Economic and fiscal overview

A stronger, more independent, and more affordable Canada

The world is becoming more complex, uncertain, and fragmented. Rising geopolitical tensions, shifting trade relationships, and conflicts in the Middle East and Europe are disrupting global supply chains and challenging long-held assumptions about economic integration. Meanwhile, technological advances, particularly in artificial intelligence and quantum computing, are rapidly transforming economies, industries, and labour markets. Together, these forces are reshaping the global economy and accelerating economic change.

Canada's new government inherited an economy facing longstanding structural challenges. For much of the past decade, productivity growth was weak, private sector investment lagged, and affordability pressures intensified. Economic growth relied heavily on population growth rather than productivity gains, while Canada remained excessively dependent on the United States.

Amid significant trade and global economic uncertainty, Canada's new government is confronting these challenges and building the foundations of a stronger, more independent economy. Since taking office in spring 2025, we have worked to accelerate major projects, strengthen trade within Canada, attract capital, and diversify our economic relationships. The objective is a structural transformation that raises productivity, strengthens economic security, and creates better opportunities and higher living standards for Canadians.

Canada has significant advantages on which to build. It benefits from abundant natural resources, a highly skilled workforce, world-class research institutions, strong public finances, reliable access to global markets, and institutions that investors can trust. In a world where stability, security, and reliable market access increasingly matter, these strengths provide a solid foundation for Canada to compete and prosper.

The transformation underway will take time to deliver its full benefits. But despite a more challenging global environment, the Canadian economy has shown notable resilience. Real gross domestic product (GDP) grew by 3.3% annualised in the second quarter of 2026, the fastest pace in the G7. Recent data suggest the economy remained relatively resilient in the third quarter as well. Real disposable incomes have risen, household spending remains resilient even in the face of affordability pressures, and Canadian workers are finding more opportunities.

Private employment increased by 214,000 jobs over the past year, while the unemployment rate is 6.5%, near its lowest level in two years. Canadians continue to participate in the labour market at high rates, with overall labour force participation remaining well above that of the United States, and women's participation markedly so. Since the start of 2025, Canada has created nearly twice as many jobs per capita as the United States. Strong labour income growth, combined with targeted affordability measures such as the Canada Groceries and Essentials Benefit payment, helped lift real disposable income per capita by nearly 5% annualised in the second quarter of 2026, leaving it 1% higher than a year earlier.

There are signs that housing affordability is improving. Strong housing construction and actions to better align immigration levels with infrastructure capacity are helping to rebalance housing markets. For prospective buyers, softer home prices and continued income growth have improved affordability, while asking rents have declined. Housing costs remain too high for too many Canadians, but these developments represent meaningful progress after years in which housing costs rose faster than incomes.

We are reinforcing this progress through measures that put more money in Canadians' pockets and lower essential costs, including the middle-class tax cut, the Canada Groceries and Essentials Benefit, the temporary suspension of the federal fuel excise tax, GST relief for new housing, and more affordable child care. Together with employment and real wage gains, these measures support households through a combination of higher disposable income and lower costs, easing affordability challenges.

Canadian businesses are also adapting to major structural changes, including the shift in the Canada-U.S. trade relationship and slower population growth. Canadian firms are finding new customers around the world, strengthening supply chains, adopting new technologies, and pursuing new sources of growth. Business investment rose at its fastest pace in two years in the second quarter of this year, while Canada's exports are becoming more diversified. There are also encouraging signs that productivity growth is beginning to improve after several years of weakness. These adjustments are supporting the recovery and provide early evidence of a more productive, competitive, and independent economy.

Canada's economic resilience is supporting better-than-forecast fiscal results. The deficit is expected to be $27.5 billion lower in 2025-26 compared to the Spring Economic Update 2026. Disciplined management of operating spending is creating more room for the capital investments that can expand Canada's productive capacity. Together with Canada's trade pivot, these investments will support stronger productivity and higher wages over the long term. Canada is projected to maintain one of the lowest deficit-to-GDP ratios in the G7. At the federal level, we are now on track to balance operating spending with revenues in 2027-28, a year ahead of schedule.

The coming years will remain challenging. The latest trade actions by the U.S. are imposing costs on affected businesses, workers, and communities. After growth picked up through the middle of the year, it is expected to moderate in the fourth quarter of 2026 and into 2027 as the economy adjusts, but private sector economists expect the Canadian economy to continue growing. Growth is then expected to strengthen over the course of 2027 as exports recover and business investment rises. The International Monetary Fund (IMF) projects Canada to be the second-fastest-growing economy in the G7 in 2027 (Chart 1). By supporting Canada's growth prospects, capital investments proposed in Budget 2026 are expected to reinforce this position.

In a more uncertain world, Canada's continued prosperity cannot depend on any single market, supply chain, or trading relationship. That is why Canada's government is building a stronger and more independent economy. That requires a stronger foundation at home, including increasing investment, raising productivity, improving competitiveness, and enabling goods, services, and workers to move more freely across the country.

It also means building a broad network of stronger relationships abroad. Canadian businesses must be able to reach new customers, access fast-growing markets, and form more resilient supply chains. Diversification will take time, given the scale and depth of Canada's economic relationship with the United States. But the shift is underway, and Canada has the resources, expertise, and trusted relationships needed to compete in a changing global economy.

Global investors increasingly seek the combination that Canada offers: attractive returns, secure supply chains, reliable market access, and long-term stability. Investors recognise these advantages: Canada has recorded the highest foreign direct investment per capita in the G7 since 2025, well above the rate of our nearest G7 peer, and has been ranked the most attractive country in the world for infrastructure investment.

At the Canada Investment Summit, investors, financial institutions, and businesses announced nearly half a trillion dollars in financing and investment commitments. This includes approximately $325 billion in bank financing, nearly $100 billion in financing commitments from pension funds, insurers, and institutional investors, and more than $14 billion in financing commitments from investment funds. On the margins of the Summit, Bell Canada also announced a $52.5 billion capital investment in an AI infrastructure hub in Saskatchewan.

These commitments to mobilise financing and invest in Canada demonstrate confidence in our economic potential and will help advance our broader goal of catalysing $500 billion in new private sector capital investment and $1 trillion in total capital investment over five years.

Budget 2026 is designed to turn this pipeline of potential projects into real investment. It will mobilise public and private capital, accelerate approvals, and provide the certainty needed for projects to proceed. Greater predictability will strengthen Canada's competitiveness and investment climate. Together, these measures are supporting a new era of investment, productivity, and growth: Canada's Investment Supercycle.

Canada's economy has shown resilience, businesses are adapting, and Canadians are seeing progress. But the work is not finished. Affordability remains a pressing challenge, trade uncertainty continues to weigh on businesses, workers, and communities, and the structural weaknesses built up over the past decade will not be reversed overnight.

Canada's new government is pursuing a clear plan: deliver affordability relief today while building a stronger and more independent economy for tomorrow. Budget 2026 will build on Canada's advantages, turning opportunity into investment, investment into productivity, and productivity into higher incomes, greater affordability, and lasting prosperity for Canadians.

Global context

Oil shock persists, while global borrowing costs rise

Despite rising trade barriers, geopolitical tensions, and higher energy prices, the global economy has remained more resilient than expected. The IMF projects global growth to slow to 3% in 2026 before picking up to 3.4% in 2027, only modestly below the pace of recent years. This resilience reflects several factors, including strong investment related to AI and energy infrastructure, supportive financial and fiscal conditions, and the ability of businesses and supply chains to adapt to trade and geopolitical disruptions. However, these sources of resilience have limits, and growth is increasingly concentrated in a relatively small number of sectors and economies, leaving the outlook more vulnerable to further geopolitical and
policy-related shocks.

The situation in the Middle East remains volatile, and ongoing tensions have proven more persistent than previously expected, increasing risks to global energy supplies in recent months. Tensions in the Middle East and the intensification of Russia's war in Ukraine have renewed pressures in global energy markets following a brief period of relative calm earlier in the summer (Chart 2). While the upward pressure from these disruptions has been partly offset by weaker global oil demand, increased production outside the Gulf, and releases from strategic petroleum reserves, futures markets suggest oil prices will remain well above pre-conflict expectations through 2027. At the same time, constraints on refining capacity have tightened fuel markets and pushed refined product prices sharply higher relative to crude oil prices, increasing the risk of pass-through to other goods and services prices. All together, these developments are expected to place more persistent upward pressure on global inflation than previously expected.

Policy rate expectations have risen across advanced economies in response to renewed inflationary pressures from the global energy price shock and a reassessment of the implications of the AI investment boom. In the United States, higher energy prices, the continued pass-through of tariffs, and strong private domestic demand have kept underlying inflation elevated (Chart 3). The Federal Reserve held its policy rate steady in October, after raising it in September. In Canada, the Bank of Canada raised its policy rate by 25 basis points in October amid concerns that persistently high energy prices could lead to broader inflationary pressures. Central bank communications have also signalled less tolerance for above-target inflation. As a result, financial markets are pricing in a firmer path for policy rates than anticipated at the start of the year.

Higher expected policy rates, along with growing concerns about fiscal sustainability and sovereign debt issuance, have pushed government bond yields higher across advanced economies, with some long-term yields at times reaching levels not seen in nearly two decades. Canada is not immune to these global forces. Canadian long-term borrowing costs have also risen. However, the increase since the beginning of the year has been more moderate than in many peer countries (Chart 4). Canada's 10-year government bond yield also remains among the lowest in the G7 (Chart 5). Canada's strong fiscal position, combined with a resilient economy and favourable growth outlook, has helped sustain investor confidence and insulate Canada from the fiscal concerns that have put additional upward pressure on borrowing costs in some other countries.

In many advanced economies, rising borrowing costs are already weighing on housing activity and non-residential investment while increasing debt-servicing costs for governments, businesses, and households. A global economy characterised by higher borrowing costs and intensifying competition for global capital is placing greater value on fiscal discipline and investments that enhance productivity and capital formation.

Currency markets have also experienced periods of volatility as investors reassess the outlook for growth, inflation, and interest rates. Since the beginning of the year, the Canadian dollar has edged lower and is now trading around 71 U.S. cents. Recent softness appears to largely reflect a generally stronger U.S. dollar and wider Canada-U.S. interest rate differentials. The Canadian dollar nevertheless remains above its early-2025 lows of around 68 cents, when concerns over broad-based U.S. tariffs were particularly acute.

Global economy resilient as technology and trade reconfigure growth

A global wave of protectionism and uncertainty continues to reshape trade patterns across the world. At the same time, geopolitical tensions remain high, disrupting energy markets, supply chains, and investment decisions. Recent energy-related shocks have underscored the world's need for reliable sources of energy and critical inputs—areas where Canada can lead.

Rising trade barriers and heightened geopolitical uncertainty (Chart 6), alongside the impacts of U.S. trade policy, are resulting in a reconfiguration of the world's established trade patterns and supply chains (Chart 7). Firms and governments are reorganising trade, and investment relationships are being reevaluated to balance opportunity and economic security. As businesses seek to reduce risks, trade and capital are increasingly flowing toward strategic sectors and trusted partners like Canada.

At the same time, rapid advances in AI are emerging as a powerful force reshaping global investment and trade patterns (Chart 8). Growing demand for data centres, semiconductors, computing infrastructure, electricity generation, transmission networks, and critical minerals is redirecting capital flows and creating new opportunities across global supply chains.

Rapid growth in AI investment is generating significant global demand for capital, infrastructure, energy, and critical inputs. Canada is well positioned to benefit from this global AI buildout through growing demand for energy, critical minerals, digital infrastructure, and advanced technologies. Canada continues to attract significant private AI investment and ranks among global leaders on several measures of AI-related financing. As adoption expands, AI has the potential to become an important driver of productivity growth and competitiveness. At the same time, responsible deployment and appropriate regulatory safeguards can help manage associated risks.

Canada's economy is growing and adapting to change

Canada is successfully navigating a challenging environment

Canada's economy has demonstrated resilience despite tariffs, heightened global uncertainty, and slower population growth. Economic activity has expanded, Canadians have continued to find work, and household spending has remained solid.

The economy grew by 2% on average in 2025, maintaining the pace recorded over the previous two years despite significant headwinds. Economic growth was uneven as businesses and exporters adjusted to trade-related disruptions. However, the economy repeatedly regained momentum, supported by rising real household incomes and resilient consumer spending.

The Canadian economy entered the second half of the year on a solid footing. Growth strengthened through the first half of 2026, reaching more than 3% annualised in the second quarter (Chart 9), the fastest pace in the G7 and the strongest in nearly two years. Recent data suggest the economy remained relatively resilient in the third quarter.

Growth is broadening

Canada's economic growth is becoming more broadly based. After being driven largely by rapid population growth in recent years, growth is increasingly being supported by higher investment, stronger productivity, and expanding activity in emerging sectors.

Second-quarter growth was supported by a pickup in exports, stronger business investment, and increased housing activity (Chart 10). Household spending also remained resilient despite higher gasoline prices and slower population growth, supported by real disposable incomes growing at their fastest pace since 2024 and improving labour market conditions.

At the same time, new sources of economic growth are emerging. Investment and activity in areas such as AI, data centres, and digital infrastructure, defence-related activity, and energy are playing an increasingly important role in supporting economic activity and creating high-value jobs (Chart 11).

Canada is diversifying its export markets

Canada is now the best-connected economy in the world, and the only G7 country that has a free trade agreement with every other G7 member. Businesses operating in Canada have preferential access to 1.5 billion consumers across 51 countries, representing roughly two thirds of global GDP. Canada is on track to double that market access in the next few months through new trade agreements, including with the Association of Southeast Asian Nations and India, which will in total provide preferential market access to 3 billion consumers globally. Despite recently imposed additional U.S. tariffs, Canada still has a competitive advantage relative to other economies (Chart 12).

Even with headwinds from tariffs, real exports of goods are up around 5% over their 2024 average level, led by energy exports (Chart 13), whose volumes are nearly 15% higher, as well as stronger exports of consumer goods and machinery and equipment.

New transportation capacity for energy resources—particularly the Trans Mountain Expansion Project and LNG Canada Phase 1—has significantly improved Canada's ability to sell products to global markets. The planned LNG Canada Phase 2 expansion, which will double the facility's export capacity, will further strengthen Canada's access to global markets. Enbridge is also advancing the first phase of its Mainline optimisation work. This project would add 150,000 barrels per day of capacity to transport Canadian crude oil to the U.S. Midwest and Gulf Coast markets, with connections to global export facilities, through upgrades to its existing pipeline system. Meanwhile, disruptions to global energy supplies stemming from the conflict in the Middle East have increased demand for reliable and secure sources of energy, driving demand and better pricing for Canadian energy.

Industries that are most exposed to U.S. section 232 tariffs are beginning to recover, with aggregate output, exports, and employment in these sectors stabilising, and in some cases, approaching pre-tariff levels. Stronger commodity prices, export diversification, and favourable global market conditions have helped support a number of sectors. Aluminum and copper producers have benefited from tighter global supply conditions, while the AI investment buildout is boosting demand for semiconductors. Higher prices and stronger domestic demand have helped offset lower U.S. demand, supporting activity across many tariff-impacted industries. Canada's automotive sector is also gaining momentum. Exports of vehicles assembled in Canada have picked up after factory retooling earlier this year. Production is expected to increase modestly in 2027 amid mixed market conditions and ongoing adjustment pressures.

Nominal goods exports to the U.S. have largely recovered to around their pre-tariff levels, while goods exports to non-U.S. markets are more than 50% above their 2024 average, reflecting both better pricing for several commodities as well as early diversification efforts (Chart 14 and box below). In the past year, Canada has signed more than 20 trade and security deals across five continents, with the most recent trade deal with the United Arab Emirates completed in a record 47 days.

The latest trade actions by the U.S. are expected to weigh on Canada's exports and further strain supply chains. While creating additional headwinds, they are not expected to change the trajectory of Canada's economic recovery. We continue to assist affected businesses through the tariff remission framework and targeted support measures. To date, we have provided nearly $44 billion in tariff support to industries across Canada.

While the most recent U.S. tariffs are expected to exert greater pressure on exports in affected sectors and contribute to slower and uneven economic growth in late 2026 and early 2027, private sector economists expect real GDP growth to strengthen through 2027. Economists expect real GDP to reach around 2% annualised by next year's end as businesses adapt, exports recover, and new sources of demand and new markets emerge.

Exports are strengthening through new trade corridors

Diversifying our exports is central to building a stronger and more resilient economy. By expanding access to a broader range of markets, Canada can reduce its exposure to country-specific disruptions and create new sources of growth. Progress will not be uniform across sectors. Industries with deep integration in North American supply chains may face longer adjustment periods as production networks adapt and firms develop new markets.

Canada's services sector, which accounts for around one third of non-U.S. exports, is well positioned to benefit from growing global demand. Digital services exports, including telecommunications services, software development, engineering and professional consulting, and financial services, are becoming an increasingly important driver of growth. These industries can serve customers in many markets simultaneously and are generally less exposed to tariffs and goods-related trade disruptions, making them an important source of export diversification while supporting growth, investment, and high-value jobs.

Modern and efficient trade-enabling infrastructure is critical to strengthening Canada's competitiveness and supporting long-term economic growth. Investments in ports, rail networks, and export corridors have strengthened Canada's ability to move goods to global markets. Gains are visible across many product categories, with energy exports poised to play a significant role in growing Canada's global exports (Chart 15). Expanded export capacity has already improved access to Indo-Pacific markets, supporting growth in crude oil and liquefied natural gas exports. Looking ahead, further investments in trade corridors and pipeline infrastructure could accelerate these gains by connecting Canadian resources with growing demand abroad, reinforcing Canada's position as a reliable supplier of energy to global markets.

Budget 2025 set an ambitious goal to double exports to non-U.S. markets over the next decade, generating an additional $300 billion in annual trade. Early indicators are encouraging. Nominal goods and services exports to non-U.S. destinations increased by $33 billion in 2025 and are on pace to rise by a further $57 billion in 2026 (Chart 16).

Canada is creating the foundations for an investment supercycle

As the world responds to the rupture brought on by rising geopolitical tensions and a more fragmented trading environment, Canada is well positioned to attract investment in strategic sectors. Growing demand for reliable energy, critical minerals, and AI-related infrastructure, together with major projects, expanded market access, and improved investment incentives, is creating conditions that could support an investment supercycle in Canada.

Private investment will play an important role in realising this opportunity. Canada's goal of catalysing $500 billion in new private investment over five years reflects the scale of investment opportunity emerging across the economy. In an annual survey of global business executives, Canada was ranked as the second-most attractive destination for investment over the next three years, closing the gap with the U.S. (Chart 17). The ranking underscores growing international confidence in Canada's economic fundamentals, strategic assets, and long-term growth prospects.

Canada will benefit as global capital shifts toward industries expected to drive the next wave of growth, including AI, electric vehicles and batteries, semiconductors, cybersecurity, space technologies, and nuclear energy (Chart 18). They are among a broader set of sectors that are expected to drive future economic growth and estimated to generate between US$29 trillion and US$48 trillion in annual global revenues by 2040.

Canada can compete in many of these industries by combining its natural resources, reliable energy, research capacity, and skilled workforce with established commercial strengths. Canadian firms have already built globally competitive positions in several of these sectors, including world-leading video game clusters in Montréal and Vancouver, emerging leaders in AI, a strong presence in e-commerce and cybersecurity, established leaders in space, technology infrastructure, and telecommunications, and a key player in the nuclear renaissance. These capabilities are reinforced by Canada's reserves of uranium and other critical minerals, abundant electricity, and advanced nuclear expertise, supporting opportunities in areas such as electric vehicles, batteries, and other energy-intensive industries.

Canada's advantages extend beyond resources and skilled workers. Strong institutions, developed capital markets, and a resilient financial system provide a stable foundation for investment and economic activity.

Canada is using its fiscal strength wisely. Through strategic, targeted investments and broad-based tax policy changes, Canada remains among the leading advanced economies for tax competitiveness. Budget 2026 advances flagship tax policy changes, including the Productivity Mega Deduction and the Canada Growth Incentive, which will further strengthen our tax competitiveness and create the conditions to catalyse an investment supercycle.

In a more uncertain world, investors increasingly value stability, reliable market access, and confidence that projects can succeed over the long term. Canada increasingly offers all three, along with a growing pipeline of investment opportunities at scale. Recent policy measures are also strengthening Canada's attractiveness as an investment destination.

Today, Canada offers the most competitive tax treatment for new business investment in the G7. The proposed Productivity Mega Deduction is one of the most significant business tax changes in half a century, driving the reduction in Canada's marginal effective tax rate on new business investment from 15.4% before Budget 2025 to 6.4%. Canada's government has introduced a series of changes to make Canada a more competitive environment for businesses of all sizes and sectors. These include cutting taxes on personal incomes and incentivising new business investments.

Budget 2025 introduced the Productivity Super-Deduction, allowing businesses of all sizes to immediately deduct 100% of the cost of eligible new investments. The measure provided immediate expensing to a broad range of productive assets, including new machinery, equipment, technology, and other assets. With the Productivity Mega Deduction, Canada increased the amount of assets covered from roughly 15% of assets to more than 65%, including fibre-optic cable, mining property, oil and gas pipelines, software, research and development, computer equipment, aircraft and vehicles, patents, rail track, bridges, and roads.

Limited exclusions apply for certain assets that are long-lived, subject to regulated rates, or that have a significant personal use component. The Canadian approach to immediate expensing is competitive for investors compared with the U.S.

Recent tax changes have fundamentally improved the economics of investing in Canada and are expected to encourage firms to expand their capital spending. With the Productivity Mega Deduction, Canada's marginal effective tax rate on new investment will be about 10 percentage points below that of the U.S. and roughly one third of the average for countries in the Organisation for Economic Co-operation and Development (OECD).

There are emerging signs that Canadian businesses are investing for future growth. Business investment rose at its fastest pace in two years in the second quarter (Chart 19), supported by annualised gains of more than 20% in industrial building construction and machinery and equipment—in particular technology-related investment (Chart 20). Firms continue to invest despite the uncertainty brought on by trade disputes, reflecting strong balance sheets, improving confidence, and growing opportunities in sectors positioned to benefit from the structural changes underway in the global economy.

Higher energy prices and growing demand for secure, reliable energy are supporting capital spending in the energy sector. Strong global demand for critical minerals and other commodities is encouraging new exploration and development. Investments in productivity-enhancing assets, such as machinery, equipment, and computing infrastructure, are rising, supported in part by growing investment in and adoption of AI. These investments can generate benefits far beyond the sectors where they originate, supporting activity and job creation in manufacturing, logistics, transportation, engineering, and business services. Forward-looking investment intentions point to continued strength in business investment (Chart 21).

Major projects will convert these emerging areas of strength into a broader and more durable investment cycle. For example, new energy and trade infrastructure will expand access to global markets, increase the capacity to move Canadian energy and other goods, and improve the return on private investment.

The capital needed to build these projects is increasingly flowing to Canada. Foreign direct investment (FDI) has risen to its highest level in nearly two decades, averaging $98 billion in 2025, and Canada has led the G7 in per capita direct investment inflows since the beginning of last year (Chart 22). For the first half of 2026, reinvested earnings have accounted for the majority of FDI, representing 54% of inflows. The large share of reinvested earnings suggests that foreign firms operating in Canada continue to identify attractive opportunities for expansion.

Major projects are a catalyst for investment

Canada's major projects agenda is about connecting and transforming our country—cutting red tape, accelerating project reviews and construction, and giving investors the greater certainty they need to invest in major projects. Canada is setting the stage for an investment supercycle: crowding in private capital and building the infrastructure, capacity, and confidence needed for follow-on investment, all combined with one of the most significant business tax changes in half a century.

Large projects in areas such as energy, transportation, critical minerals, and digital infrastructure will generate substantial construction activity in the near term, while their broader impact will lower costs, expand market access, and open new opportunities for Canadian businesses to invest and grow. As projects move from planning to construction, they reduce uncertainty among investors by showcasing that large-scale projects can get built, encouraging businesses to commit capital.

Projects referred to the Major Projects Office represent some of Canada's most significant nation-building investments. The Office has announced 28 nation-building initiatives across the country: 18 projects, representing more than $194 billion in new investment and supporting an estimated 200,000 jobs per year during construction, and 10 transformative strategies designed to unlock broader regional and sectoral opportunities. Together, these projects span every region of the country and are advancing through planning, construction, and delivery (Figure 4).

These estimates do not include the potentially significant associated upstream investments that these projects are expected to enable. For example, estimates indicate that the Pacific Link could generate $70 billion to $81 billion in pipeline and upstream production investment.

To get big things built again, we are pursuing a "one project, one decision, one year" approach to accelerate major projects, including through more coordinated federal-provincial reviews and reforms proposed under the Building Canada Strong Act to complete federal review and decisions in just one year. With many of these projects requiring several years to build, their construction will support significant employment and economic activity over an extended period, while the completed assets will generate lasting benefits for Canada through stronger productivity, expanded export capacity, and improved economic resilience.

AI investment and adoption are accelerating

Investment in AI is accelerating globally, opening new opportunities for Canadian firms and workers. Canada is well positioned to benefit, with a world-class research ecosystem, highly skilled talent, abundant clean electricity, and deep integration into the North American market. Global investors are increasingly recognising these advantages. Relative to the size of its economy, Canada ranks second in the G7 (among countries with available data) in attracting private AI-related financing (Chart 23).

The federal government has made important investments to strengthen Canada's sovereign AI ecosystem and lay the foundation for long-term growth. This includes initiatives through Canada's National Artificial Intelligence Strategy: AI for All. The strategy fosters trust in AI systems, provides opportunities for Canadian institutions and companies to adopt and benefit from AI, and safeguards Canada's AI sovereignty through investments in domestic compute infrastructure, data, and talent.

The AI buildout is already generating new economic activity in Canada. Firms are investing in computing, software, research and development, and data-centre capacity, with business investment in computer-related assets rising 60% since 2023.

Canada is also becoming an increasingly important location for the infrastructure that underpins the global AI economy. Exports of information, telecommunications, and computer services have increased by 25% since 2022, while clean, low-emission electricity and favourable conditions for energy-efficient computing are supporting a pipeline of more than 200 data-centre projects.

AI is also increasingly being adopted by Canadian businesses. According to the Canadian Survey on Business Conditions, the share of firms using AI has more than tripled since 2024, rising from 6.1% to 19.2% in 2026 (Chart 24). Firms are using AI technologies to automate routine tasks, improve decision-making, complement skilled workers, and raise efficiency. As adoption spreads, the OECD estimates AI could add between 0.4 and 1.1 percentage points to annual labour productivity growth in Canada over the next decade—a significant boost, especially in the context of an aging population.

Realising this opportunity will require continued investment. Expanding data-centre and computing capacity will increase demand for electricity generation, transmission networks, digital infrastructure, and skilled workers. In this way, the AI investment cycle extends well beyond the technology sector. Investment across the energy, infrastructure, and technology sectors will be needed to ensure that Canada can meet this growing demand, and to ensure the benefits of AI investment are broadly shared by Canadians.

Canada is taking action to build the capacity needed to compete in the global AI economy and accelerate the commercialisation of Canadian AI technologies through investments in Canadian AI champions such as Cohere. This is complemented by efforts to support the development of safe AI through investments like that in LawZero, a Montréal-based not-for-profit organisation developing a novel approach to advanced AI that is designed to be trustworthy, transparent, and safe. Support for major AI infrastructure investments, including TELUS's data-centre projects in British Columbia and Bell Canada's planned AI hub in Saskatchewan, is strengthening Canada's domestic compute capacity, with the latter generating up to $52.5 billion in capital investment, the largest in Saskatchewan's history, and supporting 4,500 high-quality jobs.

Creating jobs and making life more affordable

More Canadians are finding work

Canada's labour market conditions have improved over the last year (Chart 25). This has been led by a notable pickup in private employment, which has increased by 214,000 jobs over the past year (Chart 26), a significant shift toward business-led job growth. Overall employment rose by 95,000 jobs over this period despite some employment losses in August and September. At the same time, slower population growth also means fewer people are entering the workforce looking for work, helping bring the unemployment rate down to 6.5% as of September—near its lowest level in two years.

In early 2025, rising trade tensions with the United States led many firms to slow hiring and reduce vacancies, rather than undertake widespread layoffs. This "low-hire, low-fire" dynamic helped preserve employment, household income, and consumer spending, but also contributed to longer job searches and higher unemployment, particularly among young people. As economic activity strengthened through the middle of 2026, hiring resumed and labour market conditions improved.

Labour market conditions for young people have also improved. The youth unemployment rate has declined from a peak of 14.6% in September 2025 to 13% as of September this year. And the labour force participation rate for youth aged 15 to 24 is by far the best in the G7 at 62.3%, about 6 percentage points higher than the U.S. rate. Nonetheless, subdued hiring and low job vacancies mean that it is more difficult than usual for young people and other new entrants to find work. Government initiatives, including the Canada Summer Jobs program and the Team Canada Strong initiative announced in Spring Economic Update 2026, which aims to recruit, train, and hire up to 100,000 new skilled trade workers, are aimed at helping young Canadians gain valuable experience and develop in-demand skills.

Looking ahead, renewed U.S. tariffs are expected to moderate employment growth, with the effects more pronounced in tariff-exposed sectors and regions. Small- and medium-sized businesses may face challenges given limited capacity to absorb lost export revenue and diversify into alternative markets. Chapter 2 provides further detail on the nearly $44 billion that we have announced to support workers and businesses impacted by tariffs.

Canada's labour supply has remained resilient, supported by remarkably strong labour force participation as population growth has slowed. Canada continues to lead the G7 with a participation rate of 64.8%, 3 percentage points above that of the United States (Chart 27). Participation among Canadians aged 25 to 54 has rebounded to 88.5%, just 0.4 percentage points below its all-time high, supported by historically high labour force participation for women. About 85% of women aged 25 to 54 are participating in the labour force, roughly 7 percentage points higher than in the United States.

Since assuming office 20 months ago, we have taken back control of immigration. The 2027-2029 Immigration Levels Plan focuses on stabilising immigration rates at sustainable levels (Chart 28). Within that context, the Plan continues to prioritise economic immigration that helps address critical labour gaps while maintaining Canada's commitments to family reunification and humanitarian protection. It also recognises the important role of temporary foreign workers in supporting growth, especially in rural and remote communities, offering a fast track to permanent residency for many temporary workers who are already working in Canada and contributing to their communities.

Canadians' incomes are rising and affordability is improving

Canadian households have made meaningful gains in income and purchasing power in recent years. Real disposable income per capita has increased 6.4% since 2019, the second-strongest growth in the G7. Real hourly wages are 6.1% above their 2019 level, over twice the increase in the United States (Chart 29). Together with generally sound household finances, these income gains have supported continued growth in consumer spending (Chart 30).

Not only have real wages increased since 2019, but gains have been seen across the wage distribution (Chart 31). More recently, higher global energy prices have moderated real wages in many countries, including Canada. At the same time, the cost of essentials such as food and housing remains elevated after strong increases in recent years, continuing to put pressure on household budgets.

Even as higher prices continued to pressure household budgets, household incomes strengthened in the second quarter of 2026, reflecting support from the Canada Groceries and Essentials Benefit alongside stronger labour income. Nominal disposable income per capita rose 8.3% annualised in the second quarter, leaving household incomes 4.2% higher than a year earlier (Chart 32). After inflation, real disposable income per capita grew nearly 5% annualised in the second quarter and was 1% higher than a year earlier.

We are also providing affordability relief today, while pursuing the longer-term investments needed to provide a boost to tomorrow, raising incomes and living standards. In terms of improving purchasing power, more than 12 million Canadians from low- or modest-income families are receiving the Canada Groceries and Essentials Benefit, which contributed to the rebound in household income growth (Chart 32), and which Budget 2026 proposes to enhance through an additional 50% top-up. Around 22 million Canadians are keeping more of what they earn because of our middle-class tax cut. Budget 2026 also proposes the Build Canada Workers Benefit to help those with low earnings qualify, while also increasing the amount of support available for lower-income workers.

We are also improving affordability by helping to lower costs where it is needed most. The temporary suspension of the federal excise tax on fuels has lowered the cost of gasoline, offsetting some of the increase from higher oil prices. To make food more affordable and improve domestic food security, we have introduced the National Food Security Strategy, as well as proposed new investments in the Nutrition North Canada program, which aims to lower food costs and increase food supply in remote northern communities. Canadians are also benefiting from new measures to help first-time home buyers and the Electric Vehicle Affordability Program. A new National Heat Pump Rebate Program is also proposed in Budget 2026.

Household finances remain generally sound. Debt relative to income remains below pre-pandemic levels, household net worth is at a record high, and the saving rate remains above its historical average. These financial buffers have helped households maintain spending through a period of elevated uncertainty.

There are also encouraging signs of progress on some everyday costs. Grocery inflation slowed to 1.7% in September, down from its recent high of 5% in December 2025. Rent inflation has also moderated as housing supply continues to expand (Box). Canadians are benefiting from lower costs that directly affect household budgets. The average cost of child care has fallen by around 30% nationwide since 2019, while cellular service prices have declined by roughly half since 2019. Asking rents have been declining year over year for two years, falling nearly 8% ($170 per month) from their peak to just over $2,000 nationally. This translates into annual savings of roughly $2,000 for newly rented units.

Affordability nevertheless remains top of mind. Food and housing costs remain elevated, and higher energy prices have recently put renewed pressure on purchasing power. The measures above provide relief today, while sustained improvements in productivity, investment, and economic growth will be essential to delivering durable gains in real incomes, living standards, and prosperity over time.

Canada is making major progress on housing affordability

Housing affordability in Canada has continued to improve as elevated construction levels and moderated demand help rebalance housing markets. Housing starts averaged about 250,000 units in the first half of 2026, roughly 20% above pre-pandemic levels (2015-2019). Record rental construction has been a key source of resilience, helping offset ongoing weakness in some parts of the housing market, particularly condominiums and some low-rise housing segments.

The improvement has been most evident in rental markets. Strong rental construction, combined with a more sustainable pace of immigration and slower growth in the number of new households, has expanded choice for renters and reduced pressure on rent. Since peaking in May 2024, asking rents have declined by about 8% nationally, equivalent to roughly $2,000 per year in savings. Larger declines were seen in some of Canada's least affordable markets, including Toronto (-14%) and Vancouver (-18%) (Chart 33).

Housing affordability for prospective buyers has also improved as previous declines in interest rates, softer home prices in several markets, and continued income growth have reduced ownership costs relative to income. The Bank of Canada’s housing affordability index has fallen to 41% from a peak of 55%, meaning the share of household income needed to cover housing costs has fallen by roughly one quarter. While affordability remains more challenging than before the pandemic, the index has moved materially closer to its 2016–2019 average of 37% (Chart 34).

Continued progress will require maintaining a strong pace of homebuilding. While housing market conditions have improved, Canada continues to face a significant housing supply shortfall that accumulated over several years. Our approach to housing, including Build Canada Homes, is helping increase the supply of affordable housing and support further improvements in affordability. We are also working with provinces and territories, including through the Build Communities Strong Fund and the Improving Housing Supply Act, to reduce barriers to housing supply, such as development charges and other levies on new home construction.

Higher inflation is being driven primarily by energy prices

Headline inflation has risen in recent months as conflict in the Middle East and Europe pushed up global energy prices. Disruptions to energy and shipping infrastructure, together with damage to global refining capacity, have kept gasoline and other energy prices elevated. As a result, headline inflation has averaged around 3% for the past six months, compared with roughly 2% before the conflict began. In September 2026, gasoline prices were nearly 28% higher than a year earlier. The extension of the federal fuel excise tax suspension to early next year will continue to provide a partial offset to these cost pressures.

Underlying inflationary pressures remain contained so far. The recent rise in inflation has been concentrated in energy-related components, including transportation and some travel-related services. The consumer price index (CPI) excluding gasoline has remained close to 2%, while measures of core inflation remain near 2% in September (Chart 35).

Although many households continue to face affordability challenges, price pressures have eased across many of the essentials that matter most to Canadians. Grocery inflation slowed to 1.7% in September, its slowest pace in more than a year, down from close to 5% at the beginning of the year. Shelter services inflation was 1.4% as of September, below its historical average. Slower growth in homeownership costs and rents have helped ease pressure on household budgets. Inflation for goods excluding food and energy was moderate at 1.2% in September.

High energy prices are expected to keep headline inflation elevated over the coming months. At the same time, cost pressures on businesses are building from higher energy and other input prices. How far these pressures spread to other prices will depend on how quickly energy prices ease, the extent to which higher costs are passed through to consumers, and the broader evolution of the economy.

The Bank of Canada raised its policy rate by 25 basis points to 2.5% on October 28, 2026, to reduce the risk that persistently high energy prices spread more broadly to other goods and services prices. While the economy continues to operate with some excess supply, economic activity has been stronger than previously expected and the risk that energy-related cost pressures pass through more broadly to consumer prices has increased. The Bank indicated that further policy rate increases could be needed but that, given uncertainty surrounding the outlook, it would proceed carefully.

Low, stable, and predictable inflation is central to economic decision-making and provides certainty for Canadians and businesses. The monetary policy framework, reviewed and renewed by the Government of Canada and the Bank of Canada, underpins how the independent Bank of Canada conducts monetary policy through flexible inflation targeting.

Canadian economic outlook

Growth is expected to strengthen as the economy adjusts

The Department of Finance Canada regularly surveys private sector economists on their outlook for the Canadian economy (see Annex 1 for details).

While the latest U.S. trade measures are expected to weigh on activity in the fourth quarter of 2026 and first quarter of 2027, the Canadian economy has demonstrated resilience in the face of heightened uncertainty. Stronger than expected momentum in the first half of 2026 has largely offset these additional trade-related headwinds, leaving the annual GDP growth outlook for 2026 relatively unchanged from the Spring Economic Update 2026.

As the near-term drag from trade-related adjustments diminishes, private sector economists expected growth to strengthen through 2027, supported by resilient household spending, stabilising housing activity, stronger business investment, and the continued adoption of productivity-enhancing technologies, including AI (Chart 36).

The outlook for 2028 to 2030 has also been revised upward, reflecting stronger business investment and productivity growth. New investment incentives, including the Productivity Mega Deduction, which will permanently increase the amount of assets eligible for immediate expensing from roughly 15% of assets to more than 65%, provide a further potential source of support to business investment. Private sector forecasts may not have fully captured the potential investment response to recently announced measures. Greater adoption of advanced digital technologies, including AI, was also expected to support investment and enhance productive capacity across the economy.

Overall, private sector forecasters expected real GDP growth of 1% in 2026 and 1.7% in 2027, compared to the Spring Economic Update 2026 outlook of 1% and 1.9%, respectively. Annual average growth in 2026 is held down by weak economic activity at the end of 2025 and the beginning of this year. However, stronger momentum through mid-2026 and indications that activity remained solid over the summer point to somewhat firmer underlying growth. On a fourth-quarter-over-fourth-quarter basis, real GDP was expected to increase by 1.6% in 2026 and 1.8% in 2027, indicating gradually strengthening economic momentum over the forecast horizon.

Canada's outlook continues to compare favourably internationally. While many advanced economies face trade and geopolitical headwinds, the IMF projects Canada to be the second-fastest-growing economy in 2027. Canada benefits from significant resource and infrastructure investments, a growing pipeline of major projects, and the strength of the country's fiscal and financial institutions.

Private sector economists expected GDP inflation to average 4.6% in 2026 and 1.9% in 2027, compared with 3.1% and 1.8% in the Spring Economic Update 2026, reflecting higher oil price expectations than in the spring. As a result, the level of nominal GDP was projected to exceed the Spring Economic Update outlook by about $48 billion per year on average over 2026-2030, primarily reflecting stronger GDP inflation from higher commodity prices, with stronger real GDP also contributing over the medium term (Chart 37).

Since the September survey was completed, markets have priced in a longer period of conflict and related supply disruptions as the situation in the Middle East persists. Oil futures now point to crude prices staying higher for longer than economists assumed, adding to inflationary pressures, while also raising the value of Canada's exports and improving its terms of trade. Longer-term government bond yields are somewhat higher than expected, although they have moderated since the beginning of October. The Bank of Canada has since raised its policy rate by 25 basis points in response to increased inflation risks. Despite some moderation over the summer, economic activity has held on to much of the strength seen in the second quarter, with recent indicators pointing to solid growth in the third quarter. Taken together, these developments point to some potential improvement in the nominal GDP outlook relative to the September survey. The survey, nevertheless, remains a prudent baseline for economic and fiscal planning amid ongoing uncertainty.

In the September survey, private sector economists expected:

• West Texas Intermediate crude oil prices to rise from US$86 per barrel in the third quarter of this year to US$90 per barrel in the fourth quarter before declining gradually to US$73 per barrel in the fourth quarter of 2027. For 2026 as a whole, the price of oil was expected to average US$85 per barrel compared to the Spring Economic Update forecast of US$73 per barrel. It was then expected to decline to US$79 per barrel in 2027, moderately above the Spring Economic Update forecast of US$66.
• CPI inflation to average 2.8% in 2026 and 2.2% in 2027, compared to 2.5% and 1.9%, respectively, in the Spring Economic Update. Inflation was then expected to remain near target through 2030, similar to the Spring Economic Update.
• The unemployment rate to average 6.6% in 2026, similar to the 6.5% expected in the Spring Economic Update, and to continue its downward trend, reaching 5.8% by 2030, slightly improved from the 5.9% expected in the Spring Economic Update.
• The Bank of Canada to keep its policy rate at 2.25% through 2026 before making two 25-basis-point increases in 2027. With the economy picking up, short-term interest rates were then expected to start rising in early 2027, reaching 2.7% by 2028, unchanged from the Spring Economic Update. In contrast to the Spring Economic Update, short-term rates were expected to remain at that level over the outlook, as opposed to declining marginally.
• The 10-year bond rate to increase from an average of 3.6% in 2026 to 3.8% in 2027 before moderating to about 3.7% thereafter, largely unchanged from expectations in the Spring Economic Update.
• In the U.S., real GDP growth to average 2.1% in 2026, down 0.3 percentage points from the Spring Economic Update. Thereafter, growth was expected to rise over the outlook, somewhat stronger than the Spring Economic Update.

The Department of Finance Canada estimates that, collectively, fiscal measures introduced since the Spring Economic Update 2026 will both support the economy in the near term and strengthen productive capacity over time (see Box). Together, these measures build on recent investments to strengthen Canada's economy—supporting workers and businesses today while creating the conditions for higher incomes and better living standards over time. 

Budget 2026 supports Canadians today and builds a stronger economy for tomorrow

Budget 2026 is providing support to Canadians and the economy while laying the foundation for a more productive, competitive, and prosperous Canada. Fiscal measures introduced since the Spring Economic Update 2026 will provide about $151 billion in net support, excluding debt charges, to households, businesses, and other levels of government on an accrual basis over 2026-27 to 2030-31.

These measures will provide timely support in the near term, as tariffs and geopolitical headwinds are leaving the Canadian economy operating below its potential. By sustaining economic activity and jobs, the measures will help Canadian workers and businesses navigate this period of adjustment.

Beyond the near term, the more durable economic impacts of the fiscal measures in Budget 2026 are expected to come increasingly through stronger private investment and productivity, strengthening Canada's growth potential.

At the centre of this effort is the broad-based and permanent Productivity Mega Deduction. This measure lowers the after-tax cost of investing by allowing businesses of all sizes to deduct the full cost of eligible investments immediately. Making immediate expensing permanent also provides greater certainty for long-term investment decisions, encouraging businesses to invest, expand, and build in Canada. This is expected to increase investment in new machinery, equipment, technology, and other assets that help businesses modernise and give workers better tools to be more productive. Department of Finance Canada estimates that, by the end of the budget forecast horizon in 2030, the Productivity Mega Deduction alone could increase the level of real GDP by about 0.5%. 

For Canadians, stronger investment and productivity support higher real wages—and greater purchasing power—helping Canadians' incomes go further. They also create more opportunities for workers and raise living standards, as investments in better tools and technologies enable workers to create more value from their work.

The Department of Finance Canada estimates that, collectively, the fiscal measures in Budget 2026 could raise annual real GDP growth by 0.2 percentage points, on average, through 2030, leaving the level of real GDP about 0.9% higher by 2030 than otherwise projected. The resulting increase in economic activity is expected to raise real GDP per capita by about $800 (in 2026 dollars) and employment by about 50,000 jobs by 2030. As productivity gains build, a greater share of the improvement in living standards is expected to be reflected in higher real wages, estimated to be 0.8% higher by 2030. These effects build over time as investment accumulates and the economy's productive capacity expands.

These economic impacts are presented separately from the private sector economic forecast used as the basis for fiscal planning. The September 2026 private sector survey captures fiscal measures announced before the survey closed on September 16, including the Productivity Mega Deduction, but does not reflect the full suite of Budget 2026 measures. The potential investment and productivity effects of recent policy measures may also not yet be fully reflected in private sector forecasts. As a result, some of the economic impacts presented above represent potential additional effects beyond those reflected in the September survey forecast.

Economic scenarios analysis

Risks to the Canadian economic outlook reflect both external developments and domestic factors shaping Canada's long-term growth potential. While the Canadian economy has demonstrated resilience and a strong capacity to adapt, near-term growth prospects remain closely tied to global economic conditions. The global outlook remains vulnerable to a broader reassessment of growth prospects amid geopolitical tensions in the Middle East, resulting inflationary pressures, and rising global bond yields. Looking beyond the near term, Canada's economic performance will increasingly depend on its ability to translate emerging opportunities in the country into stronger business investment, innovation, and productivity growth.

Analysing risks helps assess the range of possible outcomes around the baseline forecast and supports prudent fiscal planning. Further details of the economic outlook and scenario analysis can be found in Annex 1, while the following provides a brief outline of each scenario.

Higher investment scenario

The higher investment scenario illustrates an environment in which Canadian businesses respond more strongly to new investment incentives, including the Productivity Mega Deduction, and adopt productivity-enhancing technologies, such as AI, more extensively than assumed in the September survey. This leads to stronger investment, productivity, and economic growth. At the same time, stronger global demand for energy, critical minerals, and related supply chains supports greater investment, while Canadian exporters expand more rapidly into non-U.S. markets, accelerating trade diversification.

Stronger productivity and capital deepening support higher incomes and business profitability, reinforcing an investment supercycle and improving Canada's competitiveness. As a result, annual real GDP growth exceeds the September survey forecast throughout the projection horizon, while the level of nominal GDP is materially higher than in the baseline. While outcomes are stronger than those in the September survey, the scenario is based on prudent assumptions and assumes that these gains build progressively over the forecast horizon as higher investment and productivity increase the economy's productive capacity.

Overall, annual Canadian real GDP growth is higher, on average, by 0.3 percentage points over the projection horizon relative to the September survey forecast, leaving the level of real GDP 1.3% higher by 2030 (Chart 38). Nominal GDP is $26 billion higher on average per year compared with the September survey forecast from 2026 to 2030 (Chart 39).

Global supply disruptions scenario

In the global supply disruptions scenario, geopolitical tensions in the Middle East prove more persistent than expected, prolonging disruptions to global energy markets, refining capacity, and critical shipping routes. Higher oil and diesel prices, along with increased transportation and other key input costs, reinforce inflationary pressures. As a result, many central banks maintain more restrictive monetary policy for longer. Concerns about persistent inflation and fiscal sustainability also place further upward pressure on global bond yields, tightening financial conditions, increasing uncertainty, and weighing on investment and economic activity. Elevated asset valuations and compressed risk premiums before the shock leave markets vulnerable to larger asset price corrections when economic and financial conditions deteriorate.

These developments spill over into Canada through higher domestic prices, reduced household wealth, increased financing costs, and weaker foreign demand, at a time when the Canadian economy is already contending with elevated uncertainty surrounding U.S. trade policy.

As a result, Canadian real GDP growth is lower than projected in the September survey forecast (Chart 38), and the level of real GDP is 0.9% lower at peak impact in 2027. Although higher energy and domestic prices provide some support to GDP inflation, nominal GDP remains, on average, $8 billion lower per year than the September survey forecast from 2026 to 2030 (Chart 39).

Responsible fiscal management creates room to invest

Our fiscal approach is focused and disciplined: maintaining fiscal sustainability while catalysing targeted, high-impact investments that strengthen growth, productivity, and long-term economic resilience.

Budget 2026 builds on this approach, proposing further investments that support infrastructure, innovation, and other growth-enhancing assets, while carefully managing day-to-day operating spending. Budget 2026 gives Canada room to invest, preserves our fiscal advantage among G7 peers, and respects the fiscal anchors laid out in Budget 2025: balancing operating spending with revenues by 2028-29 and maintaining a declining deficit-to-GDP ratio.

Budget 2026 builds on Canada's strong fiscal foundation

After factoring new measures in this budget, the fiscal outlook remains stronger than projected in the Spring Economic Update 2026. Over the next six years, the deficit is projected to be $34 billion lower than previously forecast. The deficit-to-GDP ratio is projected to decline across the planning horizon, from 1.8% in 2026‑27 to 1.3% in 2030‑31, remaining broadly consistent with, or improving on, the Spring Economic Update 2026 projections and our fiscal anchors.

At the same time, growth in direct program expenses has slowed significantly, from an average of 8% annually over the past decade (2014-15 to 2024-25) to less than 2% over the Budget 2026 horizon (2026-27 to 2030-31), while major transfers to Canadians and provinces and territories remain protected and continue to grow.

This responsible fiscal plan is creating room to act where Canadians need it most. As tariff pressures and global economic uncertainty continue to affect workers and businesses, Budget 2026 provides targeted support to help Canadian industries remain competitive, protect jobs, and strengthen Canada's economic security. These actions will help businesses adapt, diversify markets, and seize new opportunities in a changing global economy. Budget 2026 also charts a substantially improved debt-to-GDP trajectory compared with Budget 2025 and the Spring Economic Update 2026—underscoring the continued importance of operational efficiency and the focus on fiscal discipline (Chart 40).

Budget 2026 is focused on improving Canada's long-term economic performance, by strategically advancing measures that raise productivity, unlock private investment, modernise infrastructure, strengthen supply chains, support workers, and help Canadian businesses grow and compete. We are also continuing to tackle affordability challenges, with roughly one third of new measures in Budget 2026 focused on measures to lower costs for and protect Canadians.

Fiscal discipline is not a constraint on growth—it is an enabler. It allows government to preserve vital social programs and make growth-enhancing investments possible. Even as we invest, public debt charges remain low by historical standards—projected at 2.2% of GDP by 2030-31, far below the peak of 6.5% faced in the 1990s.

Growing capital investments while maintaining fiscal discipline

Budget 2026 is continuing to spend less to invest more—carefully managing day-to-day operating costs so that it can invest more in the assets, infrastructure, and productive capacity Canada needs for long-term growth. This approach is supported by the Capital Budgeting Framework introduced in Budget 2025, which classifies federal expenses and tax expenditures as either capital investments or day-to-day operating spending.

Budget 2026 projects total federal capital investments of $403.9 billion on an accrual basis from 2025-26 to 2030-31, and $676.4 billion on a cash basis (Chart 41). Annual capital investment is projected to rise from $37.4 billion in 2025-26 to $78.2 billion in 2030-31, reflecting our commitment to strategic long-term investments.

Budget 2026 will help encourage more private sector capital investment, boost productivity, and invest in the housing and infrastructure that supports trade, economic growth, and strong communities. The new Productivity Mega Deduction will encourage companies of all sizes and sectors to invest, expand, and produce more of the goods and services the world needs. At the same time, investing $10.5 billion in building the homes Canada needs, $9.5 billion in housing and infrastructure in Indigenous communities, close to $9 billion in electricity infrastructure projects, and $2.8 billion to unlock the full potential of Canada's natural resources will expand housing and vital infrastructure across Canada.

Consistent with our fiscal anchors, the composition of the deficit will continue to shift toward capital investment (Chart 42).

This disciplined approach to budgeting preserves room for high-impact investments while ensuring that public funds are managed in a responsible and sustainable way. It is supported by ongoing efforts to lower operating costs, reduce duplication, modernise service delivery, and improve value for money, including through horizontal reviews that are helping identify efficiencies and optimise the use of public resources. Chapter 6 provides further detail on these efforts and the savings identified to date.

Canada's fiscal advantage: a foundation for future prosperity

Long-term investment requires long-term confidence. Canada's low net debt-to-GDP ratio, strong budgetary position, and commitment to fiscal discipline provide the stability and resilience that investors increasingly value. While many peer countries face elevated debt and growing fiscal pressures, Canada's fiscal advantage provides an important foundation to act with confidence: protecting Canadians through disruption, supporting investment, boosting productivity growth, and positioning Canada for lasting prosperity and greater economic independence.

This strength gives Canada greater room than many of its peers to turn global uncertainty into national opportunity.

• Including all levels of government, Canada's net debt-to-GDP ratio stands at just 9.3%, compared to the G7 average (excluding Canada) of 101.3% (Chart 43).
• This debt ratio is lower than that of any other G7 country and is even below the levels in those countries prior to the pandemic.
• Canada also has one of the smallest deficits in the G7 as a share of the economy (Chart 44).

Canada is also one of only two G7 economies, alongside Germany, to maintain AAA ratings from multiple major global credit rating agencies. These AAA ratings support investor confidence and help keep borrowing costs as low as possible.

This fiscal advantage gives us the capacity to make investments today that will provide a foundation for future growth—helping make life more affordable, creating the conditions for businesses to create good, well-paying jobs, preserving the social services that allow us to take care of each other, and empowering Canada to chart its own course.

Beyond the G7, Canada's fiscal position also stands out. Compared to 30 other advanced economies, Canada has a below-average deficit-to-GDP ratio and one of the lowest net debt-to-GDP ratios in the group (Charts 45 and 46).

This fiscal advantage also provides Canada with resilience in the face of economic uncertainty, as illustrated by the scenarios that follow.

Economic scenario analysis: fiscal implications

The Canadian economy has remained resilient, but near-term risks remain elevated amid geopolitical tensions in the Middle East. To support prudent fiscal planning around the September 2026 private sector survey forecasts, and to stress-test the baseline fiscal forecast, the Department of Finance Canada has assessed the fiscal impact of the two alternative economic scenarios.

In the higher investment scenario, Canadian businesses invest more and adopt productivity-enhancing technologies more extensively, which increases productivity growth. In this scenario, the budgetary balance would improve by $3.0 billion per year, on average, over the forecast horizon (Chart 47). The federal debt-to-GDP ratio would be expected to increase to 40.0% in 2027-28 and then fall to 39.2% by 2030-31 (Chart 48).

In the global supply disruptions scenario, the conflict in the Middle East proves to be more persistent, leading to more persistent inflationary pressures and tighter global financial conditions. In this scenario, the deficit would increase by $2.2 billion per year, on average, over the forecast horizon (Chart 47). The federal debt-to-GDP ratio would increase to 40.7% by 2028-29 and fall to 40.5% by 2030-31 (Chart 48).

Details on the government's fiscal outlook and the fiscal impact of these scenarios can be found in Annex 1.

Canada's economic plan is fiscally sustainable

Our economic plan is fiscally sustainable. Modelling by the Department of Finance Canada shows the federal debt-to-GDP ratio remaining on a declining trajectory over the longer term (Chart 49). Sensitivity analysis also indicates that the federal debt-to-GDP ratio would continue to decline by the end of the projection horizon, even under the global supply disruptions scenario. Strong fiscal discipline today gives Canada the capacity it needs to invest now, and in the future.

Securing Canada's future prosperity and fiscal sustainability

Preserving Canada's fiscal capacity is essential to navigating an uncertain global environment, responding to emerging pressures, and investing in Canada's future prosperity.

Ultimately, however, long-term prosperity and fiscal sustainability depend on higher productivity. By enabling businesses and workers to produce more with the same resources, productivity supports higher incomes, stronger economic growth, and a broader tax base. In a more uncertain global environment, it also strengthens Canada's competitiveness, economic sovereignty, and capacity to build at scale.

Canada's new government inherited an economy that had experienced years of weak productivity growth and underinvestment. While recent progress is encouraging, Canada still has considerable ground to make up relative to many peer economies. Sustained productivity growth will be essential to raising Canada's economic potential and delivering durable gains in wages, incomes, affordability, and living standards (Chart 50).

Since 2025, we have pursued an economy-wide agenda to address the causes of and impediments to stronger productivity growth. Through pro-growth tax policy, strategic investments in infrastructure that unlock growth in resource and trade-oriented sectors, and measures to modernise regulation, improve labour mobility, strengthen competition, and develop skills, we have worked to strengthen the conditions for private sector investment, innovation, and capital formation.

Budget 2026 advances the next phase of this economic transformation. By reducing barriers to investment, accelerating major projects, mobilising private capital, and strengthening Canada's productive capacity, Budget 2026 aims to support a new cycle of investment and capital formation. Over time, stronger investment and productivity will be essential to raising real incomes and living standards, improving affordability, and preserving the fiscal capacity needed to invest in Canada's future.