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The Cost of Austerity: The impact of announced federal public service cuts on Ottawa-Gatineau’s economy

Canadian Economics

By: CBoC Economics Team

    

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Key insights

  • Mounting fiscal pressures are driving cuts to the public administration sector. Nearly half of all federal employees are based in the Ottawa-Gatineau area, making the region particularly vulnerable to public sector downsizing.
  • Economic fallout is expected from these cuts. Compared to a baseline scenario with steady public sector employment, we estimate that the city will lose 22,000 jobs by 2029, with 16,000 of these coming directly from the federal public service.
  • Knock-on effects will hit consumer-facing sectors such as retail, hospitality, and financial services.
  • The impact on Ottawa-Gatineau’s population will be modest, limiting any strain to the housing market.
  • The region’s proven resilience, together with a positive outlook for industries less dependent on the federal government, will cushion the economic impact in the region.

The federal government is facing a difficult fiscal environment as weak economic growth limits revenue gains while spending commitments will add to program spending. An ageing population and slower population growth will weigh on revenues. At the same time, renewed commitments to national defence and infrastructure will strain finances. Post-pandemic deficits have swelled federal government debt such that outside of program spending, federal interest payments have increased to $50 billion annually, double what they were six years ago.

Adding to the strain are heightened trade tensions with the United States, which have prompted the announcement of billions of dollars in relief measures to support businesses impacted by tariffs. These include a $5-billion Strategic Response Fund to help firms access new markets, and a $1-billion regional initiative to support small and medium-sized enterprises affected by tariffs. Federal defence spending is also set to rise by tens of billions of dollars to meet NATO’s new benchmark of 5 per cent of GDP by 2035. Meanwhile, non-defense public administration spending has surged, increasing by 88 per cent over the last decade.

Altogether, these pressures on government finances are likely to worsen an already steep fiscal deficit. Narrowing the deficit will require difficult choices. With planned increases in priority areas such as health care and infrastructure, the federal government has identified the public administration sector as one of the areas where spending can be reduced.

Federal departments have been directed to identify operational savings of up to 15 per cent by fiscal year 2028-29. By that time, we estimate this will reduce federal expenditures by around $8 billion annually. Operational reforms can include measures such as accelerated digitization of services, reduced capital outlays, and streamlined administrative processes. However, personnel expenditures account for about half of total spending, meaning the government will need to look to personnel reductions to meet its savings targets.¹

Ottawa-Gatineau bears the brunt

The federal public service is the cornerstone to the Ottawa-Gatineau economy. It accounts for about one quarter of the city’s GDP and nearly half of all federal employees are based in the National Capital Region. Thus, a reduction in federal departmental spending will have far-reaching implications for the local economy.

The government intends to achieve a smaller workforce largely through retirements. The number of civil servants approaching retirement—aged 60 years and older—account for around 9.4 per cent of the federal public service, equivalent to about 12,000 employees in Ottawa-Gatineau. Attrition from this group will play a major role in reducing headcounts but retirements alone will not be enough to achieve the required savings. Moreover, job losses within the public administration sector will have a ripple effect and lead to employment declines in sectors closely tied to the public service.

We estimate that by 2029, the city’s public administration sector will shrink by 16,000 jobs compared to our baseline forecast which projected flat public administration employment. This reduction will have significant implications for the local economy, affecting business investment, consumer spending, and the labour market.

We’ve estimated the impacts of the reduction in federal administration spending on Ottawa-Gatineau’s economy. Our estimates draw on currently available information on program spending and announced fiscal restraint measures. Major impacts include:

  • By 2029, Ottawa-Gatineau’s GDP is expected to be $1.1 billion below a baseline scenario with steady public sector employment. Almost 60 per cent of this reduction will come from the direct impact on the industry—primarily wages and salaries of public employees.
  • As the region’s largest employer, a smaller federal workforce will have a noticeable impact on the local labour market. By 2029, total employment will be around 22,000 jobs lower than the baseline, meaning an additional 6,000 jobs will be lost outside of the public sector. The unemployment rate will be 1.3 percentage points higher than without the cuts, reaching 6.4 per cent.
  • Wages and salaries fall by an estimated $2.1 billion by 2029, representing 3 per cent of total wages and salaries in the CMA. This figure is unsurprising given the number of jobs lost accounts for almost 2.5 per cent of all jobs in the city. Many of the civil servants expected to exit the federal workforce, through retirement, attrition, or job losses, are higher earners, resulting in a larger impact to lost wages.
  • Job and salary losses will result in less spending and business activity, particularly in the downtown core where many businesses such as restaurants and retailers rely on the foot traffic of civil servants. Several service industries will be impacted, notably retail trade, hospitality, financial services. Construction will be impacted by the resulting slowdown in investment. (See Chart 1.).
  • Changes in the public service are expected to have a modest impact on population trends in Ottawa-Gatineau. In the coming years, annual population growth will average 0.7 per cent, just 0.1 percentage point slower than the baseline. This slowdown reflects weaker inflows to the region rather than increased outflows. This is because workers nearing retirement tend to have a lower likelihood to move due to factors such as home ownership, family ties, and community roots. Meanwhile, some employees affected by the cuts will find new employment locally and stay in the CMA.
  • Similarly, the impact on the Ottawa-Gatineau housing market is anticipated to be modest. Housing starts are expected to fall only marginally below the baseline. Softer demand will result from fewer new residents looking to get into the market and heightened job insecurity disincentivizing new home purchases by current residents, but the relatively stable population outlook will limit any notable weakness in the housing market.

Chart 1

Major Industries Impacted

(job losses)

Bar chart showing the industries with the largest employment declines in 2029 in Ottawa-Gatineau after the public administration cuts. The greatest impacted industries are retail trade, financial services, accommodation and food services, health care and social assistance, construction, and transportation warehousing.

Sources: The Conference Board of Canada.

Bent, not broken

The federal public service is more than just a single sector or employer in the Ottawa-Gatineau area, it is foundational to the strength and stability of the local economy. When the public service grows, it fuels a broader economic expansion, while contraction has historically led to measurable slowdowns across multiple sectors.

Canada, and the National Capital Region, are no strangers to federal government belt-tightening. Similar austerity measures were undertaken by the administrations under 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. This history is evidence that the Ottawa-Gatineau economy has been tested before and gradually regained its footing. The years ahead will no doubt be challenging, and economic momentum will be lost. However, continued growth in industries less tied to the federal public service will help soften the impact from the public administration cuts. Ultimately, we expect this period of restraint to shake, but not shatter, the region’s economy.

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  1. Kpekou Tossou, Rolande, Caroline Nicol, Tim Scholz, Mark Creighton, Matt Dong, Marianne Laurin, Matthew McGoey, Ulysse Robert-Lacroix and Zachary Vrhovsek (2025), “Economic and Fiscal Outlook – September 2025”. Office of the Parliamentary Budget Officer September 25, 2025.

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