Canada’s fiscal picture is getting “cloudy,” warns BMO. The bank’s latest report flags ballooning spending, soft revenues, and trade war uncertainty as key risks facing the economy. BMO estimates the deficit could reach as high as $80 billion this year—far higher than official forecasts. A slower rollout of election promises might ease the blow, but the picture remains precarious.
“Canada’s fiscal picture is getting cloudy given that the current government did not table a post-election budget, and the cost platform has been rearranged by the evolving economic outlook and shifting policy priorities,” warns BMO senior economist Robert Kavcic.
He sees the platform spending themes still holding, but not the deficit projections. BMO warns that the deficit estimates from the PBO ($46.8 billion), and the LPC platform ($62.3 billion) are significantly underestimating the current year’s shortfall. The issue is attributed to policy, overestimating economic demand, and lofty spending goals. However, they see some opportunities that can help.
Canada Cutting Revenues, Will Collect Much Less From Counter-Tariffs Imposed On Canadian Buyers
A series of policies being rolled out will lead to much weaker federal revenues than expected. Among the promises are a personal income tax cut (starts July 1st), scrapping the capital gains tax rate increase, and GST relief on some new home purchases. Though the bank notes the final impact on these measures remains to be seen, as the additional disposable income may or may not work out as a net benefit.
The platform also planned to collect a lot more in counter-tariffs paid by Canadians. They had forecast $20 billion in revenue from retaliatory tariffs, but de-escalation of the trade war has helped reduce the actual amount. BMO’s forecast is 50-75% lower than the government anticipated, as measures are delayed. Good news for Canadians that pay the tariffs, bad news for budgeting.
Kavcic also notes that some trade war-related concessions will also result in weaker revenues. One example is scrapping the digital services tax, which will lead to collecting $7 billion less in revenues. Though once again, the impact may be partially offset as increased disposable income can boost spending.
Canada’s Deficit Could Top $80 Billion—2.5% of GDP
Weak revenue will be converging with a lot more spending in the coming months. The biggest shift the bank notes will be ramping up NATO spending to 2% of GDP, and 5% by 2035. They estimate this can add $8 billion to the current year above what was originally anticipated.
“All told, it wouldn’t be surprising to see the federal deficit jump toward $80 billion, or about 2.5% of GDP, versus $48 billion last estimated for FY24/25,” warns Kavcic.
For context, a deficit of this size would be similar to the deficit seen in the second year of the pandemic. A bit surprising, since it seems a little skewed in contrast to the social spending that occurred.
It’s worth briefly noting that this defense spending is a share of total GDP, not Federal spending. Federal spending was last estimated in 2024 at 17.5% of GDP, so a 2% GDP all else equal would equate to just over 11% of the budget, while 5% would represent roughly 28% of federal spending. Obviously, when factoring the inclusion of increased federal deficit spending this would push total public sector spending (all levels) from the current 45% of GDP to roughly half. It was about 40% back in 2019.
Canada May Minimize Damage By Rolling Out Promises Slower
Kavcic is optimistic that if policymakers are looking to slow the burn, they could—at least a little. There’s $25 billion in other measures, “some of which can be scaled back.” About $15 billion is earmarked for infrastructure and housing, which he sees as a potentially slower rollout. Then there’s $3 billion in direct support for the trade war, which could be trimmed if a deal is made sooner than later.
Providing minor relief, the bank sees this deficit as more tolerable than previous drivers. “… the nature of the Canadian deficit increase is more palatable from an economic perspective than those of the prior government. That is, tax relief and infrastructure priorities bring more of a pro-growth policy approach at a time when Canada needs a boost, and potentially with some longer-term payoffs,” explains Kavcic.
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