Economic and fiscal overview

A Changing World, A New Opportunity

The global economy is undergoing a profound transformation. After decades in which globalisation and free trade underpinned growth, a fundamental shift is now underway—driven by economic nationalism, geopolitical uncertainty, and rapid technological change.

Major global events—from financial crises and pandemics to de-industrialisation and rising geopolitical tensions—have challenged long-standing institutions and the rules-based international system. Many countries are now placing greater emphasis on domestic resilience, including through policies aimed at securing critical sectors and supply chains.

Industrial policy, once seen as secondary to market forces, is returning to the forefront. In 2024 alone, governments worldwide introduced more than 2,500 industrial policy measures reflecting a transition in how governments are protecting national security interests and securing long-term competitiveness.

The United States, our largest trading partner, is fundamentally reshaping all of its trading relationships and putting up trade barriers, with its average tariffs across all countries rising from around 2 per cent at the end of 2024 to 17 per cent today. The effect is profound—hurting companies, displacing workers, disrupting supply chains, and causing uncertainty that is curbing investment.

This evolving global context is creating significant uncertainties for firms navigating investment and supply chain decisions in North America and across the world—precisely when Canada needs investment to build its future.

A Pivotal Moment for Canada's Economy

For a country like Canada—where about one-third of national income comes from exports—these global shifts carry significant implications.

Canada's trade relationships within North America remain central to its economy, but their nature is changing. New tariffs and shifting trade policies are straining supply chains and raising costs for Canadian exporters:

• High tariffs and significant trade actions now apply to key exports to our largest trading partner, including autos, steel, aluminum, copper, softwood lumber, and wood products. A 35 per cent tariff also applies to non- Canada–United States–Mexico Agreement (CUSMA) compliant goods.
• Canadian agricultural exporters are also facing higher Chinese tariffs on canola, pork, and seafood.
• Tariff levels continue to shift, and uncertainty about future trade policy is elevated.

Despite these pressures, Canada continues to benefit from favourable access to our largest export market.

• Canada has the best deal across all key U.S. trading partners, with 85 per cent of Canada-U.S. trade remaining tariff-free.
• The average U.S. tariff rate on Canadian goods stands at 5.4 per cent—the lowest among all major countries trading with the U.S. (Chart 1).^{Footnote 1}

The economic strategy of the United States is shifting from a commitment to multilateral trade liberalisation to more transactional and managed bilateral trade and investment. The economic effects on the Canadian economy are already evident:

• New tariffs, and the uncertainty caused by trade tensions, are weighing on exports, curbing business investment, and contributing to a broader slowdown in economic activity. The Canadian economy expanded by just 0.2 per cent in the first half of the year.
• Labour markets are showing signs of strain, with trade tensions interrupting the recovery that had been underway since mid-2024. Although the economy has continued to create jobs, the unemployment rate rose from 6.6 per cent in February to 7.1 per cent in September (Chart 2), with trade-exposed industries and regions most affected.
• The medium-term outlook has weakened. Real GDP is now projected to grow just above 1 per cent annually in 2025 and 2026 compared to projections of about 2 per cent in the 2024 Fall Economic Statement (FES 2024) (Chart 3). This is a risk that the economy is adjusting to a persistently lower growth trajectory—marked by weaker productivity and soft investment.

These developments have also brought long-standing structural challenges into sharper focus: weak productivity, chronically low business investment, overreliance on U.S. demand, and internal barriers that fragment the Canadian market.

To support workers and businesses affected by new tariffs and trade tensions, the government has provided targeted sectoral measures, including re-training, income supports for workers, and liquidity, investment, and procurement supports for businesses. This immediate support is necessary, but not the entire solution.

While external forces will continue to shape the global economy, Canada retains the ability to chart its own economic course. By strengthening resilience, fostering innovation, and enhancing competitiveness, Canada can better withstand global shocks, seize new opportunities, and secure lasting prosperity for Canadians.

Building Canada's Future Economy

Budget 2025 is our plan to build the strongest economy in the G7 and one that empowers Canadians to get ahead. It focuses on building our strength at home to ensure Canada does not just withstand global shifts but prospers from them.

Both Germany and Canada recognise that in this very testing time, they need to use their fiscal space. In the case of Canada, the Canadian authorities have been very decisive to take action in the context of changing relations with their main trading partner. And one of these actions is indeed to reform—modernise the budget framework by (…) separating operating expenses in the budget from investment—that ability to then focus strategically on investment that are pro-growth, that can lift up productivity. The areas that Canada identified, housing, infrastructure, energy, they are thinking of some strategic projects. These are areas that we see the need of doing more so Canada can lift up productivity. 

At its core, our plan is a long-term economic strategy that is anchored on four objectives:

• Harnessing Our Strengths: Canada has what the world wants—it is an energy superpower in clean and conventional energy, among the top five producers of the world's most important critical minerals, a leading developer of artificial intelligence and quantum, has a highly educated workforce, and the ability to attract top talent from around the world. Investments in these foundations, including major nation-building projects, will spur growth of our industries and help businesses thrive in today's global economy.
• Building Our Nation: Canada's new government is investing to build major nation-building projects that are in our national interest. These projects will connect our regional economies to each other and to the world. Build Canada Homes will help double the pace of construction to build millions of more homes. As we build our nation, we are creating high-paying careers and supporting Canadian industries such as steel, aluminum, critical minerals, and softwood lumber, with our Buy Canadian Policy. It's time to build big, build bold, and build now.
• Unifying Our Economy: Becoming our own best customer requires a more integrated domestic market. The One Canadian Economy Act helps break down internal trade and labour barriers, which cost Canadians as much as $200 billion in lost opportunities a year. The Act expedites nation-building projects, and unleashes economic growth, with Indigenous partnerships and inclusion at the centre of this approach. Building one Canadian economy will create, and connect Canadians to, high-paying careers and more prosperity.
• Diversifying Our Trade: We are developing a more flexible, resilient network of partners. Canada's new Trade Diversification Strategy will strengthen existing relationships and open new markets for Canadian businesses, particularly in Asia. Our investments in trade infrastructure will increase Canada's trade capacity. Through the Major Projects Office, we are also helping to develop transformative energy and trade corridors. This includes the Port of Churchill Plus project, that has the potential to expand export capacity in the North through Hudson Bay—increasing and diversifying trade with Europe and other partners, while more strongly linking Churchill, Manitoba to the rest of Canada.

To support our plan to build a stronger economy, the government is adopting a new growth-oriented approach to its budget—underscored by the shift in the composition of spending. This new approach is guided by two fiscal anchors:

1. Balancing day-to-day operating spending with revenues by 2028–29, shifting spending toward investments that grow the economy; and
2. Maintaining a declining deficit-to-GDP ratio to ensure disciplined fiscal management for future generations.

In addition to these anchors, Budget 2025 enables $1 trillion in total investment over the next five years through smarter public spending and stronger capital investment.

The economic impact of achieving this target would be substantial, compounding over time through higher productivity. As an illustration, with $500 billion in additional private investment over 5 years, real GDP could be about 3.5 per cent higher than otherwise by 2030, reflecting the enduring benefits of a more capital-rich economy. Over the same period, Canadians' purchasing power would strengthen, with real GDP per capita $1,400 higher per year, on average. This lift in output could improve the budgetary balance by an average of $7 billion per year over the forecast horizon.

1. Global Context

Slower Global Growth and Rising Risks

Global economic growth has been solid over the last two years. Inflation in most advanced economies has fallen and given central banks, in Canada or elsewhere, the room to pause or cut interest rates, supporting household spending and business investment.

This year, risks to growth and inflation have risen. In particular, average U.S. tariffs are at levels not seen in decades (Chart 4), making trade more expensive and unpredictable. These trade measures are reshaping global trade and straining global supply chains. Measures of global economic uncertainty have eased from their peak earlier in 2025 but remain high—well above pre-pandemic norms and at levels typically linked with major crises.

Although some tariff measures were scaled back or delayed, U.S. bilateral tariff rates have increased on almost all trade counterparts and the shift to protectionist trade policy is clear.

Early in 2025, the global economy proved more robust than anticipated. Businesses accelerated imports ahead of new U.S. tariffs, while supportive financial conditions driven by expectations of further policy interest rate cuts and strong equity markets helped sustain economic activity.

Those favourable conditions are now fading. The impact of higher trade barriers is becoming more visible with weaker reported earnings, trade being diverted away from the U.S., slower domestic demand in major economies, and softening labour markets. The International Monetary Fund (IMF) now sees higher tariffs leading to inflationary pressure re-emerging in the U.S., limiting the scope for further monetary stimulus.

Looking ahead, international organisations—including the IMF and the Organisation for Economic Co-operation and Development (OECD)—expect global growth to slow in the second half of 2025 and into 2026 (Chart 5).

New trade tensions are reshaping the global economy, creating uncertainty and driving developments that affect oil prices, exchange rates, and long-term interest rates—also impacting Canada's economic outlook.

• Oil prices—an important driver of Canada's economy and fiscal position—remain low and volatile. Soft global demand growth and continued OPEC+ production increases have weighed on markets. West Texas Intermediate (WTI) has traded between US$57 and US$81 this year, and is currently hovering around US$60 per barrel, substantially lower levels than expected in the 2024 Fall Economic Statement (FES 2024).
• The U.S. dollar has fallen by about 7 per cent against other major currencies since the start of the year, as softer growth prospects and market concerns about its safe-haven status weigh on the currency. A weaker U.S. dollar lifts the Canadian dollar—helping ease inflation but reducing support exporters might otherwise receive amid new U.S. trade barriers.
• Long-term sovereign bond yields have declined in the U.S. and Canada since July, amid expectations of greater monetary policy easing. However, yields remain elevated—or have even risen further—in some advanced economies over the past two years as markets price in concerns about the long-term sustainability of fiscal policy and demand higher premiums on government debt. Yields in Canada remain lower relative to peers (Chart 6), reflecting strong investor confidence in Canada's fiscal position.

2. Canadian Economic Context

The Canadian Economy in the Face of New Tariffs

From an age when free trade was a motor of global economic growth, we have entered an age of economic nationalism and mercantilism. Canada's largest export market, the U.S., is fundamentally reshaping all its trading relationships.

The U.S. tariff rate is now the highest it has been since the Great Depression in the 1930s, and these tariffs are being applied to all countries and nearly all goods. The trade war and the uncertainty it created has had profound effects on the Canadian economy.

After growing by more than 2 per cent in the second half of 2024, real GDP in Canada rose at an annualised pace of 0.2 per cent. Growth reached 2.0 per cent in the first quarter but contracted by 1.6 per cent in the second quarter, as trade activity brought forward in the two previous quarters unwound and new tariffs came into effect.

Despite headwinds, the Canadian economy has shown resilience and private sector forecasters expect modest growth to resume in the second half of 2025. The IMF predicts that Canada will have the second fastest annual growth in the G7 (after the U.S.) in both 2026 and 2027.

The impact of higher U.S. tariffs and ongoing uncertainty on the Canadian economy has been evident:

• Exports contracted sharply, even as U.S. growth remained strong, and manufacturing sales declined as new tariffs were imposed.
• Business sentiment has weakened in this environment (Chart 7), with declines across many sectors, including those exposed to trade.
• Investment pulled-back in the first half of the year as businesses delayed or cancelled projects. Private sector forecasters expect investment weakness throughout 2025 (Chart 8), dragging on the economy's productive capacity.
• There were job losses in tariff-targeted sectors and those most exposed to trade, and hiring has been subdued among other sectors.

However, the Canadian economy has shown resilience, with domestic-facing sectors faring better. This highlights the importance of strengthening the domestic economy through investment in infrastructure and housing, including through Buy Canadian initiatives, while continuing to diversify trade and expand export markets.

Household spending has remained solid, with indications this strength continued over the summer months. Household balance sheets have benefitted from solid real wage gains, elevated household savings, lower borrowing costs, and rising asset values (Chart 9). At the same time, reduced travel to the U.S. and Buy Canadian initiatives have redirected some spending towards domestic products and services, providing additional support to local economies. Housing activity is returning to growth after a period of sharp pullback, although conditions remain uneven across regions.

The impact of new tariffs and the uncertainty they have caused is expected to continue to build. The outlook for growth is weaker than projected in the FES 2024 (Chart 10). Private sector economists expect real GDP growth to resume in the second half of 2025, with annualised growth of 0.2 per cent and 0.9 per cent in the third and fourth quarter, respectively.

Tariffs and supply chain disruptions are expected to drag on business investment and productivity. Combined with slower population growth, the level of real GDP is projected to be 1.8 per cent below what was anticipated in the FES 2024 before the trade conflict (Chart 11). Slower economic activity weighs on Canada's fiscal capacity. The Department of Finance's sensitivity analysis shows that this type of economic shock could result in a deterioration of the budgetary balance by $7 billion per year, on average, over the forecast horizon (see Annex 1 for details on the sensitivity of fiscal projections to economic shocks).

Canadian Exports Amid New Tariffs

Canada's exporters are facing growing challenges from higher tariffs, uncertainty over future trade rules, and lower global demand. Exports to our largest trading partner have seen large declines, after initial front-loading of shipments as businesses tried to get ahead of the new tariffs. Newly added energy export capacity, such as the Trans Mountain expansion and LNG Canada, has cushioned some of the decline in exports.

Businesses in sectors directly targeted by tariffs, and the regions where these sectors have the largest footprint, have been the hardest hit. While domestic sales have partially offset weaker U.S. demand and firms have built up inventories, these have not fully made up the shortfall, and output in affected sectors has declined.

• The value of Canadian exports to all destinations are down 7.2 per cent in August relative to their 2024 average, including exports to the U.S. declining by 10.4 per cent.
• Steep declines have been seen in steel and aluminum exports where volumes are down 33 and 32 per cent respectively in August relative to their 2024 average (Chart 12). The U.S. first introduced 25 per cent tariffs on these products in March, then doubled them to 50 per cent in June.
• China has applied 76 per cent tariffs on Canadian canola seed, and 100 per cent tariffs on canola oil and oilcake—effectively shutting Canadian canola out of the Chinese market. Canola exports are down 17 per cent since 2024.
• Auto and auto parts exports are down 9 per cent since 2024, yet this masks what would have been a pickup in growth if not for trade tensions. Planned expansions in the sector have been delayed, put on hold, or cancelled entirely due to trade uncertainty.
• Despite most Canadian goods entering the U.S. duty-free, exports outside of directly tariffed sectors have also declined, reflecting spillovers from weakening industrial demand in the U.S.
• There has been an encouraging pivot toward other destinations for exports since 2024 (Chart 13). In particular, exports of metal and non-metallic mineral products, energy, consumer goods, and electrical equipment to third country trade partners are all up more than 7 per cent in August relative to 2024, as firms seek to diversify trade and new export capacity for energy has come online.

• The pace of export decline has slowed in the third quarter as further declines in tariffed sectors were partially offset by recovering energy shipments and the launch of LNG Canada. Yet, steep declines earlier in the year have left exports well below last year's levels. Forecasters expect exports to continue lagging growth in the broader economy over the next two years, as elevated tariffs weigh on U.S. demand and new markets take time to develop.
• Expanding global partnerships with reliable, like-minded countries—including the EU, Korea, Japan, and Mexico—will help open new markets and reduce overreliance on any single trading partner, improving the long-term resilience of Canadian exporters.

Labour Market Amid Trade Uncertainty

The U.S. tariffs have had impacts throughout the labour market. Businesses are pausing hiring plans in response to new tariffs and trade tensions. This has interrupted the labour market recovery that had taken hold in late 2024.

Employment growth has slowed since January but rebounded in September, adding 60,000 jobs and offsetting earlier losses. Most of the rise in unemployment comes from slower hiring, as businesses delay or cancel job postings.

Layoffs have increased slightly from historically low levels but have stabilised recently, and new Employment Insurance claims remain relatively low, unlike previous episodes of economic slowdown.

Some Canadians are feeling the effects more acutely:

• Job losses have been concentrated in trade-exposed sectors (Chart 14) like manufacturing, which has shed about 30,000 jobs since January. Employment in these sectors may remain subdued as businesses adjust to weaker U.S. demand. While unemployment has risen in most provinces, the largest increases have been in manufacturing-focused regions including Windsor and Oshawa in Ontario, and parts of British Columbia (Chart 15).
• Young people are being disproportionately affected by weaker hiring. Youth unemployment rose from 12.9 per cent in February to 14.7 per cent in September—the highest level since 2010 outside of the pandemic period.
• With fewer hiring opportunities across many sectors, job searches are taking longer, pushing up long-term unemployment.
• Building the economy of the future requires ensuring that workers and industries are equipped to seize opportunities. We will create a strong, confident workforce by introducing a new reskilling package for up to 50,000 workers, making Employment Insurance more flexible and with extended benefits, and launching a new digital jobs and training platform with private-sector partners to connect Canadians more quickly to careers.
• The labour force has expanded more gradually as a result of slower population growth and immigration rates returning to sustainable levels under the 2025-2027 Immigration Levels Plan. These measures have helped ease pressure on the labour market, containing overall unemployment. Slower hiring has made it harder for youth and newcomers to find their first job, highlighting integration challenges for newcomers and entry barriers for young workers. Youth have faced particular strain, with their unemployment rate rising by 5.7 percentage points since 2022. Managed immigration growth is now helping to stabilise labour-market conditions and is expected to support better outcomes for youth.
• The 2025-2027 Immigration Levels Plan is already delivering results: new temporary foreign worker arrivals have fallen by about 50 per cent this year, and new international student arrivals are roughly 60 per cent lower than in 2024. Asylum claims are also down by one-third so far in 2025.

Labour force participation among women and prime-aged workers has fallen slightly but remains high by historical and international standards:

• Canadians remain engaged with the labour market and businesses continue to have a large pool of labour supply to draw from.

The unemployment rate is projected to remain elevated over the forecast horizon, peaking at around 7.2 per cent by the end of year before gradually easing.

Progress on Housing Supply Helping Ease Pressures

After softening earlier in the year, the housing market has stabilised, with home resales and new housing starts picking up once again, although activity remains uneven across regions. Housing affordability has improved for both renters and home buyers, supported by government actions such as investments in purpose-built rental construction, lower immigration targets, and new supports for first-time home buyers.

• The elimination of the GST for first-time home buyers on homes up to $1 million and recent changes to mortgage rules will help make homeownership a reality for more Canadians.
• Home sales have risen in five of the past six months, and forward-looking indicators—including sales-to-new-listings ratios and inventory levels—point to broadly balanced market conditions at the national level.
• Easing home prices, lower interest rates, and robust income growth have improved affordability for first-time home buyers. The Bank of Canada's housing affordability index has been improving for seven consecutive quarters, supported by a 2.75 percentage-points reduction in the policy rate since May 2024 and easing resale prices in several housing markets.
• Housing starts have trended upward this year, averaging 277,000 units over the past six months—the highest level since 2021—driven by government-supported strength in purpose-built rental construction.
• Strong rental construction, combined with early government measures to responsibly manage immigration and population growth, has alleviated housing pressures, with average asking rents down 3.2 per cent over the past year (Charts 16 and 17).
• Government policies, such as the Apartment Construction Loan Program and Mortgage Loan Insurance, have helped maintain elevated levels of construction activity, particularly in the rental segment.

Government efforts are already helping to scale up the supply of homes and bring down costs.

But restoring affordability over the long term will require sustaining this momentum and closing the supply gap. This is why Canada's new government is taking measures to double the pace of construction to build millions of new homes, including through a new agency, Build Canada Homes.

• Canada's new government launched Build Canada Homes which will help double the pace of homebuilding over the next decade to increase housing supply, alongside other measures. It will also transform public-private collaboration and deploy modern methods of construction, as it catalyses the creation of an entirely new Canadian housing industry.
• Build Canada Homes will deploy capital, create demand, and harness innovative housing technologies to build faster and more sustainably, 365 days a year. Build Canada Homes will place an intense focus on using cost-efficient and modern methods of construction such as factory-built, modular, and mass timber. Through bulk procurement and long-term financing, Build Canada Homes will mainstream these advanced methods of construction—with the potential to cut building timelines by up to 50 per cent, reduce costs by as much as 20 per cent, and lower emissions by approximately 20 per cent during construction.
• The federal government is working with other levels of government to take action through a comprehensive suite of policy measures. These include low-cost financing for builders, incentives for purpose-built rental construction, cutting red tape, infrastructure investments, and initiatives to expand the skilled construction workforce.
• Investments in new supply are being coupled by actions to responsibly manage immigration to alleviate pressures on housing demand. The 2026-2028 Immigration Levels Plan will return immigration to sustainable levels by stabilising new permanent resident admissions at less than one per cent of the Canadian population beyond 2027 and reducing the total number of temporary residents to less than 5 per cent of the population by the end of 2027, down from a peak of 7.6 per cent in 2024.

Inflation Remains Within the Target Range

Consumer Price Index (CPI) inflation remains near 2 per cent, at 2.4 per cent in September, and has stayed within the Bank of Canada's 1 to 3 per cent target range for the past 21 months. Canada has seen faster disinflation than many of its peers (Chart 18). The removal of the federal consumer carbon price in April helped to lower costs.

The strength of past costs pressures continues to keep underlying inflation elevated. Excluding indirect taxes, inflation was 2.9 per cent in September, and measures of core inflation have held slightly around 3 per cent in recent months. This reflects a few lingering forces:

• Goods inflation (excluding energy) remains firm due to earlier global cost pressures that passed through to import prices. This was driven by global factors such as a weaker Canadian dollar in late 2024, higher industrial prices, and elevated global shipping costs—though these factors have eased recently.
• Food prices have risen globally, including in Canada, reflecting past cost increases such as the depreciation of many global currencies against the U.S. dollar in late 2024. These past cost increases are still feeding through to food prices. Elevated global commodity prices and supply disruptions have also added further pressure. The increase in food prices in Canada is of a similar magnitude as its peers (Chart 19).
• Energy inflation remains moderate following the removal of the consumer carbon price, though higher global refinery margins, driven by tight supply and robust demand, have offset some of the decline.
• Services inflation is still elevated, though shelter inflation is easing. Moderation in mortgage interest costs is expected to continue and the decline in rent inflation is expected to resume as population growth cools and more rental supply comes online, driving market rents down.

Wage growth is putting more money in the pockets of Canadians, with paycheques rising even after accounting for inflation. Wage growth has now outpaced inflation for nearly three years (Chart 20).

Looking ahead, inflation is expected to remain close to 2 per cent as upward and downward price pressures balance each other:

• Higher U.S. tariffs on their imports are increasing production costs for Canadian firms, which could add to domestic inflation. Cost pressures resulting from supply chain realignment as firms diversify their suppliers could also spill over into Canadian consumer prices, given tightly integrated North American supply chains.
• The removal of most Canadian countermeasures means less upward pressure on many U.S. sourced goods prices going forward.
• Slower domestic demand and softer labour market conditions putting downward pressures on unit labour costs will weigh down inflation more broadly.

The Bank of Canada has lowered interest rates significantly, providing support to domestic demand and the Canadian economy. Since May 2024, the policy rate has been cut by 2.75 percentage points to 2.25 per cent—below the midpoint of the Bank's estimated neutral range. The Bank of Canada has eased monetary policy earlier and more decisively than many peers in this easing cycle, thanks in part to faster disinflation (Chart 21).

On October 29, the Bank cut its policy rate by 25 basis points, citing ongoing weakness in the economy and fewer upside risks to inflation. The Bank further noted that the policy rate was at the right level to help the economy through the current period of adjustment.

3. Canadian Economic Outlook

Global Uncertainty Is Impacting Canada's Outlook

The Department of Finance regularly surveys private sector economists on their views on the outlook for the Canadian economy (see Annex 1 for more detailed discussion of forecast results).

Since 1994, Canada has used the average of private sector forecasts as the foundation for its economic and fiscal planning. This approach supports objectivity and transparency, and introduces a degree of independence into the government's forecast process—a practice endorsed by international institutions such as the IMF.

In the August 2025 survey, forecasters incorporated new tariff measures and trade policy developments that were known at the time of the survey. In particular, they incorporated the uncertainty tariffs create and the burden they have placed on the Canadian economy. A gradual de-escalation of U.S. tariffs was assumed over the next two years, but a return to broadly open, low-tariff global trade was not anticipated.

Despite this uncertainty, forecasters expect modest growth in the second half of the year (Chart 23), after the economy stalled in the first half of the year. In this outlook, exports and business investment remain weak due to U.S. tariffs and uncertain demand prospects. Household spending remains robust but moderates along with weaker labour market conditions and slowing population growth.

Real GDP growth is projected to recover through 2026, supported by stabilising exports and a recovery in domestic demand amid lower interest rates. As the Canadian economy adjusts to the new trading environment, growth is expected to pick up to reach around 2 per cent by 2027 and beyond.

Despite the trade war, real and nominal GDP in Canada are still expected to expand. The IMF expects that Canada will see the second strongest real GDP growth in the G7 in 2026, following only the U.S. (Chart 22).

Overall, private sector forecasters expect real GDP growth of 1.1 per cent in 2025 and 1.2 per cent in 2026—revised down from the FES 2024 outlook of 1.9 per cent and 2.1 per cent, respectively. The level of real GDP is about 1.8 per cent lower than forecast in FES 2024 by the end of 2027. GDP inflation is expected to average 2.4 per cent in 2025 and 1.8 per cent in 2026 (compared to 2.0 per cent in both years in FES 2024) but is broadly similar to the FES 2024 outlook afterwards. Over the forecast horizon (2025-2029), the level of nominal GDP is lower than the FES 2024 projection by $40 billion on average per year.

In the August survey, private sector economists expect:

• Disinflation from the consumer carbon price removal and excess supply to largely offset cost pressures from tariffs and supply chain disruptions. As a result, CPI inflation is projected to average 2.1 per cent in 2025 and 2.0 per cent thereafter, consistent with the FES 2024 forecast.
• Trade tensions continue to weigh on labour demand, resulting in the unemployment rate peaking at 7.2 per cent in the fourth quarter of 2025, averaging 7.0 per cent for the year (compared to 6.7 per cent in the FES 2024). It is projected to decline to 6.0 per cent by 2029.
• The Bank of Canada to keep its policy rate at 2.25 per cent through 2026.
• Short-term interest rates to be about 30 basis points lower on average than forecast in FES 2024, settling around 2.5 per cent by the end of the forecast period in 2030.
• The 10-year bond rate to increase from an average of 3.3 per cent in 2025 to 3.6 per cent in 2029 (about 15 basis points higher than anticipated in FES 2024).
• Forecasters in the survey saw greater risks to the downside given the possibility of escalating trade tensions, higher impacts from U.S. tariffs and trade policy uncertainty, and a potential financial market repricing (Chart 24).

Economic Scenario Analysis

The August 2025 survey provides a reasonable foundation for economic and fiscal planning. However, the full impact of tariffs and trade uncertainty are still unfolding, and risks remain on multiple fronts. A core mission of the new government is to help households and businesses emerge stronger from global economic shifts by investing in the economy to catalyse growth and build resilience in the long run.

To support responsible planning amid this high uncertainty, the Department of Finance has developed downside and upside scenarios around the August 2025 survey forecast.

Downside Scenario

In this scenario, trade policy uncertainty remains elevated, leaving consumers and businesses cautious in spending and investment.

• Global headwinds weigh on oil prices and financial assets, while a weaker U.S. economy reduces demand for Canadian exports. Adjusting to new U.S. tariffs proves more challenging than anticipated, dampening productivity growth.
• Combined, these factors result in a decline in real GDP in the third quarter of 2025, followed by stalled activity in the fourth quarter and a protracted period of slower growth and higher unemployment (Chart 25).
• Nominal GDP is, on average, lower by $51 billion per year over the forecast horizon relative to the August 2025 survey forecast (Chart 26).

Upside Scenario

In the upside scenario, trade policy uncertainty eases more rapidly as the U.S. concludes trade agreements with major partners and global tensions ease. Domestic measures to streamline internal trade, bolster competition, and diversify and deepen global partnerships contribute to a more predictable business environment.

• Stronger-than-expected U.S. growth and higher global oil prices increase demand for Canadian exports, and there is a faster recovery in consumer spending and business investment.
• The scenario incorporates modest productivity gains, reflecting the positive impacts of structural reforms that remove barriers to investment and productivity.
• Nominal GDP is, on average, about $25 billion higher per year over the forecast horizon relative to the August 2025 survey forecast.

4. Building a Strong and Competitive Economy

Canada's Path Forward is to Improve Productivity

A strong economy is tied to strong productivity. Productivity growth, the basis of rising living standards and economic competitiveness, means finding ways for businesses and workers to produce more with the same effort.

• When productivity grows everyone benefits: the wages and incomes of hard-working Canadians rise, businesses have the conditions to grow and to create more jobs, and Canada stays competitive in global markets.
• If Canada's productivity growth had matched the U.S. from 2017 to 2023, the median income of a family with one child would be nearly $11,000 higher.
• A strong economy driven by productivity growth also provides steady revenues needed to fund the public services Canadians count on.

Over the past decade, Canada's productivity performance has been persistently weak. In this time, productivity grew by only 0.3 per cent annually—less than one-third the pace of the previous two decades (Chart 27). This had led to substantial productivity gaps with other G7 economies (Chart 28).

Perennially weak productivity growth is closely tied to longstanding weakness in investment. For decades, Canadian firms have invested less per worker than their American counterparts. This investment gap has worsened since 2015 after the collapse in commodity prices contributed to a sharp fall in energy investment.

• Overall business investment within Canada has been flat over the past decade, while business investment in the U.S. has risen sharply (Chart 29). Much of this weakness has been driven by a retrenchment in capital spending by Canada's energy sector following the sharp decline in global oil prices in 2015, and the contrasting increase in U.S. technology investment in recent years.
• Canada's economy has also faced weak investment in machinery and equipment, research and development, and intangible assets like intellectual property, data, and software that is pervasive across sectors.

Businesses often perceive the risks and costs of investments in high-risk and innovative assets as outweighing the rewards, a mindset reinforced by structural impediments such as the regulatory environment, limited competition, and scale constraints. In addition, Canada's economy remains oriented toward lower-growth activities, with limited export exposure to dynamic, high-growth markets abroad, and relatively weak investment in technology. Overcoming these barriers will require a structural shift toward greater risk-taking and a stronger focus on innovation-driven growth.

The most immediate way to jumpstart productivity growth is to address structural impediments and increase investment—in machinery, equipment, innovation, and infrastructure that allow workers to build faster and at a more competitive cost. This includes tackling longstanding weaknesses such as internal trade barriers, enhancing regulations and project approval processes, and increasing competition (Chart 30)—all proven measures to strengthen competitiveness, attract private investment, and supercharge growth.

Canada must also look to new high-growth markets and invest in technology that can unlock its economic potential. Doing so will position the economy for success in the future defined by the twin transformations of digitalisation and decarbonisation that are driven by technology advancement.

The status quo is no longer an option—the current challenges require a comprehensive response. We must drive Canada's productivity growth to reinvigorate Canada's industrial capacity, which will allow us to successfully pivot to other markets, build more homes, and leverage our natural resources.

Canada's New Industrial Strategy

Canada is already among the most prosperous countries in the world. We enjoy the comparative advantages of being an energy superpower, having a highly skilled workforce, the ability to attract top global talent, and an abundance of critical minerals and other resources that the world needs. But to thrive in the rapidly evolving global economy, Canada must build its strength at home. To that end, through Budget 2025, the government is taking a proactive approach with the introduction of a new comprehensive industrial strategy to drive productivity and build a stronger economy that protects Canadian workers, builds major infrastructure, buys Canadian goods, and diversifies our exports.

High-Impact Actions for Lasting Growth

High impact actions to drive productivity growth can deliver benefits that compound over time—supporting higher wages, stronger private sector investment, and greater resilience to future shocks.

Canada's new government is taking these high-return actions:

• Infrastructure projects: connecting markets and regions, enabling private investment
• Public investment in R&D: fostering innovation and accelerates technology adoption
• Regulatory reforms: cutting red tape that slows private investment, limits trade and labour mobility, and restricts competition
• Productivity super-deduction: providing enhanced tax incentives that help companies recover investment costs faster

The combined effect of high-return actions can create a virtuous cycle of economic growth. For instance, improved infrastructure can facilitate the dissemination of new technologies developed through public investment in R&D, while regulatory reforms can ensure that these technologies are adopted efficiently across industries. Over time, these high-return actions can lead to a more dynamic and resilient economy.

These high-return actions will help to catalyse $500 billion in private investment over the next five years. The economic impact of achieving such target would be substantial, compounding over time through higher productivity. To illustrate, with $500 billion in additional private investment, real GDP could be about 3.5 per cent higher than otherwise by 2030, reflecting the enduring benefits of a more capital-rich economy. Over the same period, Canadians' purchasing power would strengthen, with real GDP per capita $1,400 higher per year, on average. This lift in output could improve the budgetary balance by an average of $7 billion per year over the forecast horizon. All these benefits underscore the importance of capital-driven economic growth for Canada's economy.

Recent and newly proposed measures in Budget 2025 will work together to catalyse a virtuous cycle of investment and strengthen productivity over the years to come. In addition to crowding-in private sector investment at a time of economic uncertainty, they are collectively designed to address critical policy challenges through renewed industrialisation of Canada.

• The new Major Projects Office will fast-track nation-building projects and coordinate federal financing to help build projects faster. These projects will connect our country, attract domestic and global capital, and create high-paying careers.
• Build Canada Homes will catalyse the creation of an entirely new Canadian housing industry that uses modern methods of construction to boost productivity, sustainably and at scale.
• Canada's new Defence Industrial Strategy will strengthen our industrial capabilities, give ourselves the tools we need to meet our defence requirements, and seize the opportunities that arise. With increased procurement there are more opportunities for Canadian workers, businesses, and manufacturing across supply chains, supporting Canadian steel, aluminum, critical minerals, and cyber industries. These investments will also help Canada realise its NATO commitments, enhancing our collective security.
• With the new government's Buy Canadian Policy, we will be our own best customers. When we build, we will do so with Canadian goods and suppliers. This requires an economy that is more unified than it has ever been by removing internal trade barriers to increase flows of goods and services across the country—creating One Canadian Economy.
• The new Climate Competitiveness Strategy—combining strengthened industrial carbon pricing, a streamlined regulatory environment and aggressive tax incentives—will accelerate investment to drive down emissions in key sectors, boost market access for Canadian exports, and grow jobs and the economy.
• Our Trade Diversification Strategy will build a new web of trade relationships around the globe and open new markets for Canadian businesses. This will help Canada transition from an economy reliant on one trade partner to one resilient to global shocks.

Enabling $1 Trillion In Total Investment

To drive productivity, boost the capacity of Canada's economy and to secure a prosperous future for Canadians, Canada needs a sea change to reverse Canada's history of weak private sector investment. The government is acting decisively by improving regulatory efficiency, increasing competition, boosting tax incentives for new investments, and promoting generational investments in housing and infrastructure.

We will attract private capital by accelerating major projects. The first five projects referred to the new Major Projects Office collectively represent $60 billion in total capital investment. Further nation building projects will be announced this month. Taken together, these nation-building projects are expected to trigger at least $150 billion in total capital investment.

Budget 2025 will attract further investment by unlocking AI data centres, building the next generation of infrastructure, supercharging housing construction, and developing our defence industry. The Budget will encourage companies to invest and innovate in Canada through investment tax credits, the Productivity Super-Deduction, and improvements to the Scientific Research and Experimental Development tax incentives.

The measures proposed in Budget 2025 put Canada on track to meet our investment objectives. Of the government's planned capital spending over five years, about $280 billion (cash basis) is in support of third parties. These incentives and this planned spending enable more than $1 trillion in total investments. As they are realised, the return on this investment will be more jobs, faster growth and more resources to support social programs so that all Canadians get ahead.

Infrastructure	$315 billion
Supports for Private R&D	$210  billion
Housing	$130 billion
Industrial Development Programs	$270 billion
Accelerated Depreciation and Immediate Expensing Measures	$60 billion
Other Tax Incentives	$95 billion
Total	$1,080 billion

These generational investments will create demand for domestic production while supporting growth of our strategic sectors and empowering Canada to capitalise on its natural advantages. Enabling investments for our resources sectors will allow Canada to maintain its core economic strengths while transitioning our economy to a cleaner future.

Investment in the areas of skills and technology will also help build new capabilities and bolster Canada's productive capacity. Canada has a significant potential, comparable if not better than other advanced economies, in emerging technologies such as AI or Quantum computing (Chart 32). Investments that help set the foundation during the early adoption stage could enhance Canada's future growth prospects in these critical technologies. The government will continue to support the growth of these technologies in Canada and develop a new AI strategy by the end of 2025.

These measures are further reinforced by a series of actions to build a competitive marketplace where businesses can live up to their full potential. Canada's new industrial strategy will seek to streamline regulations, fast-track project approvals, introduce pro-competitive reforms, and reduce taxes on investment to enable both the public and private sector to move quicky to build Canada strong.

The goal is clear—boost Canada's productive capacity to build a stronger economy; protect our industries, workers and sovereignty; and empower Canadians through greater affordability and the resources to excel in a rapidly evolving global economic future. To achieve this goal, Canada needs more business investment, fewer barriers to growth, and more competition. With further steps in Budget 2025, the government's new industrial strategy is advancing these objectives.

5. Economic Strength Through Fiscal Discipline

Realising the full potential of the government's new industrial strategy will require doing things differently. Over the past decade, government spending has grown rapidly, with direct program expenses increasing by 8 per cent annually—a pace that is no longer sustainable. To make the generational investments needed to strengthen Canada's industries, support its workers, and defend its values and interests, the federal government will need a new approach, one that spends less to invest more.

We will make responsible choices to spend less on government operations and reduce wasteful spending, so Canadians can invest more in the workers, businesses, and nation-building infrastructure that will build Canada strong.

This new approach is guided by two fiscal anchors:

Balance operating spending with revenues by 2028-29, shifting the composition of spending from day-to-day operations to investments that support capital formation and productivity.

Maintain a declining deficit-to-GDP ratio, reflecting disciplined fiscal management that safeguards economic stability for future generations.

In addition to these anchors, the government's new fiscal approach will be driven by one overarching target to catalyse $500 billion in new private sector investments over the next five years, by focusing federal spending toward capital formation and projects that attract private investment, creating a virtuous cycle of investment and economic growth.

New Approach to Budgeting

To help the government shift its focus and drive capital formation across the economy, it is implementing a new Capital Budgeting Framework. Announced on October 6, the Framework provides a consistent way to classify spending, including tax expenditures, that contributes to capital formation (called 'capital investment') from day-to-day operating spending. Capital investments are the building blocks to economic growth. The Framework encompasses spending not only on the government's own assets, but also support for capital formation by other levels of government and the private sector. For example, it includes transfers to provinces and territories under infrastructure agreements and capital-focused tax incentives such as the clean economy investment tax credits.

Importantly, the Framework is meant to enhance—not replace—existing financial reporting. Further details on the Capital Budgeting Framework can be found in Annex 2.

This framework now guides budget decisions toward measures that empower Canada to capitalise on its advantages and grow our economy, all while keeping overall spending sustainable. As highlighted by the IMF in its October 2025 Fiscal Monitor, redirecting government spending toward areas that increase an economy's productive capacity—such as infrastructure—while improving efficiency in less productive areas (e.g., administrative overhead) can unlock substantial long-term economic gains.

In relation to the government's recent actions, the Managing Director of the IMF, Kristalina Georgieva, noted "In the case of Canada, the Canadian authorities have been very decisive to take action in the context of changing relations with their main trading partner."

Consistent with this framework, a significant portion of net new spending in Budget 2025 is classified as capital investment, totaling more than $32.5 billion over five years. This includes key measures to further Canada's new industrial strategy, by:

• improving and expanding community and regional infrastructure through a new Build Communities Strong Fund;
• driving growth and innovation through a new Productivity Super-Deduction;
• supercharging homebuilding and productivity in construction through Build Canada Homes; and,
• rebuilding domestic production capacity through a Defence Industrial Strategy.

Cumulative capital investment over the 2024-25 to 2029-30 period, inclusive of planned investments in this budget, is expected to total $311.5 billion on an accrual basis, or $502.2 billion on a cash basis. With measures in the budget, annual capital investment will also nearly double from $32.2 billion in 2024-25 to $59.6 billion in 2029-30 (Chart 33). As a share of the deficit, capital investment will grow from 58 per cent in 2025-26 to 100 per cent from 2028-29 onwards (Chart 34).

To remain fiscally sustainable, the shift in spending toward capital investment requires a reduction in day-to-day operating spending. Budget 2025 delivers on this through an ambitious savings plan—the Comprehensive Expenditure Review—which will reduce duplication and inefficiencies and realign activities towards the core federal mandate. The Comprehensive Expenditure Review will rein in government spending—saving Canada $13 billion annually by 2028-29 (detailed in Annex 3), for a total with other savings and revenues of $60 billion over five years. With these efforts, growth in direct program expenses is expected to average under 1 per cent over the Budget 2025 planning horizon, compared to 8 per cent over the last decade.

Over the next four years, capital investments in the economy as well as major transfers to people, provinces, and territories will grow, but spending on other expenses will fall. With this prudent fiscal management, by 2028-29, the government will meet its anchor of balancing its day-to-day operating spending with revenues, creating the fiscal space needed in this budget to make generational investments in Canada's future.

Through the Comprehensive Expenditure Review, and the introduction of new and better tools such as AI, the tech-enabled public service of the future will continue to deliver the services that Canadians depend on, while bringing public service growth in line with forecasted Canadian population growth.

Beginning with this budget, as announced on October 6, the government is also transitioning to a fall budgeting cycle. This new timing will facilitate expenditure oversight by Parliamentarians and help builders, investors, and every level of government to make smarter, faster decisions. Providing certainty and predictability is what unlocks investment—so that projects can begin as soon as construction season starts. Fall budgets will be complemented by economic and fiscal updates in the spring.

Fiscal Outlook

The impact of recent U.S. tariffs and uncertainty over future trade rules have weighed on the Canadian economy. The downward revisions to the economic outlook relative to FES 2024 could be expected to result in an average estimated deterioration in the budgetary balance of $7 billion per year over the forecast horizon.

The deficit in 2025-26 also reflects the proactive steps the government has taken to stand up for Canadians and invest in our future growth, including through Budget 2025. Notably, the government has acted to:

• Respond to global economic shifts and protect Canada's sovereignty, including by investing:
  • $3.0 billion in 2025-26 to support workers and industries in sectors most impacted by U.S. tariffs and trade disruptions, helping them reskill, retool, and pivot to their future.
  • $7.2 billion in 2025-26 to rebuild, rearm, and reinvest in the Canadian Armed Forces, enabling Canada to achieve NATO's 2 per cent defence target this fiscal year, half a decade ahead of schedule.
• Deploy $10.4 billion in 2025-26 to bolster the economy while reducing costs for Canadians, including by cutting taxes and increasing investments to build more homes.

These measures are intended to respond to immediate challenges while building Canada's long-term economic strength and security.

Looking beyond 2025-26, with the actions taken in Budget 2025 to spend less to invest more, the government is meeting its fiscal anchor as the projected deficit as a share of the economy declines across the horizon, from 2.5 per cent in 2025-26 to 1.5 per cent by 2029-30. The federal debt-to-GDP ratio also remains relatively stable across the horizon.

Prudent fiscal management keeps Canada's finances on a sustainable path, and will help preserve the country's fiscal advantage when compared to G7 peers.

The government's new budgeting approach ensures that by 2028-29 deficits reflect investments that support capital formation—capital investments will go from slightly more than half of the deficit this year to all of it in 2028-29 and future years. This necessary shift is key to the government realising its target of catalysing $500 billion in additional private sector investment over the next five years.

By encouraging growth, the benefits of these investments compound over time, as output and income increase. This in turn will generate additional fiscal revenues—which for prudence are not included in Budget 2025 projections, enhancing Canada's capacity to meet future challenges. Measures included in Budget 2025 will have a net cost of $89.7 billion over five years. Of this, $32.5 billion will be capital investment under the new Capital Budgeting Framework, including generational investments to drive capital formation such as improving infrastructure through a new Build Communities Strong Fund , supercharging growth and homebuilding through a Productivity Super-Deduction and Build Canada Homes, and increasing defence spending to protect Canada's sovereignty in a way that also grows the economy through a Defence Industrial Strategy.

Economic Scenario Analysis

Canada continues to rest on strong economic fundamentals that provide the capacity to rebound from short-term shocks. However, higher U.S. tariffs and rising geopolitical tensions have created significant uncertainty, heightening risks to the economic and fiscal outlook.

To facilitate prudent economic and fiscal planning around these risks and to further stress-test its baseline forecast, the Department of Finance has developed downside and upside scenarios of Canada's economic outlook.

In the upside scenario the budgetary balance would improve by an average of approximately $5.0 billion per year over the planning horizon. The federal debt-to GDP ratio would stabilise in the near-term and fall more rapidly from 2026-27 onward, reaching 42.2 per cent by 2029-30 (see Chart 37).

In the downside scenario, the budgetary balance would deteriorate by an average of approximately $9.2 billion per year over the planning horizon. The federal debt-to-GDP ratio would be expected to rise to 45.3 per cent by 2028-29 before falling to 45.2 per cent by 2029-30 (see Chart 38).

Full details of the government's fiscal outlook and the fiscal impact of the scenarios can be found in Annex 1.

Preserving Fiscal Firepower for Future Generations

In uncertain times, strategic investments today are the surest path to tomorrow's prosperity and security. That is why the government is shifting the fiscal debate from "how much" we borrow to "why" we borrow—seizing generational opportunities and ensuring that public dollars back high-impact actions with lasting economic returns. Investing more while spending less on government operations will help secure sustained economic and fiscal capacity well into the future.

The government's economic plan is fiscally sustainable:

• Modelling scenarios developed by the Department of Finance show the federal debt-to-GDP ratio on a declining trajectory over the longer term (Chart 39).
• Long-term projections help illustrate that fiscal sustainability depends not only on sound fiscal policies, but also on strong economic policies and growth-enhancing investments, such as those presented in Budget 2025.
• These policies work together to catalyse a virtuous cycle of investment, contributing to sustained increases in economic activity and, in turn, helping lower the government's debt burden.
• As an illustration, with $500 billion in additional private investment over five years, real GDP could be about 3.5 per cent higher than otherwise by 2030, which would produce an even more pronounced downward trajectory for the federal debt-to-GDP ratio over the longer-term.

Preserving fiscal firepower is crucial to manage future pressures, including, among others, from recessions, additional defence spending, population aging, climate change, and the transition to net-zero emissions.

Maintaining Canada's Fiscal Advantage

Across the globe, geopolitical instability, structural economic shifts, and intensifying global competition are redefining the role of government. At the same time, there is growing recognition that underinvestment carries a steep cost—slower growth, eroded competitiveness, and weakened security.

Like Canada, many countries around the world are responding with bold, forward-looking strategies that place investment in productivity, innovation, and defence at the core of their fiscal and economic agendas.

Canada is well positioned to seize generational opportunities and turn this moment of global uncertainty into one of national opportunity.

• Canada's net debt-to-GDP ratio stands at just 13.3 per cent, compared to the G7 average (excluding Canada) of 101.4 per cent (Chart 40).
• Canada's net debt burden today is lower than that of any other G7 country, and is even below the levels of those countries prior to the pandemic.
• Canada also has one of the smallest deficits in the G7 as a share of the economy (Chart 41).

Notes: The internationally comparable definition of "all levels of government" includes the central, state, and local levels of government, as well as social security funds. For Canada, this includes the federal, provincial, territorial, and local and Indigenous government sectors, as well as the Canada Pension Plan and the Québec Pension Plan.

Source: IMF, Fiscal Monitor, October 2025.

Canada's fiscal position also stands out among a broader set of 30 other advanced economies, posting a below-average deficit-to-GDP ratio and one of the lowest net debt-to-GDP ratios among the group (Charts 42 and 43).

This marks a sharp contrast with Canada's fiscal situation in the 1980s and early 1990s, when sustained deficits led to a rapid rise in the net debt burden and an erosion of Canada's fiscal advantage relative to its peers.

Canada is also one of only two G7 economies, along with Germany, to have an AAA rating from major global credit rating agencies. Canada's AAA credit ratings help maintain investors' confidence and contributes to maintaining low borrowing costs.

The government's new approach for a strong Canada, focused on driving high-impact investments while reinforcing fiscal discipline by reducing day-to-day operating spending, will help ensure Canada maintains its fiscal advantage going forward.

Notes: The internationally comparable definition of "all levels of government" includes the central, state, and local levels of government, as well as social security funds. For Canada, this includes the federal, provincial, territorial, and local and Indigenous government sectors, as well as the Canada Pension Plan and the Québec Pension Plan. "30 Other Advanced Economies" are: Australia, Austria, Belgium, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, New Zealand, Netherlands, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Taiwan, United Kingdom, and the United States. For greater readability, budgetary balance data points for Ireland in 2010 (-32.1) and for Iceland in 2016 (12.4) have been excluded from the other advanced economies range calculations. Norway, a statistical outlier due to its significant net asset position (+154.7 per cent of GDP in 2024), has been excluded from the group.

Source: IMF, World Economic Outlook, October 2025.