{"id":16979,"date":"2026-11-05T21:30:00","date_gmt":"2026-11-05T21:30:00","guid":{"rendered":"https:\/\/www.rbc.com\/en\/economics\/?p=16979"},"modified":"2026-11-06T03:23:41","modified_gmt":"2026-11-06T03:23:41","slug":"canadian-budget-2026-windfall-fuels-spending-not-savings","status":"publish","type":"post","link":"https:\/\/www.rbc.com\/en\/economics\/canadian-analysis\/provincial-and-fiscal-outlooks\/budget-analysis\/canadian-budget-2026-windfall-fuels-spending-not-savings\/","title":{"rendered":"Canadian Budget 2026: Windfall fuels spending, not savings"},"content":{"rendered":"\n
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Budget 2026 delivers a familiar formula: big new spending offset by an improved baseline, leaving the bottom line and fiscal anchors on track.<\/p>\n\n\n\n

The Carney government’s $500 billion private investment goal gets a push from the Productivity Mega Deduction, funding under the National Electricity Strategy, and a range of supporting measures. But budget 2026 does not mark a strategic departure or deliver new signature wins on major projects and defence \u2014 nor did we expect it to, given the long lead time to bring these initiatives to fruition.<\/p>\n\n\n\n

Otherwise, budget 2026 dedicates significant funding for major social infrastructure and affordability measures, especially Indigenous funding, non-market housing, and one-time direct cost-of-living supports. In total, half of the budget\u2019s $150 billion in new measures is for day-to-day, not capital spending.<\/p>\n\n\n\n

This raises the stakes on the government’s fiscal strategy. Growth dividends from the investment agenda remain longer dated and uncertain.<\/p>\n\n\n\n

Materially increasing day-to-day spending now to address affordability issues may reduce capacity to take on future investments, especially while other major (implicit) fiscal commitments around defence, health and childcare loom.<\/p>\n\n\n\n

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Deficits stable after big 2025-26 improvement but spending is still high<\/strong><\/h3>\n\n\n\n

Budget 2026\u2019s deficit path delivered a big surprise versus our preview<\/a>, basically flat versus the spring update from 2026-27 on, thereby preserving the declining deficit-to-GDP ratio.<\/p>\n\n\n\n

At $39 billion the preliminary 2025-26 number is almost $30 billion better than the update’s $67 billion projected deficit. A much smaller 2025-26 deficit was our suspicion for most of the year \u2013 fiscal monitor tracking for even the first 11 months of the year showed a cumulative deficit of only $25.6 billion \u2013 before March\u2019s monitor revised it up to $55.3 billion. Major year end adjustments clearly reversed course, linked to higher year-end tax receipts. <\/p>\n\n\n\n

In a rerun of the update, though, a mostly unchanged go-forward deficit profile does not mean restrained new spending. Instead, $158 billion in positive economic and fiscal developments over the 5 years from 2026-27, are matched with $152 billion in new spending.<\/p>\n\n\n\n

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Fiscal anchors<\/strong><\/strong><\/h3>\n\n\n\n

Ottawa has set two fiscal anchors \u2013 i) a declining deficit-to-GDP ratio; and, ii) balancing the operating budget by 2028-29 \u2013 as well as an overarching fiscal objective to attract $500 billion in private investment ($1 trillion total) over 5 years.<\/p>\n\n\n\n

Per above, anchor i) continues to be met with budget 2026 showing an improved profile, and end point, versus both the spring update and budget 2025.<\/p>\n\n\n\n

Based on the budget\u2019s capital tables, half of new spending in Budget 2026 qualifies as capital under the government\u2019s definition (the budget says that two-thirds of new measures support growth and investment). Budget 2026 continues to meet anchor ii), with a balanced operating budget expected one year early in 2027-28.<\/p>\n\n\n\n

Budget 2026 reiterates Ottawa\u2019s focus on and tracking toward the $500 billion goal.<\/p>\n\n\n\n

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Debt & borrowing requirement<\/strong><\/h3>\n\n\n\n

The federal debt-to-GDP ratio \u2013 Ottawa\u2019s favoured debt burden ratio that excludes both financial and non-financial assets from gross debt\u2013 gets a better starting point from higher baseline nominal GDP, staying below both the spring update and budget 2025 profiles throughout the projection period. It remains flat throughout, without any turn downward until the mid-2030s in Ottawa\u2019s baseline long-term projections, the same as before.<\/p>\n\n\n\n

In partial contrast, the net debt burden \u2013 gross debt minus financial assets only and of particular interest to investors and credit rating agencies \u2013 trends upwards from 2026-27 onwards. But with a better starting point, it ends up only slightly higher versus the spring update in 2030-31.<\/p>\n\n\n\n

The differing trajectory is related to Ottawa\u2019s borrowing to fund non-financial assets.<\/p>\n\n\n\n

Ottawa\u2019s cumulative 5-year financial requirement between 2026-27 and 2030-31 now looks to come in at $765 billion, up across each year by an average of $19 billion versus the spring update. The biggest driver is higher outlays for acquisition of non-financial assets, especially in defence. Higher projected Crown borrowing and settlements related to contingent liabilities also play a role.<\/p>\n\n\n\n

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Borrowing plan<\/strong><\/p>\n\n\n\n

There were no changes to planned Government of Canada bond issuance in FY26\/27 at C$298bn. This means the current pace of bond issuance should be maintained over the remainder of the fiscal year. The higher financial requirements in FY26\/27 are funded with a C$16bn increase in the planned treasury bill stock as of 31 March 2027 to C$284bn.<\/p>\n\n\n\n

For FY27\/28, bond issuance is increased by C$18bn to C$316bn, with 2y and 5y issuance raised, while 10y and 30y issuance were held steady. The bill stock is projected by the budget to rise by a further C$6bn in FY27\/28, to C$290bn by 31 March 2028.<\/p>\n\n\n\n

– Simon Deeley, Canadian Rates Strategist<\/em><\/p>\n<\/div>\n<\/div>\n\n\n\n

Revenue & Spending<\/strong><\/strong><\/strong><\/h3>\n\n\n\n

The positive economic and fiscal developments that offset new spending are attributed ~70% to higher revenues \u2013 mostly income taxes because of higher oil prices and carry-forward of a stronger 2025-26 baseline.<\/p>\n\n\n\n

The remaining 30% is from lower direct program expenses, reduced by an average $12.4 billion per year. This is attributed to a better assessment of timing and take-up across a broad range of federal non-capital spending. While some of this may be delays in recent initiatives, it is applied to the whole expense category \u2013 which grew strongly in recent years- and is pitched as a permanent downward adjustment in the direct program expense profile.<\/p>\n\n\n\n

Public debt charges follow substantially the same profile as in the spring update, trending upwards over the projection period.<\/p>\n\n\n\n

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New measures<\/strong><\/h3>\n\n\n\n

Budget 2026 pairs major new incentives for private investment \u2013 notably the mega deduction \u2013 with a lot of social infrastructure and affordability supports.<\/p>\n\n\n\n

Measures with biggest 5-year fiscal cost<\/h4>\n\n\n\n
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    $36 billion \u2013 Productivity Mega Deduction<\/h4>\n\n\n\n

    As expected, Budget 2026\u2019s biggest measure was the corporate tax mega deduction.<\/p>\n\n\n\n

    Ottawa\u2019s headline tax measure for helping small business \u2013 the Canada Growth Incentive tax exemption for capital gains and rollover of capital gains tax liability \u2013 has only moderate fiscal cost. The budget also includes a bunch of tax simplification measures.<\/p>\n<\/li>\n\n\n\n

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    $27 billion \u2013 Advancing reconciliation with Indigenous Peoples<\/h4>\n\n\n\n

    While the budget narrative does not highlight this major new commitment, budget 2026 includes at least $12 billion to Indigenous infrastructure, especially clean water, as well as housing and other infrastructure in First Nations communities. The remainder targets education, children and families, and health and safety.<\/p>\n<\/li>\n\n\n\n

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