Federal Budget 2026 Preview

Highlights

• Canada’s economy has been hit by multiple geopolitical shocks since the start of 2025. In response, the Government of Canada leveraged its strong fiscal position to support households and businesses while investing in long-term economic growth. We expect new planned spending since the SEU 2026 to top $50B over the coming decade while tax cuts and deductions could reach around $90B over the same period.
• Gaps in federal fiscal disclosure have made the Government of Canada’s annual deficits more difficult to forecast than in the past. Despite that, our analysis suggests the federal government may not meet its commitment to a declining deficit-to-GDP ratio, a conclusion also reached by the Office of the Parliamentary Budget Officer. Discretion in classifying operating and capital expenses limits the operating budget anchor’s usefulness as a measure of fiscal sustainability. That said, the federal debt-to-GDP ratio should improve over the next year or so due to a higher level of nominal GDP. Elevated oil prices and inflation are to thank for that. But as oil prices gradually return to normal, the tailwind to the deficits and debt will fade as well, leading to a weaker federal fiscal outlook compared to the SEU 2026.
• Despite the deteriorating long-term federal fiscal outlook, Canada’s absolute and relative debt position and path are broadly in line with maintaining a triple‑A sovereign credit rating. However, a re-escalation in the US‑Canada trade war or continued rise long-term interest rates could put the Government of Canada’s fiscal sustainability at risk. Preserving fiscal room would help the federal government respond to unforeseen economic and financial shocks.