Much has changed since the spring of Budget 2024. The feds\u2019 lower immigration targets will hamper the growth engine the Canadian economy has relied on in recent years. U.S. President-elect Donald Trump’s policies could dictate domestic economic outcomes and spending priorities. A federal election also looms.<\/p>\n
And, a lot of the same challenges remain. Canada\u2019s unemployment rate has risen faster than any other advanced economy, productivity growth is among the weakest, and many continue to grapple with a lack of general affordability.<\/p>\n
Though tracking of the 2024-25 fiscal plan so far this year indicates some upward pressure on the federal deficit, the issues above bring greater risks to the government\u2019s bottom line in the years ahead.<\/p>\n
As we get closer to 2025 and when a Fall Economic Statement has historically been released, we\u2019ll be looking for how government budgets tackle the new, but also persistent challenges while maintaining fiscal responsibility.<\/p>\n
Robust population growth\u2014which has supported growth but also comes with its own set of challenges\u2014is set to moderate sharply given lower targets for immigration and temporary residents.<\/p>\n
Lower population growth means lower total consumption and employment growth for the economy as a whole in the years ahead, restraining the expansion of the tax base and government revenues. These changes will shave nearly 1 percentage point off economic growth over the next three years compared to our previous projections<\/a>, negatively affecting the budgetary balance by a cumulative $50 billion over five years starting in 2025.<\/p>\n But, other factors will help partially offset this negative fiscal shock over the planning period. Primarily, lower interest rates than planned in Budget 2024\u2014given the Bank of Canada will have to cut rates more aggressively to get ahead of economic weakness\u2014will support federal finances. In total, we estimate that all economic developments since Budget 2024 will subtract almost $20 billion from the budgetary balance over the forecast horizon.<\/p>\n However, lower-trend population growth will be an ongoing fiscal drag, because it pulls growth from the entire economy. Canadian demographics are bound to return to an aging trend after the post-pandemic immigration boom pushed the median age down for the first time. Fiscal pressures will increase as a larger share of the population draws on costly government services and programs with lower fiscal support from a smaller workforce.<\/p>\n The incoming U.S. administration is adding more turbulence to the Canadian economic and fiscal outlook.<\/p>\n Our early read is that most Trump campaign promises would be negative for growth in Canada. Increased tariffs on Canadian imports to the U.S. would be a significant drag on demand for Canadian-made goods, while lower U.S. personal and corporate tax rates would undermine Canada\u2019s tax competitiveness and investment prospects. But, the magnitude of these challenges is uncertain right now. Still, rising U.S. deficits and debt needed to finance these promises could add pressure to long-term interest rates, affecting the borrowing costs of Canadian governments.<\/p>\n U.S. policy is also likely to dictate Canadian government spending priorities. Greater defence spending and more border patrol appear necessary for the Trump administration to reconsider tariffs, adding weight to Canada\u2019s bottom line if we want to remain within the U.S. trade tent. Matching tax rate reductions is another spending pressure point the Canadian government may need to address.<\/p>\n Given the significant uncertainty around the extent and timing of when Trump\u2019s promises are converted into actual policy, how the government builds contingencies into its fiscal planning, and how it at least signals its overlapping priorities to the U.S. will also matter.<\/p>\n Canadian cost of living and affordability concerns are a very real economic problem and need both near-term and structural solutions.<\/p>\n Federal policy has also already provided major and ongoing cost relief to many Canadians with tens of billions in annual funding for hallmark programs like national childcare, dental care, seniors\u2019 benefits enhancements, and housing. Further relief is in the works. Childcare fees are still set to fall in at least two provinces and housing demand will moderate further following revised immigration targets, which should soften competition in the rental market. Housing supply initiatives, including efforts from other levels of government, will reduce price pressures in years to come. These types of supply-side-driven and targeted benefits help alleviate the cost of living in the long run.<\/p>\n Broad-based and demand-side initiatives like cash transfers don\u2019t tend to solve the underlying problem and they risk exacerbating inflationary pressures while complicating the role of monetary policy. Cash transfers that also flow to higher income households, for example, dilute relief to those most in need, while almost guaranteeing a large share of the benefit will be saved by these households.<\/p>\n We\u2019ll be assessing future government spending through the lens of targeted and supply-side approaches that help reduce inflationary pressure versus broad-based and demand-side measures that have the opposite effect.<\/p>\n Canada will need to rely on other levers for economic growth with a less potent immigration policy. Skills upgrading and matching would recruit more of the domestic labour pool into the workforce. But, most of the work will depend on enhancing labour productivity growth, where Canada has been lagging<\/a> and progress has been elusive.<\/p>\n Fiscal prudence is necessary, but markets are unlikely to punish new spending with a clear link to growth\u2014like improved labour supply matching, infrastructure investments, scaling of advanced technologies, and incentives to promote greater capital investment. The greater the emphasis on enhancing productivity versus other spending, the more likely it is that growth forecasts are raised and inflation forecasts are decreased. This distinction separates the total amount of money spent by a government and its overall impact. The destination of each dollar spent can be more relevant to the outlook than the total spend.<\/p>\n Fiscal prudence must be at the top of the priority list when it comes to navigating the challenges ahead.<\/p>\n2. Preparing for trade-induced volatility<\/h2>\n
3. Tackling ongoing affordability challenges amid election-year pressures<\/h2>\n
4. Cracking Canada\u2019s productivity puzzle<\/h2>\n
5. Preserving fiscal health is paramount<\/h2>\n