aug. 11, as well as tariff-related industry supports Prime Minister Mark Carney unveiled earlier this month.
However, they do not include any campaign commitments that haven’t been rolled out yet, nor do they include the government’s current spending review. The forecast also doesn’t take into account the federal government’s commitment to increase defence spending to 5 per cent of GDP by 2035.
The PBO projections underline the fiscal challenges the government faces as Mr. Carney’s government prepares to table its first budget on Nov. 4.
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Although Mr. Carney has promised cuts in some areas of the government, overall spending is headed higher as he moves ahead with major commitments on defence, housing and infrastructure. The outcome will likely mean high federal deficits, more debt and increased costs to finance that borrowing.
The budget will be the first update on public finances since the fall economic statement in December. Since then, U.S. tariffs have battered key Canadian sectors, triggering an economic slowdown that is expected to weigh on government coffers.
In June, Mr. Carney announced at the NATO summit that Canada will spend tens of billions of dollars more on defence as part of an effort by allies to spend 3.5 per cent of GDP on defence by 2035 and 1.5 per cent on related spending, such as critical infrastructure.
The C.D. Howe Institute published a report this summer that forecast the federal deficit would reach $92-billion this fiscal year.
The PBO is projecting that the deficit will decrease in the following fiscal years to $59.2-billion in 2030-31.
The debt-service ratio, which reflects public debt charges relative to total revenues, is expected to increase to 13.7 per cent in 2030-31 from 10.7 per cent in 2024-25. The PBO notes that’s “well above its pre-pandemic record low of 7 per cent in 2018-19.”
The erosion of federal finances comes against the backdrop of a tariff-induced economic slowdown.
Thursday’s report projects real gross domestic product will grow at an average rate of 1.2 per cent annually over 2025 and 2026. Growth is expected to rebound to 1.8 per cent in 2027, though the PBO says structurally weaker trade conditions will lower the level of real GDP by 0.5 per cent by 2030.
In its own report on Thursday, Desjardins forecast a similar economic slowdown in Canada, with growth expected to average 1.2 per cent and 1.5 per cent in 2025 and 2026 respectively.
Desjardins also weighed in on the fiscal outlook and its implications for Canada’s credit rating.
“We believe the risk of a downgrade remains low. But if, as some rumours suggest, the deficit blows past $100-billion, the budget will face unusually tough scrutiny from investors,” the Desjardins report said.
In an interview, Desjardins chief economist Jimmy Jean said the global deterioration in government finances gives Ottawa some cover. But he said if Canada wants to distinguish itself from other countries, the federal government has to maintain its credibility on its pledge to both cut spending and fast-track projects.
“The details of the budget will be very important to assess that,” Mr. Jean said.
Ottawa’s fiscal watchdog Jason Jacques projects the federal government will post an annual deficit of $68.5 billion this year, up from $51.7 billion last year.
The Canadian Press
The federal government is undergoing a spending review that aims to reduce spending on its day-to-day operations by 7.5 per cent in the fiscal year that begins April 1, 2026, followed by 10 per cent in savings the next year, and 15 per cent in the 2028-29 fiscal year.
The coming budget is expected to provide details on the first tranche of cuts.
John Fragos, press secretary to Finance Minister François-Philippe Champagne, said in a statement that the government is committed to maintaining the sustainability of federal finances while spurring economic growth.
“We will be ambitious in our investments, rigorous in our savings and unrelenting in pursuing a long-term and sustainable fiscal outlook. We look forward to spelling out our plan to do exactly that on Nov. 4 when we table our new government’s first budget,” Mr. Fragos said.
With a report from Bill Curry