Ottawa’s 2025 budget brings new spending, but economists see little shift in Canada’s economic trajectory
Ottawa’s 2025 federal budget landed with promises of major new spending on defence, infrastructure, and housing—but economists at Oxford Economics said the measures would not fundamentally alter Canada’s economic outlook.
“Measures in the budget largely align with the Liberal election platform and other announcements we had already incorporated in our forecast and therefore don’t warrant a material change to our outlook,” said Tony Stillo, director of Canada economics, and Michael Davenport, senior economist, in a research briefing.
The budget outlined C$89 billion in net new fiscal stimulus over the next five years, or 2.9% of 2024 nominal GDP.
Most of this spending is earmarked for defence, with C$56 billion allocated over five years to help Canada meet NATO targets and modernize its armed forces.
“While new defence spending will boost the economy in the short and long term, the requisite structural upshift in deficit-financed defence spending will also permanently raise the government debt-to-GDP ratio and lead to higher Government of Canada bond yields over time,” Stillo and Davenport said.
Housing and infrastructure in focus
On the housing front, the budget included C$6.7 billion for the Build Canada Homes initiative, aimed at accelerating affordable housing construction. However, the government stopped short of reviving the Multi-Unit Rental Benefit (MURB) program, instead opting to increase the Canada Mortgage Bond issuance limit to support multi-unit rental construction. The elimination of GST for first-time home buyers on new homes up to C$1 million is expected to cost C$3.9 billion over five years.
Infrastructure also received a boost, with C$9 billion for the Build Communities Strong Fund and additional funds for trade and Arctic infrastructure. The new “Productivity Super-Deduction” offers enhanced tax incentives for capital investment, but its C$1.5 billion price tag over five years is modest compared to similar US measures.
Meanwhile, the Canadian Alliance to End Homelessness (CAEH) previously called for urgent, coordinated action from all levels of government following the release of Budget 2025, as more than half of Canadians reported concerns about their ability to keep a roof over their heads if their financial situation changed.
“The housing and homelessness crisis is holding us back as a country – and it’s too big for any one government to tackle alone,” Tim Richter, president and CEO of CAEH, said.
“The investments in housing and infrastructure in Budget 2025 open the door to the ‘Team Canada’ action we need to solve the crisis once and for all.”
Deficits rise, fiscal discipline questioned
The budget projects a deficit of C$78 billion in 2025-26, shrinking to C$56.6 billion by 2029-30. However, Oxford Economics flagged the government’s move to abandon its previous fiscal anchor—a declining debt-to-GDP ratio—in favour of a falling deficit-to-GDP ratio.
“This is inadequate fiscal discipline in our view, especially given the broad definition of capital under the new capital budgeting framework,” Stillo and Davenport said.
The government’s Comprehensive Expenditure Review aims to cut day-to-day federal spending by C$48 billion over five years and shrink the public service by about 10%.
Still, Oxford Economics estimated that after an initial GDP boost of 0.4 percentage points between 2026 and 2028, cuts to operational spending would cause GDP to fall around 0.2 points below baseline in 2029 and 2030.
“The net new fiscal stimulus in the budget is slightly smaller and less front-loaded than we had assumed previously, so we have trimmed GDP growth in our preliminary November forecast by 0.1 point in both 2026 and 2027,” the economists said.
For mortgage professionals and lenders, the budget’s housing measures and infrastructure investments may offer some support for construction and lending activity. However, the broader economic impact is expected to be muted, with rising deficits and a shifting fiscal anchor raising questions about long-term fiscal discipline.
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