RBC sees tariffs and structural costs fuelling most of the deficit surge
Canada’s federal government faces a delicate balancing act in its upcoming 2025 budget, navigating between ambitious growth-focused spending and maintaining fiscal credibility as deficits are projected to rise significantly, according to a recent analysis by RBC Economics.
The 2025 budget could see deficits climb more than 60% higher than projections in the 2024 Fall Economic Statement, with RBC estimating this year’s deficit at $70 billion. Five-year deficits are expected to average 1.5% of gross domestic product, while the debt-to-GDP ratio is projected to move mostly sideways.
“Budget 2025 has two tasks—deliver a growth-focused agenda and provide sufficient fiscal guardrails to maintain market confidence,” the analysis stated.
Tariffs and structural pressures drive spending
RBC assistant chief economist Cynthia Leach identified multiple factors behind the rising red ink. Current tariff shocks and fiscal support for affected sectors account for more than a quarter of cumulative deficit additions. However, the bulk reflects structural challenges, including defence, affordability, housing, and investment needs that will continue pressuring federal finances.
The government also faces increasing provincial health care costs as Canada experiences peak population aging, with the federal government likely to shoulder a greater portion of these expenses over time.
New approach to fiscal management
The government has abandoned its previous fiscal anchor of a declining debt-to-GDP ratio, instead focusing on balancing the operating budget within three years and achieving a declining deficit-to-GDP ratio over that period.
The analysis noted this approach has merit in uncertain times but identified potential weaknesses. “Limits are needed on capital spending—a declining deficit-to-GDP ratio may not be enough,” the document stated, warning that capital eventually becomes consumed or that marginal spending may not provide good value for money.
Market confidence remains key
While Canada ranks relatively well on fiscal metrics compared with peers—with net debt the lowest in the G7—global markets have grown increasingly concerned about rising public debt in major economies. RBC noted investors will keep a watchful eye on how the government preserves fiscal space for future shocks, particularly given Canada’s exposure to US trade disruptions.
Execution challenges ahead
The analysis highlighted significant execution risks, with much of the new spending earmarked for infrastructure and defence projects that could face delays. Recently created agencies for defence procurement, housing, and major projects underscore timing concerns.
RBC has “conservatively” increased growth forecasts by 0.1 percentage point in 2025 and 0.3 percentage points in 2026 to account for government spending but noted these figures may need revision depending on actual implementation.
The analysis emphasized that Budget 2025’s credibility will depend on achieving realizable savings through expenditure review, fairly defining capital spending, and balancing ambitious physical infrastructure projects with structural policy reforms.
