Prime Minister Mark Carney's second budget uses windfall oil revenue to fund productivity measures and infrastructure over the next five years. It keeps his previous fiscal goals intact, but economists question how the numbers were built and whether debt costs will rise.
Prime Minister Mark Carney plans to use windfall oil revenue to boost Canada's productivity and build infrastructure over the next five years while keeping his previous fiscal goals intact, his second budget showed on Thursday. Higher oil prices due to the Iran war have given Ottawa a fiscal boost, according to Reuters.
Oil revenue adds C$158.3 billion in fiscal room
Mainly higher oil revenue has given the government additional fiscal room of C$158.3 billion ($113.2 billion) since April. The budget shows the government planning to spend up to C$142.1 billion of it, along with an additional C$10 billion announced since April 2026, over five years.
Most new spending goes to the government's permanent tax incentive, which helps businesses expense project costs upfront. The budget also funds a tax incentive for Canadian builders, infrastructure, a top-up of a grocery rebate, social housing incentives and defence.
The deficit for the previous year dropped to C$39.3 billion from C$66.9 billion projected in the April economic update. Even so, BMO Capital Markets senior economist Shelly Kaushik said the deficit is very little changed despite growth that came in more resilient than expected in the spring, because the government chose to spend most of the room.
Economists question the accounting and the debt path
Randall Bartlett, deputy chief economist at Desjardins, described the budget as unusual and said creative accounting was needed to create the fiscal room. He is not expecting an imminent debt downgrade in Canada, but he said the numbers raise concern about the federal fiscal position. A Finance Ministry spokesperson responded that the government holds its financial accounts to a high standard.
Meanwhile, the budget shows federal debt rising to C$1.59 trillion in 2030-2031 from C$1.37 trillion in the current 2026-2027 fiscal year. Because of higher GDP projections, federal debt-to-GDP stays elevated but flat.
The government expects its debt financing cost to climb to 13.6% in the next five years from 11% this year. Economists said Canada is earmarking none of the oil windfall to reduce debt and debt payment charges.
Support for the investment push, with a caution
Pedro Antunes, chief economist at Signal 49 Research, said the budget hits the right pieces: "The government is hitting the right pieces in this budget," according to Reuters. But he cautioned that the risk is that debt stays elevated and financing costs keep increasing.
The government said it will balance day-to-day operating spending against revenue by 2028-2029 and maintain a declining deficit-to-GDP ratio.
Sources: Reuters via Investing.com, Reuters via Investing.com
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