ICBA ECONOMICS: A Perspective on Budget 2025

By Jock Finlayson, ICBA Chief Economist

QUICK SUMMARY:

• Deficits up, debt rising: 2025-26 deficit swells to $78B (vs. $42B forecast), with $55–65B annual shortfalls ahead; debt climbs to $1.53T (~43% of GDP) by 2028–29 despite an “operating vs. capital” split that still means heavy borrowing.
• Some supply-side moves, not a reset: New tax incentives, a Major Projects Office, Bill C-5 fast-tracks “national interest” projects and trims red tape – but no broad business tax cuts or game-changers to stem investment, production, and talent flowing to the U.S.
• Construction outlook: Bigger public infrastructure pipeline and faster major projects are positives; little new on housing; planned cuts to permanent/temporary immigration risk labour shortages – ICBA urges immigration selection to prioritize construction-ready skills.

What are we to make of the much-anticipated federal budget presented by the “new” Liberal government helmed by Prime Minister Mark Carney? It is fair to say the advance hype was breathless. Unfortunately, the 493-page document falls short relative to the expectations stoked by government officials and much of the media over the last several weeks.

Budget 2025 is not “transformational,” if by that one means sufficient in scale and ambition to materially alter the direction – or the composition – of Canada’s $3.4 trillion economy. That is not to say the budget is bereft of welcome measures (more on that below). Nor do we discount the challenges facing the Carney government, as it sought to chart a fiscal and economic course amid the ongoing trade wars unleased by the U.S. under President Trump and a deteriorating geopolitical backdrop. But in our assessment, Budget 2025 does not mark a dramatic departure from the strategies that curried favour in Ottawa during the Trudeau era.

Deficits and debt: more of the same, only worse. To begin with, the “new” Liberal government evidently has inherited from its predecessor a fondness for red ink and a willingness to preside over a steadily rising debt. While the Fall 2024 Economic Statement projected a deficit of $42 billion for 2025-26, the updated figure now sits at $78 billion. In part, the larger deficit reflects a softer economy and the Carney government’s pledge to dial up spending on defense, border protection, and support for industries and workers hit hard by Trump’s tariffs.

Looking ahead, the government forecasts ongoing flows of red ink in the range of $55-65 billion per annum over the next four years. In other words, there is no commitment to balance the overall federal budget. True, federal spending is being split into “operating” and “capital” components, with a plan to balance the “operating” budget in three years’ time. But Ottawa will continue to borrow heavily even when that goal is achieved. As a consequence, the federal debt is set to march higher, climbing from $1.27 trillion in 2024-25 to an estimated $1.53 trillion by 2028-29. By the latter year, the debt will amount to 43% of GDP, up from 40% two years ago. That’s a manageable increase, and it likely won’t cause bond-rating agencies to re-assess their hitherto positive view of Canada’s credit-worthiness. But many in the business community will judge that the debt arrow is still pointed in the wrong direction.

Different fiscal priorities. While the broad direction of fiscal policy largely follows the path blazed by Trudeau, there is a shift in priorities in aid of the Carney government’s economic development and industrial strategies. Specifically, Budget 2025 targets $60 billion (cumulative) in “efficiency” savings in operating costs over the next five years, with some of this coming from a shrinking public service (which purportedly will shed 40,000 positions by the end of the decade). These savings will help to finance the expanded “capital” budget. It must be said that the separation of total program expenditures into “operating” and “capital” categories, while defensible in principle, will increase the temptation to assign as much spending as possible to the latter bucket, including many programs that involve transfers to provinces and businesses. However, our view is that in the final analysis it doesn’t matter how the government organizes its books, inasmuch as the gap between revenues and spending will continue to show up as net additions to the debt, regardless of the accounting details.

Bolstering the “supply side” of the Canadian economy. Perhaps the most important change from the “lost decade” of the Trudeau era is a renewed focus on improving and strengthening the foundations of Canada’s economic prosperity – productivity, business investment, and infrastructure (defined broadly to encompass housing). Here, the new budget does signal a different approach. Under Mr. Carney, a higher priority is being given to advancing large-scale capital projects, reducing regulatory burdens, accelerating innovation, and kick-starting private sector investment. To this end, Budget 2025 announces a handful of tax incentives intended to spur private sector investment in manufacturing, clean tech, climate mitigation, innovation, the adoption of digital technologies, and certain types of infrastructure. This comes on top of the establishment of the Major Projects Office and the government’s strategy – enshrined in Bill C-5 -- to move forward quickly with a significant number of energy, natural resource, and infrastructure development projects that are judged to be in the “national interest.” We see these steps as positive, as far as they go. However, the budget offers no broadly-based business tax cuts and it lacks game-changing measures to meaningfully counter the outflow of investment dollars, manufacturing production, entrepreneurs, and top talent to the United States.

Budget 2025 – a few issues for construction. Finally, from a more specific construction industry perspective, we highlight the following issues:

• First, the commitment to significantly increase public infrastructure spending and fast-track large-scale natural resource and infrastructure projects will undoubtedly benefit the Canadian construction industry in the coming years.
• Second, the budget offers little new on housing, beyond the announcements the government made over the summer. In ICBA’s view, Ottawa needs to do more to boost housing supply in regions facing supply shortfalls and affordability challenges.
• Third, we note the federal government’s intention to further dial back both permanent immigration and the annual intake of “temporary” foreign residents over the 2026-2028 period. With the economy on the edge of recession and the unemployment rate ticking higher, we recognize the case for adjusting immigration targets. That said, the government’s emphasis on “build-build-build” immediately gives rise to concerns about the availability of enough qualified labour to undertake the unprecedented volume of construction projects – including in the housing sector – contemplated in the budget. ICBA believes that Canada’s immigration programs and the selection criteria used to evaluate permanent and non-permanent immigrants should be re-calibrated to put a higher priority on admitting newcomers with construction-relevant skills and experience. This issue takes on added urgency given the budget’s emphasis on expanding public sector capital outlays, doubling homebuilding, and quickening the pace of major project and infrastructure development across the country.