Can the federal budget reset Canada’s economy?

By almost every measure, Canada’s economy is in a tailspin. Development has stopped. Unemployment rate is increasing.

In normal times, remeis dye clear. The Bank of Canada has cut interest rates and the federal government has increased spending to help businesses and households weather the storm.

These are definitely not normal times.

And Bank of Canada Governor Tiff Macklem knows it.

“The structural damage caused by tariffs is reducing our productive capacity and raising costs. It limits the ability of monetary policy to boost demand while maintaining low inflation,” Macklem said last week.

He says that a lot can be achieved only by reducing interest rates. And in this uniquely strange moment for the Canadian economy, he says there are limits to monetary policy.

“It can’t target specific sectors. It can’t target the most affected sectors: aluminum, steel, auto. It can’t help companies find new markets. It can’t help companies reconfigure their supply chains. What it can do is it can try to mitigate the spillover effect from the most affected sectors to the rest of the economy,” he said.

There is a clear message in that statement. It’s not just Canadians who are struggling to stay above water during these difficult times. Economists say Macklem is sending an important signal to the federal government.

“It seems the Bank feels it has done all it can and is now handing over the reins to the federal government to support the economy through fiscal policy,” says David-Alexandre Brassard, chief economist at the Chartered Professional Accountants of Canada.

That fiscal policy will be laid out for all to see on Tuesday.

Randall Bartlett, Desjardins’ deputy chief economist, says the budget itself will be truly unprecedented.

“It is unprecedented not only in its delay, but also in its planned spending, tax cuts and savings. The deficit could swell to levels not seen in decades except in a recession or pandemic, and the debt-to-GDP ratio is likely to go in the wrong direction,” Bartlett wrote in a budget preview last month.

The question, of course, is whether the Budget can do what the Bank of Canada cannot.

“It certainly could,” says Benjamin Reitz, managing director of BMO Economics.

He says it’s clear the Bank of Canada has done what it is comfortable doing. Now, he says, the focus has shifted to the federal budget.

“They are handing over the reins to the fiscal authorities, which in this case is the federal government. We’ll see what’s in this budget. I think there’s a lot of optimism about potential new measures to stimulate growth,” Reitz said.

Sparking growth is at the heart of the matter.

Development has been an issue for years now. Long before Donald Trump returns Oval Office, and Before U.S. tariffs were causing so much damage, Canada was struggling to attract investment and spur economic growth.

Per capita GDP declined dramatically. Between 2014 and 2022, average growth in Canada was the third lowest among OECD countries.

Above all, Reitz says this week’s budget is a chance to reset Canada’s economic priorities.

“Now is the time to look at the economy and economic growth differently than we have in the past several years and to focus more on how to grow Canada than anything else,” Reitzes said.

Therefore spending is important. Canada has pledged billions of dollars in new defense spending. It has already earmarked billions of dollars more for major project office and diversification of trade corridors.

But every budget is a mix of accounting and storytelling.

The numbers say one thing, the text of the document sometimes tells a different story.

Reitz says the challenge in this week’s budget will be to make sure everyone, from Canadian workers and businesses to pension funds and investors around the world, hears a clear message from the government.

“We’re ready to grow the economy, we’re focused on the things that Canadians need to have a better life and those priorities are not the same as they have been for the last 10 years,” Reitz said.