The federal budget shows a tough path out of the current crisis – with little margin for error.
The 2025 federal budget paves the way for the Canadian economy to emerge from the current crisis. But it also highlights how deep a hole the economy is in right now and how little margin for error there is as Canada grapples with the dangers of a trade war.
Finance Minister François-Philippe Champagne said, “This budget must be generational in its ambition and must shape the future of our economy and our country.” “There is no room for retreat, ambiguity or even standing still; there is only bold and quick action.”
The budget presents various scenarios for economic growth over the next five years. The so-called upside scenario imagines a world in which US tariffs are rolled back and global trade returns to normal.
Under the “negative scenario”, the Canadian economy would shrink during the quarter running from April to June. Unemployment will peak at around 7.4 per cent and Canadian growth will remain weak for several years.
“Nominal GDP will be on average $51 billion less per year over the forecast horizon relative to the August 2025 survey forecast,” the budget said.
In that scenario the Canadian economy would weaken further – and that is not far-fetched. It’s still entirely possible that next month’s GDP figures will show that Canada slipped into recession this summer and that unemployment has been rising for several months.
Finance Minister François-Philippe Champagne presented the Liberal government’s first budget on Tuesday. CBC journalists analyzed the political and economic implications of the budget, which also includes a major new direction in defense spending.
Will trade chaos end?
The budget makes clear promises about the way forward: Canada will emerge relatively quickly from the ashes of two quarters of trade chaos.
But David Macdonald, senior economist at the Canadian Center for Policy Alternatives, says there’s a problem with that promise.
“It’s not clear to me that the chaos will end, and the impact on Canada, any time soon,” he said.
Macdonald says the budget promises to rethink the Canadian economy; helping businesses find new markets; And helping industries adjust to a new, less predictable future than the one they’ve become accustomed to.
It provides billions of dollars in tax incentives for Canadian companies to build new facilities. And it pledges vast resources to ensure Canadian products find markets.
But Macdonald says this comes with great difficulty. And with Canada’s economy already in recession, there isn’t much wiggle room if things turn around.
He said, “How do we replace federal government interference with trade with the United States? How do we replace international trade with trade with the United States? It’s a very challenging proposition.”
And although the Budget outlines what a more troubled economic scenario would look like, it does not provide many measures if things actually get worse, not better.
“If the situation worsens on the economic side, it (the budget) will have to be changed,” says Sahir Khan, co-founder and executive vice-president of the Institute of Fiscal Studies and Democracy at the University of Ottawa.
The situation can worsen in many ways.
The trade war may deepen. Any other external shock could weigh heavily on the economy or, perhaps most likely, the benefits projected in the Budget may take longer to be realised.
Khan said, “I don’t think these measures are going to be implemented in the short term. It’s about confidence in the short term, but the consequences of a major capital strategy and defense strategy will be felt over decades.”
losses are already being incurred
While this budget shows an extremely important new path forward, the fact is that right now there is very real harm being done to the Canadian economy and to Canadian businesses.
So the toughest hurdle in the Budget isn’t just implementing some sweeping changes (from a government that has struggled with implementation in the past). Nor is it worth seeing whether the bet succeeds or not.
The hard part will be to ensure that the Canadian economy keeps its head up.
Finance Minister François-Philippe Champagne responded to skepticism that his first budget could meet the claimed $1 trillion in total investment over five years, and defended the value of the budget’s $78 billion deficit. Champagne asked MPs from other parties to ‘think twice’ before deciding not to support the document because it is unclear where the Liberals will get enough support to pass it.
If Canada can prevent a recession, keep the unemployment rate from rising further and keep the trade war from escalating further, the changes made in this budget will be much easier to implement.
But it’s a tall order – and at least part of it is out of the Canadian government’s control.
