{"id":2968,"date":"2025-04-29T13:37:43","date_gmt":"2025-04-29T13:37:43","guid":{"rendered":"https:\/\/www.rbc.com\/en\/economics\/2025\/04\/29\/canadas-path-ahead-six-economic-challenges-facing-the-new-federal-government\/"},"modified":"2026-03-31T18:27:02","modified_gmt":"2026-03-31T18:27:02","slug":"canadas-path-ahead-six-economic-challenges-facing-the-new-federal-government","status":"publish","type":"post","link":"https:\/\/www.rbc.com\/en\/economics\/canadian-analysis\/provincial-and-fiscal-outlooks\/budget-analysis\/canadas-path-ahead-six-economic-challenges-facing-the-new-federal-government\/","title":{"rendered":"Canada\u2019s path ahead: Six economic challenges facing the new federal government"},"content":{"rendered":"\n
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Canada is at crossroads. It\u2019s facing a shifting relationship with its main economic partner, a reawakening to its forgotten growth potential, and questions about its place in a new and developing global supply chain. All of this is happening amidst a likely painful slowdown in growth in the coming year. And, landing into this maelstrom of economic change is a new government.<\/p>\n\n\n\n

It\u2019s too early to fully assess how a new government will impact Canada\u2019s economy in the short and long term. Indeed, platforms are not the same as enacted policies.<\/p>\n\n\n\n

As a starting point, however, we should begin with where the main economic challenges will be. Here are key areas worth highlighting.<\/p>\n\n\n\n

1. The pressure of immediate needs imposed by a recessionary-type slowdown\u2026<\/h2>\n\n\n\n

RBC Economics isn\u2019t currently calling for a technical recession, but our outlook<\/a> suggests it could still feel very much like one\u2014essentially no growth for the remainder of this year and more job losses. Certain sectors such as autos, steel and aluminum among others, and regions like Ontario and Quebec will feel it more.<\/p>\n\n\n\n

Meanwhile, we continue to see signs of greater pressure on low- and middle-income Canadians<\/a>, who feel the weight of a larger price-level shock, the end of any excess savings and smaller real wage gains. Combined with a rise in joblessness, targeted federal support will be needed, and it won\u2019t be particularly optional.<\/p>\n\n\n\n

2. \u2026 while tackling Canada\u2019s record-low structural weakness.<\/h2>\n\n\n\n

Meanwhile, fiscal policy will have to focus on reviving a sad economic development. Potential growth\u2014a combination of labour force participation and productivity\u2014is expected to fall below 1% at current rates.<\/p>\n\n\n\n

This isn\u2019t a new problem\u2014potential has been declining for 65 years, much like in other advanced economies. But, as Bank of Canada Senior Deputy Governor Carolyn Rogers described in 2024<\/a>, we are at a \u201cbreak the glass\u201d moment.<\/p>\n\n\n\n

There\u2019s no shortage of ways that falling potential could be addressed. The size and scope of the next chapter of immigration policies will matter, but so will addressing Canada\u2019s productivity crisis, including lagging business investment relative to peer economies, and there\u2019s no bad place to start on that one.<\/p>\n\n\n\n

As we\u2019ve covered here<\/a>, from cutting red tape to reducing interprovincial trade barriers to generating innovation, there\u2019s a laundry list of approaches that could work. But, the key will be a parallel focus on short-term and long- term needs.<\/p>\n\n\n\n

3. The best treatment for what ails Canada is fiscal policy, not monetary.<\/h2>\n\n\n\n

For Canada\u2019s short-term and long-term challenges, fiscal policy at federal and provincial levels are a better prescription for what ails Canada than long relied upon monetary policy.<\/p>\n\n\n\n

In the near term, the BoC might have a few more interest rate cuts in its toolbox to soften some of the broad-based slowdown ahead, but the segmented nature of the impact likely means there are pockets needing much more support than others. Monetary policy can\u2019t target the areas most in need and risks inflation by being too supportive to some segments of the economy and not helpful enough to others.<\/p>\n\n\n\n

Longer-term challenges of promoting investment, deregulation and a more competitive ecosphere fit squarely with governments, with the feds in the lead. In other words, there are no other appropriate lifeboats.<\/p>\n\n\n\n

4. Rebalancing of focus between social and business investment measures.<\/h2>\n\n\n\n

In recent years, Canadians have benefited from a permanent expansion in federal government spending on often broad-based social programs without absorbing the costs. Some of these programs may \u201cpay for themselves\u201d over time by encouraging greater economic growth, but current costs have been deficit-financed. Now, the feds have a new laundry list of \u201cto-dos,\u201d and fiscal space is not unlimited.<\/p>\n\n\n\n

Affordability and other social challenges remain very real concerns, but the need to encourage greater wealth drivers in the Canadian economy amid shifting economic and geopolitical forces necessitates a reset. Business investment will be at the forefront of rebuilding the economy\u2014preventing a backslide amid uncertainty and reversing its underperformance is key.<\/p>\n\n\n\n

Addressing this won\u2019t just be about spending through tax measures, incentives or public infrastructure. In some places, it\u2019s about pulling government influence back through deregulation, removing red tape or finding efficiencies like through a streamlined tax code.<\/p>\n\n\n\n

5. Finding ways to make social and other \u2018must do\u2019 spending more growth positive.<\/h2>\n\n\n\n

There is a bunch of significant government spending hovering in the near and medium term, including on housing, defence and healthcare.<\/p>\n\n\n\n

Both housing and healthcare have lower than average labour productivity\u2014meaning they risk tying up a lot of the economy\u2019s resources. In a recession with idle resources, it can be a good thing. But otherwise, this \u201ccrowding out\u201d could make growing the economy in other areas more difficult. In the longer term, some areas may not generate a lot of additional economic growth. Defence spending, for example, will accumulate some idle (deterrent) assets\u2014if we\u2019re lucky.<\/p>\n\n\n\n

Canada does not need to choose between growth and this type of spending, which is absolutely needed. It can just try to do better. Public spending in these areas can encourage innovation, dual-use applications, ties into other areas of the economy, or links to export opportunities. We\u2019ll be following up with more on this soon.<\/p>\n\n\n\n

6. Fiscal space is not unlimited, but it can buffer the economy in a tariff shock and take on some growth-positive spending.<\/h2>\n\n\n\n

The slow growth environment we\u2019re currently projecting would not require significant federal stimulus, but a major tariff shock such as 25% permanent tariffs\u2014a downside scenario<\/a> we were seriously contemplating a month ago\u2014would require a much bigger fiscal lift. We previously wrote<\/a> that as much as $145 billion could be needed over two years, which would send the federal debt-to-gross domestic product ratio to COVID-19 highs.<\/p>\n\n\n\n

As debt buyers, investors are the ultimate arbiters of fiscal sustainability, and they tend to look at countries on a relative basis. Even though Canada\u2019s consolidated government gross debt is high relative to other triple A-rated peers, its net debt is much lower and the lowest in the G7. Government support through a potential recession is expected by markets and should not raise red flags provided it is targeted and sized appropriately.<\/p>\n\n\n\n

The government should also have capacity for some other spending. Canada is not the only country facing shifting trade winds, and with pervasive uncertainty weighing on businesses, the public sector will need to play a role in making the economy more resilient. But a lot is being asked of the public purse.<\/p>\n\n\n\n

The more each dollar of public spending delivers greater growth dividends, the more the Canadian economy will be headed in the right direction, while the federal debt burden remains sustainable.<\/p>\n\n\n\n

\n\n\n\n

Frances Donald<\/strong> is the Chief Economist at RBC and oversees a team of leading professionals, who deliver economic analyses and insights to inform RBC clients around the globe. Frances is a key expert on economic issues and is highly sought after by clients, government leaders, policy makers, and media in the U.S. and Canada.<\/em><\/p>\n\n\n\n

Cynthia Leach<\/strong> is Assistant Chief Economist at RBC covering the team\u2019s structural economic and policy analysis. She joined in 2020.<\/em><\/p>\n<\/div>\n<\/section>\n","protected":false},"excerpt":{"rendered":"

It\u2019s too early to fully assess how a new government will impact Canada\u2019s economy over time, but here are key areas worth highlighting.<\/p>\n","protected":false},"author":79,"featured_media":2665,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"advgb_blocks_editor_width":"","advgb_blocks_columns_visual_guide":"","footnotes":""},"categories":[59,83,91],"tags":[115],"rbc_econ_content_type":[],"class_list":["post-2968","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-budget-analysis","category-canadian-analysis","category-provincial-and-fiscal-outlooks","tag-canada"],"acf":[],"yoast_head":"\nCanada\u2019s path ahead: Six economic challenges facing the new federal government - RBC Economics<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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