Stronger GDP and oil revenues offset Ottawa’s summer spending surge

The federal government is likely entering Parliament’s fall sitting in a stronger fiscal position, helped by better-than-expected economic results. At last week’s Canada Investment Summit, Prime Minister Mark Carney said Ottawa is on track to balance its operating budget a year earlier than planned.

After taking office in 2025, Carney reoriented the federal budget framework toward capital investment to address Canada’s longstanding productivity shortfalls. The Liberals have also identified $60 billion in existing spending to cut over five years, partly through a smaller federal public service. Carney had promised to balance operating spending within three years so the government would borrow only for capital-forming items, such as infrastructure and other major projects. He said earlier this week that target will now be reached next year, rather than by fiscal 2028 as originally promised.

John Fragos, spokesperson for Finance Minister François-Philippe Champagne, said in a statement to The Canadian Press that continued fiscal prudence, discipline and spending efficiency had moved the operating-budget balance target forward by a full year.

Some experts, however, say the improvement owes more to the economy than to fiscal restraint. Randall Bartlett, deputy chief economist at Desjardins, said federal revenues rose 10 per cent year over year from April to June, compared with the spring economic update’s forecast of roughly 3.5 per cent revenue growth for the full year. Strong consumer spending and corporate profits contributed to the increase, he said.

Higher global oil prices have also lasted longer than many expected. Ottawa used some of the resulting oil-revenue windfall to pause the federal fuel excise tax in the spring, providing relief at the pumps. Earlier this month, Champagne announced that the measure would be extended into 2027.

Those revenues have helped offset a series of spending announcements made during the spring and summer. Bartlett estimates Ottawa has announced more than $100 billion in spending over the next 10 years since the spring update, including an estimate of public financing needed for a proposed oil pipeline from Alberta to the B.C. coast. He said the opposing forces should leave the overall deficit path broadly stable relative to the spring update and could reduce the debt-to-GDP ratio when Ottawa releases its fall budget.

The Liberals’ deficit is also affected by the new “productivity mega-deduction,” a tax measure announced at this week’s investment summit to spur business capital spending. It is expected to cost $36 billion over five years. Bartlett said the measure, while intended to support capital formation, should be classified as program spending within the operating budget. He and other fiscal hawks, including the parliamentary budget officer, have criticized Ottawa’s broad definitions of capital and operating spending.

Fragos said tracking operating expenses is a more effective fiscal guardrail than measures such as debt-to-GDP because it is based on absolute levels rather than a ratio. He added that Ottawa’s outlook shows debt-to-GDP remaining stable over the long term.

Sahir Khan, executive vice-president at the University of Ottawa’s Institute for Fiscal Studies and Democracy, said the government’s definitions are not inherently flawed, though they may be somewhat broader than those used elsewhere. He also attributed much of the fiscal improvement to stronger tax revenue. Ottawa’s retaliatory duties on U.S. goods are largely fiscally neutral, he said, because the revenue is mostly redirected to sectors hit by tariffs.

Khan said the Carney government’s emphasis on capital spending marks a departure from former prime minister Justin Trudeau’s focus on program spending and transfers. Borrowing for a capital-focused agenda can eventually generate returns if investments succeed, he said, although the government must still closely watch its deficit and debt costs.

Bartlett said Ottawa’s effort to stimulate Canada’s economy will be constrained until there is more clarity on trade with the United States. The new tax incentive may help revive stagnant business investment, he said, but tariffs and trade uncertainty remain significant headwinds for growth, investment and productivity.