Investing in Canada’s Future: A Costly Endeavour—Our Analysis of the 2025 Federal Budget

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A Capital Idea

The federal government’s 2025 budget shifts gears to a focus on capital spending, away from the Trudeau-era’s prioritization on social programs. This focus is reflected across a wide range of direct investments through the new Major Projects Office and tax incentives aimed at spurring business investment. The government hopes this realignment will generate new private sector investment across Canada, boosting growth, employment, and productivity. However, these initiatives come at a substantial cost, with the current deficit doubling to $78 billion (or 2.5 per cent of GDP) before moderating to $57 billion (1.5 per cent of GDP) in 2029–30.

The increased deficit reflects both the $280 billion in spending over five years as well as the significantly weakened economic outlook due to the United States’ ongoing trade wars that continue to fuel uncertainty. As a result, total federal debt grows from 41 to 43 per cent of GDP over five years.

Canada, however, is in an enviable position compared to other advanced economies—our low debt level relative to the size of the economy means there is more than enough room to absorb the deficit-financed spending without affecting our creditworthiness.

The 2025 budget also introduced a “Capital Budgeting Framework” that separates operational from capital expenditures. Capital expenditure, according to the budget, “stimulates public and private sector capital investment.” In our view, this is a communication tool that sheds some light on government priorities but does not alter the fiscal outlook.

Short-term Pain, Long-term Gain

The government is counting on its ambitious tax and spending measures to boost both private investment across the economy and ultimately support revenue growth. It is showing prudence by not accounting for new revenue these measures might generate.

The Major Projects Office is the main vehicle through which infrastructure investments will flow. This includes public investment in a liquified natural gas (LNG) facility in BC, development of a small modular nuclear reactor (SMR) in Ontario, expansion of the Port of Montréal’s capacity, a mining project in Saskatchewan, an off-shore wind project in Nova Scotia and the High-Speed Rail connection between Toronto and Quebec City, to name a few. Many of these projects had previously been announced but are consolidated as $13 billion in spending between now and 2030.

Even with the new emphasis on fast-tracking nation building projects and attracting investment, it takes time to get things built and there are significant downside risks that can derail any major infrastructure project.

The second avenue to spur investment is more favourable tax incentives through accelerated capital allowance depreciations for certain sectors and activities. The most notable addition is the reintroduction of the Accelerated Investment Initiative and a Productivity Super-Deduction, which will allow for 100 per cent depreciation schedules for productivity-enhancing capital expenditures, including intangible assets, research and development, manufacturing equipment, and clean energy generation, over the next three years.

The shift in capital depreciation schedules boosts the competitiveness of our corporate tax system. This is particularly important in the wake of the “One Big Beautiful Bill Act” (OBBA) in the United States, which provided for full capital depreciation allowances in the first year of investment.

Fortifying Growth

As expected, strengthening Canada’s sovereignty and security was central to Budget 2025’s investment strategy. Budget 2025 reaffirms Canada’s commitment to defence investment, targeting 2 per cent of GDP in 2025 and setting a trajectory to meet NATO’s new 5 per cent benchmark by 2035. This translates to an additional $82 billion in new spending over five years—a substantial investment that has plenty of upside for the domestic economy.

Through the Buy Canada Policy, the government aims to bolster domestic defence capabilities, reduce reliance on NATO allies, and enhance national security. While broader in scope than the National Shipbuilding Strategy, these investments are similar in the sense that they are positioned to drive job creation, attract private capital, and strengthen Canada’s industrial base.

Trump-proofing the Economy

The budget seeks to address the unique challenges Canada faces given its deep integration with the US economy during this time of rapid change. The budget announced a new “Trade Infrastructure Strategy” that includes funding for infrastructure projects increasing our capacity to export overseas. We support these efforts to build the connections that get Canadian goods to all three coasts—and from there, to the world.

Direct support for the agricultural and forestry sectors and regionally-focused business support programs are also included in the budget as short-term measures to blunt the immediate impacts of U.S. tariffs on the economy.

Lighter Touch on Affordability

Affordability remained a theme in Budget 2025, though the scope of new measures was modest and largely limited to previously announced initiatives. A hallmark measure was the middle-class income tax cut, which will provide families a few hundred dollars in annual savings starting in 2026. While welcome, its impact is modest.

On the housing front, the government introduced targeted measures, including a proposed GST exemption for first-time homebuyers. Additionally, the newly launched Build Canada Homes agency aims to accelerate the development of affordable housing, with a focus on transitional and supportive units to address homelessness. While important, these efforts will not resolve Canada’s broader housing supply and affordability challenges.

Overall, Budget 2025 signals a shift away from short-term affordability relief toward a strategy aimed at strengthening the economy over the long term. In a challenging economic environment, this more restrained approach may be divisive—but it reflects a deliberate move away from temporary measures in favour of longer term, structural investments.

“Rightsizing” Government Will Have Repercussions

As anticipated, the government’s primary approach to reduce spending centers on improving operational efficiencies across the public sector. A comprehensive expenditure review is planned to improve the efficiency of the public sector and reduce costs. While some workforce reductions will occur through attrition, the scale of spending cuts suggests broader job losses are likely.

This marks a clear pivot from the public sector expansion seen over the past decade, echoing cost reduction measures undertaken by the Harper government in 2012 and the Chrétien administration in 1995. In both cases, spending restraint came at the expense of thousands of public sector jobs, which had wide-reaching economic implications. Regions with a high concentration of federal public service jobs, particularly Ottawa-Gatineau, will bear the brunt of these cuts.

Omissions and Oversights

The budget’s emphasis on spurring capital development puts the human side of the economy on the backburner.

There is little emphasis on skill development and training. Instead, the government emphasizes international talent recruitment largely through university research grants. Yet, these efforts run against the 25 per cent reduction in the non-permanent resident targets while leaving permanent resident admissions unchanged. Ultimately, our ability to deliver on major new infrastructure projects will require a skilled workforce that should be central to the overall strategy.

The budget also leaves the Canada Health Transfers unchanged—leaving any changes to healthcare priorities to the provinces. The federal government is in a position to incentivize much needed structural reforms in healthcare across the country but has not taken up that mantle in this budget. More broadly there is a missed opportunity in this budget to leverage health spending to drive innovation in the sector.

Summary

The 2025 budget is a clear and welcome shift in priorities. It takes advantage of Canada’s strong fiscal position in an effort to seize the upheavals in the world’s relationship with the United States. The new, deficit-financed initiatives are aimed in the right direction – building the infrastructure the country needs—even though it de-emphasizes important areas such as affordability, skills development and healthcare initiatives.

The federal government is investing in Canada’s future but it’s too early to tell if the high costs will pay off in the long run, and whether they will translate into the kind of accelerated growth our country needs.