Carney’s federal budget plans billions in new spending in response to US tariff shocks

Canadian Prime Minister Mark Carney has unveiled his first federal budget, which lays out an ambitious plan to transform the Canadian economy and address the challenge of US tariffs.

Billed as an “investment budget” by the government, the fiscal plan increases Canada’s deficit to C$78 billion ($55.3 billion; £42.47 billion), the second largest in history.

The costs are offset by plans to attract Canadian dollar investment to Canada over the next five years, with the federal government arguing that tighter spending would eliminate “vital social programs” and funding for Canada’s future.

However, the budget outlines cuts, including reducing the size of the federal workforce by about 10 percent in the coming years.

The budget was presented by Canada’s Finance Minister Francois-Philippe Champagne in the House of Commons late Tuesday afternoon.

In his budget speech, Champagne warned that Canada is facing “a time of profound change” and that “bold and swift action is needed” to ensure the country prospers.

The uncertainty and need for protectionist measures as a result of US tariffs on Canada is mentioned throughout the budget. President Donald Trump imposed a broad 35 percent tariff on Canadian goods not covered by an existing free trade agreement and slapped tariffs on certain sectors such as steel, aluminum and autos.

Those levies, introduced earlier this year, have already led to Canadian job losses in those sectors, and business leaders have warned of slowing investment in Canada due to trade uncertainty.

To counter that, the budget proposes spending C$280 billion over the next five years “to strengthen Canada’s productivity, competitiveness and resilience.”

These include upgrading ports and other trade infrastructure with the goal of doubling Canadian exports to non-US markets over the next decade, as well as direct funding to support businesses affected by the tariffs.

The fiscal update also outlines a plan to increase Canada’s competitiveness, with the goal of making Canada a more attractive place to do business than the US.

Rebecca Young, head of inclusive economics and sustainability at Scotiabank, said the budget lays out a plan to reduce timelines and iron out regulatory hurdles in the hope that this will boost private investment in Canada over the years.

But she warned that parts of the budget could be a hard sell for Canadians immediately struggling with the cost of living.

“They’re going to open up this budget and they’re not going to see any new (supports),” she said.

And while the budget delivers on its generational spending promise, Ms Young said it remains to be seen whether it will be as “transformative” as Carney hopes.

“We want to unlock a trillion dollars based on this investment here. A lot has to happen to get to that trillion,” she said.

On defence, the budget pledges nearly C$82 billion over five years – the most funding in decades – putting Canada in line with its NATO commitment to spend 2% of its gross domestic product (GDP) on its military by this year.

The Carney government is also betting big on AI, offering nearly C$1 billion to promote the integration and use of the fast-growing technology, including in government operations.

Carney warned Canadians before the budget of “sacrifices”. Among them is a reduction in the size of the federal government, which will result in 40,000 job losses by 2029. International aid is also slated to be reduced to pre-pandemic levels.

Immigration targets were slightly reduced over the next three years to “stabilise” new intakes into the country, including a significant reduction in student visas.

The budget must be passed by the Parliament of Canada before it can be implemented. Carney’s Liberal government is three seats short of a majority, meaning it will need the support of other parties to implement its fiscal plan.

Failure to pass the budget could risk a federal election.

According to multiple reports, one Conservative MP, Chris d’Entremont, is no longer in the party’s caucus after he told Politico on Tuesday that he was considering switching the floor to the Liberals and would make a decision “in the next few days” after reviewing the budget.

If he does, it will narrow Carney’s razor-thin minority at a critical time.

Meanwhile, Conservative opposition lawmakers criticized the budget for increasing Canada’s deficit while doing little to address affordability for Canadians.

Yves-Francois Blanchet, the leader of the separatist Bloc Quebecois party, said his group did not see how they could support the budget.

Members of the left-leaning New Democratic Party said they would take time to study it, but criticized the planned public sector cuts.

With the larger deficit projected, Carney’s fiscal plan claims Canada still has the lowest deficit-to-GDP ratio in the G7, behind only Japan.