Canada is using public spending to mask private sector weakness, and the bill won’t stop at taxes. A new National Bank of Canada (NBC) report warns public investment is growing at over twice the rate of overall GDP. It’s also fueling more borrowing, lifting the benchmark rate that impacts borrowing costs for everything from government debt to your mortgage. Recently more of that spending has been directed into capital projects, including defence—but swapping payroll for weapons doesn’t exactly turn that debt into productive growth. Until weapons start making weapons, anyway.
Canadian Public Investment Growth More Than Double Overall GDP
Over the past decade, government spending has grown much faster than the broader economy. To illustrate the gap, the bank focuses on the “G” in GDP—government consumption and fixed capital investment. Sluggish private investment has been flat-to-negative in GDP, made up by state spending. Over the past 3 years, public sector fixed capital investment advanced at a 3.5% compound annual growth rate (CAGR), over double the 1.7% CAGR that general GDP has seen. The bank’s index chart shows this wasn’t a long-term trend so much as a post-pandemic shift where public spending filled the gap left by weak private investment.
“Canadian government expenditures have decisively outpaced broader economic growth over the past decade,” writes the bank.
Canada’s Public Spending Is Hiding Its Private Sector Pain
The share of GDP driven by government spending has climbed sharply in recent years. Before 2020, it was rare to see government spending represent more than 25% of total GDP, only seen during extreme downturns like the Global Financial Crisis and the pandemic. Post-pandemic, the share fell towards the historic norm until 2022, when it began to rapidly climb. The Canadian economy is now reliant on government to represent over a quarter of total GDP. The shift occurred before the trade shock.
The divergence between Canada and the US in the above chart turns more surprising when broken down. Since 2022, Canada’s trailed in major GDP components, with non-residential business investment being one of the more concerning lines.
“… government expenditure growth is the only area where Canada holds a relative edge when compared to the U.S. GDP picture, where growth in other components are much more impressive south of the border,” explains NBC. “Thankfully, the share of Canadian ‘G’ allocated to fixed capital (as opposed to consumption) is growing.”
Canada’s Public Debt Still Growing: Swapping Workers For Weapons
Let’s circle back to the composition of state spending, and what that means. Government consumption is spending for day-to-day operations (e.g. payroll). Fixed-capital formation is spending for infrastructure, a term that’s increasingly lost meaning, but traditionally includes things like roads, hospitals, and military capacity. The latter is doing the heavy lifting.
Program spending is forecast to slow sharply, from 8.1% CAGR over the past 10 years to just 0.5% through 2029-30, with workforce reductions playing a key role. Meanwhile, capital outlays—such as buying weapons—have grown to fill that gap, and then some.
Canada’s Plan Will Cost You More—and Not Just In Taxes
Credit is a market-based system, where supply and demand determine cost. When borrowing demand outstrips available capital, lenders want higher yields. When there is excess capital, borrowing becomes cheaper to encourage demand. Since government bond yields set the benchmark price for everything from business loans to mortgages, Ottawa’s spending spree doesn’t just raise the tax burden—it raises all borrowing costs. That means more pressure on housing demand, private investment, and other rate-sensitive parts of growth.
NBC warns it won’t be cheap. “Expansionary policy, like in the U.S., is set to keep the sovereign yield curve at relatively steeper levels,” notes the bank. Their analysis also highlights that the fiscal load is increasingly shifting to provinces, which are expected to drive the borrowing shortfall into 2026.
Yields rise no matter who is doing the borrowing, but the bank argues this mix matters. Investors tend to be more forgiving when debt funds long-term productive assets instead of day-to-day operations. NBC adds that, “Over time, higher defence expenditures could help re‑energize Canada’s manufacturing base, which has steadily lost global relevance.”
However, the improvement the bank points to isn’t the same as solving the problem. It’s more like taking a punch to the stomach instead of the groin—less painful, but still painful. Defence manufacturing offers some short-term relief, but it still depends heavily on government demand rather than market-driven growth. Without a private sector base strong enough to sustain it, the result is just creating a larger liability for the public to pay. Plus interest.
English (US) · 