Have High Oil Prices Created the Federal Fiscal Room to Spend Even More?

It’s been a whirlwind of a week in Canada, with many of the world’s largest institutional investors coming to Toronto for the Prime Minister’s first-ever Canada Investment Summit. News reports have been mostly positive, with heightened interest in Canada as an international destination for investment in infrastructure, energy, mining and more.

Prior to the summit, we raised a note of caution External link. regarding the number, scale and risk-adjusted return of Canadian investment opportunities. In the past, all these attributes needed to attract institutional capital to Canada have been lacking External link.. However, leaked documents show that at least 167 projects in need of capital were put in front of investors this week, thereby hopefully addressing the first of these concerns. At least some of these opportunities should also be of sufficient scale to attract investor attention. But there is a lot more that can be done to create large-scale investment opportunities in roads, rail, towers, transmission, airports, ports, pipelines and other infrastructure. Indeed, a greater role for institutional investors is on the table for federally owned major airports and potentially other assets as well.

That just leaves the risk-adjusted return of available opportunities to be addressed. It’s a big world, and Canada is competing with every other jurisdiction for the long-term, patient capital of pension funds, insurance companies, sovereign wealth funds and other institutional investors. Emerging markets and less-regulated developed countries have historically been more attractive destinations than Canada. How much has really changed since the end of 2024?

Private infrastructure is known for its high return. But as interest rates rise around the world, so does the cost of capital, thereby eroding profitability. Fortunately, infrastructure is somewhat immune from these forces as higher costs—including inflation—can to some extent be passed on to consumers, albeit often subject to significant regulatory restraint. And with inflation-adjusted borrowing costs on the rise, real returns would need to rise at the same pace to maintain profit margins. However, given that Canada’s population is currently declining and escalating trade tensions with the US are acting as an additional headwind to real GDP growth, two of the components that drive expected real infrastructure returns remain constrained.¹

That’s where the federal and provincial governments come in. At a minimum, they can reduce investment risk by facilitating faster reviews for projects and reducing red tape. Accelerating international trade diversification by inking trade deals while removing internal trade barriers can help too. And indeed, following the introduction of the Building Canada Act in June 2025, that’s what Canadians have seen.

Canadian governments can’t guarantee market returns on private investments. But they can guarantee a minimum return on investment, take a subordinated debt or equity position in an investment (ensuring they get paid last) or assume much of the front-end investment risk by leveraging the public balance sheet. By doing so, some portion of the risk of a project is transferred from the private to the public sector, boosting the risk-adjusted return to investors. However, this risks socializing the costs of these projects if they don’t turn out as planned. That is to some extent the justification for the proposed Canada Strong Fund External link.—leverage the federal balance sheet while ensuring that the risk taken on the part of the taxpayer is appropriately rewarded.

How much capital governments in Canada will need to commit, on net, to attract substantial international investment remains a big unknown. However, it is the federal government that has sufficient fiscal room to leverage its balance sheet for major infrastructure and other investments, as the provinces are more fiscally constrained. High oil prices mean that revenues are pouring in External link., as growth in Canada’s nominal GDP—the broadest measure of the tax base—is expected to be about 1.5 percentage points higher this year than anticipated at the time of the Spring Economic Update External link. (SEU) 2026 (graph 1). After that, nominal GDP growth should remain broadly in line with the spring outlook. That suggests the level of the federal deficit should be smaller, debt should be lower and nominal GDP should be higher in the near term than in the SEU 2026, all else being equal (graph 2). Together, this means the federal debt-to-GDP ratio should be pushed lower from the top and the bottom.

But all else isn’t equal. The federal government has announced significant new spending measures External link. since the SEU 2026. According to our most recent tally, the unplanned measures unveiled since the spring amount to more than $100B over the next decade, some of which can be linked to capital investment (that is, an asset on the Government of Canada’s balance sheet). And while that new spending could be sufficient to push the federal debt-to-GDP ratio one percentage point higher by 2035, this should partly be offset by higher nominal GDP and revenues. However, the debt ratio could ultimately be above the SEU 2026 a decade from now (graph 3).

If the hoped-for infrastructure investment is timely, well-selected and successfully executed, it could support near-term economic activity and, crucially, expand Canada’s productive capacity over time. Any resulting improvement in nominal GDP and associated revenues could place the debt-to-GDP ratio on a lower path than currently projected. But the magnitude and timing of these gains remain uncertain and would need to be weighed against the costs of financing, operating and maintaining those assets. The case for directing any resulting fiscal room towards new commitments should therefore rigorously rest on the expected economic and strategic returns of each investment.

¹ For demand-based infrastructure assets, expected real returns are often estimated using population growth as a proxy for growth in the potential user base, combined with assumptions about take-up rates. Growth in real GDP per capita also serves as a proxy for growth in per-user inflation-adjusted revenue.