Federal Budget 2026: Betting that Deficits will Payoff in the Future

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Budget 2026 is the next step in the government’s plan to boost capital investment in exchange for steep deficits. 

Key findings on the 2026 federal budget

Budget 2026 reinforces the Federal Government’s plan to move away from operating spending and toward a whole-of-government effort to get things built. The result is a budget in which stronger-than-expected revenues relative to the Spring Economic Update (SEU) are met with more spending. At the same time, the government is ahead of its plan in reducing its operating deficit, which is now projected to reach balance in 2026–27, even as the capital deficit widens. However, the distinction between operating and capital spending does not change the bottom line, as the overall deficit remains steep at $62.3 billion in 2026–27, modestly below the $65.3 billion projected in the spring. Deficits projected through the planning horizon are also largely unchanged, settling at $52.9 billion in 2030–31. 

Beyond the deficit, the financing requirement for the budget are even steeper. When considering military purchases, which are non-budgetary, the total financing requirement ranges from $103.9 billion in fiscal year 2025–26 to $139.1 billion in fiscal year 2030–31. 

The biggest measure is the Productivity Mega Deduction, which is meant to spur investment across firms of various sizes and make Canada’s marginal tax rate on new investment the lowest in the G7. The new deduction also significantly broadens the types of investment eligible for an immediate write-off. These tax incentives are further bolstered by the Canada Growth Incentive, which is meant to provide tax relief for successful Canadian entrepreneurs who reinvest their capital gains in other Canadian companies. 

The other big area of focus was electrification, with the banner piece in the budget being nearly $9 billion for “Powering Canada Strong” to help retrofit homes to heat pumps, build out more EV charging infrastructure and extend or expand eligibility for the clean electricity investment tax credit. The focus in the near-term is on nearly 15,000 new EV chargers to be installed between 2026 and 2029, an increase of nearly 50 per increase over that period, and 820,000 heat pumps to be installed between now and fiscal year 2033–34, nearly triple current levels. 

Support for households was a bigger focus in Budget 2026 than in the prior budget. A one-time top-up to the Canada Groceries and Essentials Benefit will cost $4.1 billion in 2026–27, while the previously announced removal of the federal fuel tax accounts for another $2.9 billion in relief. Other affordability measures include $515 million per year to enhance the Canada Workers Benefit for low-income workers and the conversion of the Canada Caregiver Credit into a refundable credit, at a cost of roughly $200 million per year starting in 2027–28. 

Lastly, the budget places a major focus on building affordable housing. The budget commits $11 billion to building non-market housing over the planning horizon to help combat homelessness, topped up by another $12 billion for indigenous communities for housing and infrastructure. 

Revenue windfall is largely spent, but deficits remain on the edge of sustainable  

A notable piece of recent Federal budgets has been the willingness to run substantial deficits with the hope of spurring enough economic growth to eventually improve the fiscal picture. Budget 2026 continues that trend. 

A stronger-than-expected economic growth, combined with higher inflation and oil prices has led to stronger revenue growth than anticipated, though the higher revenue has been mostly met with greater spending.  

The Spring update had deficits of over $50 billion each fiscal year between 2025–26 and 2030–31. Despite $158.3 billion more in fiscal improvement between 2026–27 and 2030–31, projected deficits remain largely unchanged over the forecast period. This highlights the government’s commitment to supporting investment and economic growth rather than reduce deficits. While this strategy may help strengthen long-term growth, the government has foregone an opportunity to use the revenue windfall to improve its fiscal position. 

What’s also notable is a shift in the tone of Canada’s fiscal anchors, which are less restrictive than those used by the previous government. This new Liberal government has established two fiscal anchors. The first is to balance the operating budget, with any remaining deficit confined to the capital budget. The second is to ensure that the deficit-to-GDP ratio declines over the forecast horizon. 

We would like to see greater detail and a clearer planning framework on the capital budgeting requirement. For now, while the accounting is transparent and honest, there appears to be discretion over what gets classified as capital versus operating spending. A clear framework for what belongs in each category would improve fiscal planning and make it easier to assess whether the government’s fiscal anchors are being met.  

The second anchor, a declining deficit-to-GDP ratio over the forecast horizon, is a sensible one given that Canada’s overall debt picture is favourable, especially relative to the size of its economy and the debt burdens carried by many other advanced economies. The budget does adhere to this target, and we would agree that the budget is affordable and prudent provided this target continues to be respected.  

That does not mean the fiscal outlook is without risks, with debt-servicing costs becoming increasingly important to watch. Public debt charges are projected to reach $85.5 billion by 2030–31, equivalent to close to 14 per cent of government revenues. Given the uncertainty around bond yields, which have risen sharply this year, higher borrowing costs could push debt charges even higher, leaving less fiscal room for other priorities. 

There also remains a high level of uncertainty around the economic outlook. The budget does include a downside scenario focused on global supply disruptions, but it does not explicitly consider a significant deterioration in Canada–U.S. trade relations or further tariff escalation. While this is not our expectation, a less favourable outcome from trade negotiations remains a major downside risk to the economic and fiscal outlook. 

The productivity mega deduction will help Canadian attractiveness for investment 

The Productivity Mega Deduction is the strongest piece of the investment agenda announced in Budget 2026, given its broad applicability across businesses and asset types. With an estimated cost of nearly $36 billion over the next five fiscal years, this marks the largest single new measure in the budget. 

This is a clear win for businesses investment. It directly lowers the cost of investment and, because a much wider range of assets now qualify, it gives businesses more flexibility to decide which investments make the most sense for them. We see this as a positive development making Canada a more attractive place to invest, and under this regime Canada will have a relatively low marginal tax rate when compared to other advanced economies. While this is not a solution to Canada’s investment problem on its own, it does provide a strong foundation to build on, particularly given its straightforward rules and wide range of eligible investments. 

The budget also helps boost the benefits of research and development spending with an expanded eligibility for the Scientific Research and Development Credit to help firm commercialize their research and innovation. This measure is estimated to cost nearly $1 billion over the next five years. 

What is less of a slam dunk, in our view, is the Canada Growth Incentive. The idea is sensible as it gives successful entrepreneurs more incentive to keep their capital invested in Canadian businesses, but the measure is relatively modest at $715 million through 2030–31. Given some of the discretionary spending elsewhere in the budget, we would have preferred to see the government put more emphasis on this initiative. 

Ultimately, while we are generally optimistic about the government’s investment focus, it is still too early to tell how much additional private investment these measures will generate, or how quickly those effects will materialize. Budget 2026 is appropriately cautious in basing its economic outlook on the average of private-sector forecasts rather than assuming large gains for these policies. Instead, it presents a higher-investment scenario where stronger investment and productivity growth improve the budget balance by an average of $3 billion per year over the forecast period. This provides some upside potential to the fiscal outlook if the government’s investment agenda delivers as intended. 

Re-focusing on the need to boost electricity infrastructure 

In an effort to green Canada’s economy while leveraging its advantage as a clean electricity superpower, the government has put a major focus on expanding Canada’s electricity generation capacity and using these advantages to lower emissions and save households money. 

Key elements announced in the budget include efforts to increase the number of EV charging stations, helping to reduce transportation emissions, while also retrofitting homes with heat pumps, to reduce emissions from home heating. Both efforts will help Canada’s economy in two ways, firstly by reducing emissions, while also helping Canadian households save on their heating and vehicle gas consumption costs. 

The budget also outlines other objectives to help with electricity generation and transmission including the Mayo Hydro Facility and the Atlin Hydro Expansion in the Yukon, coupled with broader support for nuclear energy. 

Beyond that, the budget proposes extending the Clean Technology and Clean Electricity Investment tax credit from 2034 to 2040, and to expand eligibility. This expansion is set to cost $2.4 billion in 2027–28, increasing to $36.1 billion by 2041–42. 

Electrification continues to be central to Canada’s economic future. Given Canada’s  advantage of having a relatively clean electricity grid coupled with the expected doubling in electricity demand by 2050 laid out in the budget, policies that capitalize on this natural advantage can enable a cleaner economy, help capitalize on the electricity demands from AI, and reduce energy costs for Canadian households. 

Suspension of fuel tax and top-up to groceries and essentials benefit are temporary and responsible but will help 

Ever since the pandemic, measures aimed at helping households navigate higher inflation and cost-of-living pressures have been a common theme in new provincial and federal budgets. These measures have become less prominent over the past year as governments around the country have increasingly shifted their focus toward encouraging investment and strengthening long-term growth. 

This latest budget recognizes that the war in Iran has had a significant impact on inflation, and that cost-of-living pressures are not going away as quickly as hoped. The government, however, has largely kept these measures targeted and temporary in nature, though whether they remain temporary remains to be seen. 

The two biggest pieces in this budget are the 50 per cent top-up to the Canada Groceries and Essentials Benefit, delivered in early 2027, and the extension of the suspension of the federal fuel tax through to March 31, 2027, which will cost roughly $4 billion and $3 billion respectively, in the current fiscal year. 

Beyond this year, new household affordability measures are modest, an approach we support. Given already steep deficits and the government’s greater focus on investment and defence, household affordability measures should remain temporary outside of a crisis. Where support is needed, it should be targeted toward lower income households, as is the case with the Canada Groceries and Essentials Benefit top-up. 

Significant focus on ending homelessness and boosting infrastructure in indigenous communities 

Discussion in last year’s budget focused heavily on funding and incentives to boost productive capital stock, particularly business investment meant to boost the economy long-term. 

This budget has placed a much larger emphasis on helping build social infrastructure, like affordable housing, roads to remote communities or infrastructure for indigenous communities. 

Outside the Productivity Mega Deduction, infrastructure and housing were among the largest areas of new spending announced in the budget. For housing, there is more than $11 billion to help end homelessness in Canada and increase the supply of affordable housing, along with $1.5 billion to help support non-market housing. There is also a major focus on building infrastructure in Indigenous communities, including over $12 billion for Indigenous infrastructure, and nearly $15 billion to support Indigenous students, children, families and health. 

We see these as important areas for investment, even if they do make up a significant share of the spending from the revenue windfall. Housing shortages and affordability, while improving, remain a major constraint across Canada, while many Indigenous communities continue to face significant infrastructure gaps. Much like the policies aimed at stimulating private investment, these initiatives will ultimately be judged by how quickly the funding translated into projects getting off the ground. 

Culture spending will be a positive for Canadians, but a missed opportunity to find savings given steep deficits 

Capitalizing on a period of significant national pride, this budget places a meaningful focus on Canadian culture. While a noble cause at a time of swelling national pride, some of this spending is difficult to justify given the size of the government’s projected deficits. 

Notable measures include $325 million for celebrating Canada’s 160th anniversary, $680 million for recreational facilities and ice rinks, $511 million in renewing the Canada Strong Pass, $1 billion to support Canadian journalism and media, and investments in the culture sector more broadly. All told, the budget allocates over $5 billion in new spending aimed at promoting Canadian culture, identity and pride. 

These programs can help strengthen national identity and provide economic and social benefits. However, given deficits that remain above $50 billion throughout the forecast horizon, we believe some of these initiatives could have been deferred or scaled back in favour of improving the fiscal position. 

Immigration and skills plans may not meet the budget’s other ambitions 

The budget regularly highlights investments aimed at better aligning education and training programs with the country’s labour market needs. The government notes that more than 1.4 million skilled trades workers will be needed by 2033 to replace retiring workers and meet the labour demands associated with its nation-building agenda, including housing, transportation, energy, defence, and industrial projects. In response, the budget includes a range of measures intended to expand the skilled trades workforce, including a goal of supporting 100,000 new Red Seal certifications across various trades.  

One natural avenue to help fill these gaps is immigration. The Federal government has begun putting its immigration levels plan in the budget, but there is little change. The inflow of immigration is announced for only the next few years, with levels remaining similar to past plans at around 380,000 entrants per year for the next few years with little guidance on the longer-term path beyond then.  

All told, the federal government is doubling down on its immigration plan, which is consistent with its objective of lowering population growth over the next several years. This is also likely to constrain economic growth over that period, especially given retirements continue to rise across the country. This will result in a lower unemployment rate but also more persistent labour shortages and job vacancies in some key sectors of the economy.  

Conclusion: Sticking to the plan with even more deficits 

Overall, Budget 2026 lands with a sizeable fiscal windfall generated by a stronger economic and revenue outlook. Improvements amount to $158.3 billion over the five-year planning horizon. However, the majority of that improvement is offset by $141.8 billion in new measures. As a result, despite a substantially improved revenue backdrop, the overall deficit outlook remains largely unchanged from the Spring Economic Update. 

In our view, the budget gets much right. The continued focus on private investment, addresses one of Canada’s most important long-term economic challenges. The Productivity Mega Deduction, in particular, is a step in the right direction toward making Canada a more attractive place to invest. Spending on electricity, housing, and other infrastructure are other areas where investment was needed. 

The trade-off is that the government has opted to use most of its improved fiscal position to increase spending rather than reduce deficits. Canada’s fiscal position remains sustainable overall, but with deficits staying above $50 billion and debt-servicing costs continuing to rise, the bet on the investment strategy is getting bigger. However, with such a significant revenue windfall, this would have been a good opportunity for the government to save some of that in case it needed to bet bigger later. Regardless, the success of Budget 2026 will depend on whether these measures will meaningfully translate into stronger economic growth, and how quickly those benefits begin to show up. For now, we think it is a bet worth making, but the payoff will take time to judge.

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