The Government of Canada (GoC) surprised investors this week with a budget that pairs soaring deficits with minimal new borrowing. If that sounds off, it is. Budget 2025 relies heavily on financial engineering, with a significant portion of its funding already issued—it’s November 2025, remember? Banks warn bond issuance is set to soar within months, jamming every funding channel. The plan is a high-stakes bet: Either the economy tanks to cool inflation and suppress yield, or the risks snowball by decade’s end as short-term financing, expanding deficits, and pandemic-era debt converge.
Wait… is this a Canadian reboot of that Argentinian show?
Canada’s Budget Proposes A Bigger Deficit, But Markets Ease
Forget tightening its belt—Ottawa’s not even wearing pants. The latest budget forecasts a $78.3 billion deficit for 2025-26 and spending reminiscent of a pandemic through the decade. Normally, that would pressure bond markets and push yields higher. Not this time.
The 10-year GoC bond yield fell 3-4 basis points after the release, as investors breathed a sigh of relief. “Markets nonetheless breathed a sigh of relief, yields retreating 3–4 basis points after the budget dropped,” explains Taylor Schleich, an economist at NBF.
Canada’s Short-Term Thinking For Long-Term Public Debts
Outstanding T-bill balances have increased by 65% over the past three years, as Ottawa has leaned heavily on short-term debt.
Source: Statistics Canada; Better Dwelling.
The lack of immediate borrowing stems from the fact that this budget covers a fiscal year already two-thirds finished. With just over four months until March 31, 2026, most of the spending is done—and it’s been financed with short-term bills. Not exactly a secret: the GoC outlined this approach in its July Debt Management Strategy (DMS).
“When it comes to 2025-26, recall that the government published a DMS in July. That incorporated some of the government’s budgetary deterioration,” explains Schleich.
The July DMS formally introduced a significant jump in borrowing needs. It forecasts bill stock growth of 3.8% (+$11 billion) by year-end. But by September, the actual increase had already reached 7.2% (+$20.5 billion)—nearly $10 billion above the plan. Maybe they’ll find the difference in a couch cushion in Ottawa?
Canada’s reliance on short-term financing has ballooned. Over the past three years, outstanding treasury bills surged 65.2% to $305.7 billion. Why fund long-term public spending with a structure better suited for real estate flippers? The answer may be as simple as optics.
Buy Now, Pay Later: Canada’s Financing Government Like A Couch
NBF reminds investors that gross issuance only tells part of the story. “Net bond issuance will actually accelerate in 2026-27 as the feds finance their entire financial requirement with bonds, rather than bills,” explains the bank.
The BoC’s bond roll-off will slow by then, softening supply pressures for investors. But the real squeeze arrives when pandemic-era debt matures around 2030. By then, NBF warns the bond program could reach $380 billion, “based on the new budget plan and a reasonable path further out.”
The bank also warns that Canada’s debt profile is clouded by non-budgetary transactions (NBTs)—off-book flows like loans to Crown corporations. These don’t appear in the deficit, but they still require financing.
“Non-budgetary transactions used to be a rounding error… those have stepped up big recently and are set to remain elevated,” explains Schleich.
A large downward revision to NBTs helped ease pressure, though the opaque nature of this borrowing makes it difficult to tell how much of it is simply a liability transfer. It would be far from the first time that policymakers saddled arms-length public corporations with debt, setting them up for failure.
Canada’s budget didn’t spark the reaction many expected—but that doesn’t mean it’s benign. Debt needs continue to rise, with this budget largely financed through short-term treasuries rather than stable, long-term funding typically supported by a coherent fiscal framework. By stuffing every borrowing channel now, policymakers are effectively betting that emergency liquidity won’t be needed—while counting on a downturn to suppress inflation.
The clearest risk is fiscal dominance. This occurs when a central bank is forced to abandon inflation control to accommodate government borrowing—a scenario the BoC has studied itself, and I’ve explained in Parliament. The result? A rapid-fire rate hike cycle that turned political convenience into broad economic pain, and helped to drive foreign capital out the door. Risking that same error under the same central bank governor may slam that door shut.
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