Carney’s federal budget plans billions in new spending in response to US tariff shocks

Canadian Prime Minister Mark Carney presented his first federal budget, which outlines an ambitious plan to transform the Canadian economy and address the challenge of U.S. tariffs.

Billed as an “investment budget” by the government, the budget plan increases Canada’s deficit to C$78 billion ($55.3 billion; £42.47 billion), the second largest in history.

The expenses are offset by plans to attract C$1 trillion of investment to Canada over the next five years, with the federal government arguing that tighter spending would eliminate “vital social programs” and funding for Canada’s future.

The budget does, however, include reductions, including reducing the size of the federal workforce by about 10 percent in coming years.

The budget was presented by Canada’s Finance Minister, François-Philippe Champagne, in the House of Commons on Tuesday afternoon.

In his budget speech, Champagne warned that Canada faces “a period of profound change” and that “bold and rapid action is necessary” to ensure the country’s prosperity.

Throughout the budget, there are references to uncertainty and the need for protectionist measures due to US tariffs on Canada. President Donald Trump imposed a broad 35% levy on Canadian goods not covered by an existing free trade agreement and tariffed specific sectors like steel, aluminum and automobiles.

These levies, passed earlier this year, have already led to job losses in Canada in these sectors, and business leaders have warned of a slowdown in investment in Canada due to trade uncertainty.

To counter this, the budget proposes spending C$280 billion over the next five years “to strengthen Canada’s productivity, competitiveness and resilience.”

These include modernizing ports and other trade infrastructure with the goal of doubling Canadian exports to non-U.S. markets over the next decade, as well as direct funding to support businesses affected by tariffs.

The financial update also outlines a plan to boost Canada’s competitiveness, with the goal of making Canada a more attractive place to do business than the United States.

Rebekah Young, head of the economics of inclusion and resilience at Scotiabank, said the budget lays out a plan to reduce delays and remove regulatory hurdles, in hopes it will boost private investment in Canada over the years.

But she warned that parts of the budget could be a tough sell to Canadians struggling with the cost of living.

“They’re going to open this budget and they’re not going to see any new (support),” she said.

And even if the budget delivers on its promise of generational spending, Young said it remains to be seen whether it will be as “transformational” as Carney hopes.

“We want to unlock a trillion dollars through this investment here. A lot of things need to happen to get to that trillion,” she said.

On defense, the budget provides nearly 82 billion Canadian dollars over five years – the most significant funding in decades – which will allow Canada to meet its NATO commitment to devote 2% of its gross domestic product (GDP) to its military by this year.

The Carney government is also betting big on AI, proposing nearly a billion Canadian dollars to boost the integration and use of this fast-growing technology, including in government operations.

Carney warned Canadians ahead of the budget against making “sacrifices.” Among these measures is a reduction in the size of the federal government, which would result in the loss of 40,000 jobs by 2029. International aid should also be reduced to pre-pandemic levels.

Immigration targets have been lowered slightly over the next three years to “stabilize” new admissions to the country, including a significant reduction in student visas.

The budget will need to be adopted by the Canadian Parliament before being implemented. Carney’s Liberal government is three seats short of a majority, meaning it will need support from other parties to implement its financial plan.

Failure to pass the budget could risk a federal election.

Conservative MP Chris d’Entremont is no longer part of the party’s caucus after telling Politico on Tuesday that he was considering switching to the Liberals and would make a decision “in the coming days” after reviewing the budget, according to multiple reports.

If he did, it would reduce Carney’s razor-thin minority at a critical time.

Meanwhile, opposition Conservative MPs criticized the budget for increasing Canada’s deficit while doing little to improve affordability for Canadians.

Yves-François Blanchet, leader of the separatist Bloc Québécois party, said his caucus doesn’t see how it could support the budget.

Members of the left-leaning New Democratic Party said they would take time to study it, but criticized planned cuts to the public sector.

Given the larger projected deficit, Carney’s financial plan maintains that Canada still has the lowest deficit-to-GDP ratio in the G7, behind Japan.