Public hope for private action: How much does Canada’s budget move the needle on prosperity?

Geopolitical tensions, trade wars and a change in posture from the United States have ushered in new thinking in Canada. The days of being a beneficiary of a reliable, transparent and predictable operating environment promised by U.S. leaderships looks to be behind us. Instead, the need for a self-determined destiny has taken national attention.

As part of this changing world, Canadians, both politicians and the broader population, have a renewed focus on finding our place in the world. Canada is in a unique position—we are large by global standards but pale in size when compared to the United States, European Union, China or India. In short, Canada is a classic middle power, in a world with increasingly unreliable large powers. Our path needs to be based on this reality.

The federal government in many ways has been leading the charge on building a new vision. It was a thread that became omnipresent during the election, and the victorious Liberal party promised a transformational platform built around enhancing our sovereignty, diversifying the countries we work with, making us an attractive place to invest, while keeping our finances on a sustainable path.

Given the transformational ambition, when the budget was released in November, it became natural to ask if it delivered. Exactly how transformational it is will become more apparent over time. However, here we assess how the budget may improve our self-determination and prosperity using five pillars:

Re-Focusing on Our Strengths: Building our Sovereignty

Budget 2025 emphasized the importance of Canada’s sovereignty and security. The government signaled a desire to reduce dependency on foreign partners by reinforcing domestic supply chains and unlocking internal trade. Two cornerstone measures stand out—the Buy Canada Policy, which directs federal procurement toward Canadian suppliers and materials, and the One Canada Act, which aims to eliminate interprovincial barriers. Together, these steps can enhance self-sufficiency, attract investment and innovation, and position Canada as a trusted global partner.

Defence spending will serve as a foundation for strengthening Canada’s sovereignty and security, with the government aiming to spend 5 per cent of GDP on defence by 2035—the new NATO benchmark. While we would have liked to see more specifics on how the new cumulative spending of $82 billion over five years for the military will be allocated, the signal is clear: military spending makes up significant part of the government’s long term investment strategy. If executed properly—by using these funds to support domestic capacity— this plan can do more than strengthen security; it can attract capital, drive innovation, and create thousands of jobs across the country. However, the success will ultimately depend on what sort of multiplier this defence spending will have on the economy. Direct military spending, when limited to purely military purposes, tends to have a low multiplier.

To solve the challenge of getting maximum value for our dollar, Budget 2025 aims to strengthen Canada’s procurement impact through the Defence Industrial Strategy. A key component is the Defence and Security Business Mobilization Program, backed by $1 billion in 2025–26 to provide loans and advisory services to help small and medium sized companies contribute to national defence and security objectives. While the intent is to build capacity and strengthen Canada’s defence procurement, the success of the Defence Industrial Strategy will hinge on timely execution and whether domestic firms can realistically scale to meet complex defence requirements—an outcome that remains far from certain. Regardless, the effort to build national champions is welcome.

The budget also included a focus on developing Canada’s critical minerals industry. These minerals have become weapons in trade wars, with China using its position as a dominant source of many critical minerals to help in its negotiations with the United States. The budget has made some progress on Canadian development, including the Major Project Office being forwarded several proposals on key mines, funding for Natural Resource Canada to directly support projects, and expansion of the Critical Mineral Exploration Tax Credit along with broader funding for infrastructure projects. While development of these resources has been elusive for years, the budget, and government policy more broadly, has clearly recognized that these minerals can put us in a better negotiation position.

As a whole, the strategy of protecting our sovereignty while fostering economic growth is a positive step made in Budget 2025. We would have liked to see greater clarity on details of the new military spending and a more concrete plan to unlock the mining sector, but we remain cautiously optimistic about the effectiveness of these measures. If implemented correctly, they represent meaningful progress toward building a more resilient economy over the long term.

Clearing the Path: Diversifying Trade and Relationships

Canada has long been dependent on the U.S. as its main trading partner, which makes sense given America’s status as the world’s largest economy and its position on our doorstep. This proximity has long benefited Canada: as global trade has raised all boats, trade with the U.S. has naturally boosted prosperity, but also increased our reliance. In 2024, over 75 per cent of Canada’s goods exports went to the United States.

Over the past year, we have been reminded that this reliance comes with risk. The move away from a rules-based order means that our exporters can become a victim of unpredictable American policy. We have also learned that there is an asymmetric dependency: we rely on the American market much more than they rely on ours.

The budget was never going to immediately diversify trade. In practice, companies already have established buyer-supplier relationships that, in many cases, have long been dependable. Further, with CUSMA compliant exemptions for much of Canada’s trade and higher U.S. tariffs on other countries, exports for many Canadian firms have become more competitive, especially for products that the U.S. relies on imports for.

Despite this, the budget has made incremental progress. The most obvious success for moving the needle on trade is investing in port infrastructure through the Major Projects Office. The list of major projects produced by the federal government include a clear focus on trade-oriented infrastructure covering all three coasts. While it will take time to build ports and other infrastructure that are oriented for coastal trade rather than intracontinental trade, a focus on these projects will ultimately help support trade diversification over the long term.

The $5 billion over seven years for trade diversification corridors is a step in the right direction by building capacity to export to new destinations, but the funding itself likely isn’t enough. Like many parts of the budget, the program depends on catalyzing private investment to support these new initiatives, and the responsibility to find partners outside the U.S. remains the role of private firms. The $1 billion for the Arctic infrastructure is also a first step in diversifying trade and opening access to the Arctic. There are also investments announced in airport infrastructure, which will help at the margin.

The budget undoubtedly made good first steps on trade diversification, especially with the focus on infrastructure, but we would have liked to see more incentives to diversify export markets. More policy action including expanding trade missions, credits to attend trade shows, marketing support for new markets, export financing and tax benefits for exporting outside the U.S. would all help diversify exports further. Our concern is that firms may become complacent if U.S. policy resets, and the budget missed an opportunity to create greater incentives to prevent that.

Government Commitment for Private Action: Attracting Capital Investment

Attracting investment is clearly a focus of this government. Business investment as a share of GDP in Canada was already lagging that of the U.S. for over a decade. Given that recent trade negotiations by the U.S. administration have focused on attracting investment into the U.S. in exchange for tariff relief, Canada’s competitiveness for attracting capital has been further weakened.

The government is seeking to address or competitiveness for international capital in two ways. First by reducing the regulatory burden on many projects, especially those deemed to be nation building. And second, by adding incentives for projects that are also important but not given a goal as lofty as nation building.

The biggest initiatives here are the Build Canada Act and the Major Project Office. It’s clear that the government itself is focused on projects related to port infrastructure, electricity generation and mining. These projects will undoubtedly boost Canada’s trade potential, both internally and externally, expand our importance in the global supply chain through our mining projects, and allow us to more easily green our economy by increasing our electricity output. They also come on the heels of significant investments to position Canada as a key player in manufacturing batteries for electric vehicles.

Much of the Build Canada Act and Major Projects office boils down to industrial policy, which has had mixed success over time; the latest example being large government investments in EVs, which are now a questionable bet. More broadly, though, Canada needs to find a way to incentivize more private investment that isn’t led by the government, and the way to do that is by making the country a more attractive place to invest.

There is some movement in improving attractiveness, such as the accelerated investment incentive, and favourable capital cost allowances for companies with good emissions performances. But, as the budget shows, Canada’s marginal tax rate on capital gains remains higher than the U.S. for many industries, and Canada itself has significant variation between industries. Further, government policy has not been friendly to investment for a long while now, and so one budget will be unlikely to change the minds of foreign firms that find Canada a difficult place to invest in. It will take time to rebuild our international reputation.

Housing was another area of focus in the budget. One of Canada’s key advantages compared to many other countries, and one reason why services trade has been such an area of growth in recent years, is our ability to support strong levels of immigration. However, our inability to build enough homes has now limited our ambitious immigration plans. The Build Canada Homes program could accelerate home building and be a catalyst to broader growth if successful. While not productive investment in the traditional sense, given that it is required to further grow our population, housing can be thought of as a capital investment in a service-oriented economy—we need to have places for people to live so that they can contribute to the economy.

Overall, though, the budget largely hopes to catalyze private investment through changes in our attractiveness as a place to invest. The budget itself notes that it doesn’t compete favourably with the One Big Beautiful Bill Act in the U.S., and the incentives beyond the selected list of projects remains limited. And, most importantly, Canada has a building problem that has yet to be solved. Productivity in construction remains weak, and growth in investment will struggle to take hold if there isn’t a corresponding strategy to bring in the workers to get all these projects built. Even today, with private business investment and home building languishing below ideal levels, the country has labour shortages in construction. Those labour shortages will need to disappear to fulfil any ambitious agenda.

Looking for the Right Skills: Human Capital

Canada’s labour productivity growth has been weak for most of this century, a challenge shared by most advanced economies. Since 2000, real GDP per hour worked has risen at an average annual rate of 0.7 per cent, less than half its pace from the previous twenty years. This persistent underperformance has constrained economic growth and limited improvements in living standards, underscoring the need for investment in innovation, skills, and technology adoption.

The federal government is largely targeting productivity gains through infrastructure spending, faster approvals for major projects, and a more competitive tax environment. Building AI infrastructure is also part of the strategy to boost productivity, including the development of a Sovereign Canadian Cloud to support access to AI compute capacity for public and private research.

While we welcome these measures, we are concerned that the budget’s focus on building physical capital has left skills development on the backburner. This imbalance is particularly concerning given the budget aims to stimulate hundreds of billions of dollars in the construction sector, one of the weakest industries for labour productivity growth in recent years. Further, labour shortages in construction persist, and the pressure will intensify as retirements accelerate.

Rather than a focus on upskilling Canadians, the government aims to improve foreign credential recognition and recruit international talent to align with what is needed to drive growth in strategic industries. Measures aimed at equipping current residents with in-demand skills were modest—such as expanding the Union Training and Innovation Program and investing $500 million over five years to support employer-led retraining.

In our view, Budget 2025 should put more emphasis on building our labour force to complement the capital plan. Potential actions include reforming post-secondary programs to better match labour demands and making the apprenticeship system shorter and less rigid to improve completion rates. Without a stronger focus on workforce development, the government’s ambitious plan for building the Canadian economy faces significant risks.

The Future Needs to be Bright: Fiscal Sustainability

Budget 2025 delivered a debt financed growth strategy: invest now to strengthen the economy, and the payoff will be stronger revenues that will balance the budget down the road. A concern many Canadians will have with this approach is the cost, as the government is projecting deficits over $50 billion in each of the next five years.

To emphasize that much of the new spending is in the form of investment, the budget introduced a “Capital Budgeting Framework” that separates operational and capital expenditures. Between the planned reduction in the public service and the comprehensive expenditure review, the government aims to eliminate the operational deficit by 2030. In our view, this is a communication tool that sheds some light on government priorities but does not alter the fact that government is projecting steep shortfalls for the foreseeable future.

To their credit, the government showed prudence by not accounting for new revenue generated by its new investment and related policies. We think this is the correct approach. It takes time to attract private investment and get things built, even for projects that will be streamlined in the Major Projects Office. Meanwhile, the full impact of policies designed to spearhead private investment might take years to materialize, and their scale is difficult to predict. For that reason, the government rightfully avoided relying on these measures to significantly improve its revenues within the five-year planning horizon.

Overall, despite the worsening deficit and rising debt, Budget 2025 did balance its ambition without putting the countries finances on a significantly worse footing. The government expects its debt-to-GDP ratio to hold around 43 per cent in each of the next five years. That is high by historical standards, though still well below most advanced economies. Rating agencies have flagged potential pressure on Canada’s credit rating, though we think the fiscal position is strong enough to absorb the announced spending without immediate risk. That said, the government must tread carefully, as its margin for error is shrinking. Meeting its spending targets—something that it has struggled with for much of the past five years—is essential to remaining fiscally sustainable.

Still Depending on the Private Sector: How the Budget Meets the Moment

The budget has identified the key issues for Canada to build its presence in the world. However, direct progress on reaching those lofty goals remains limited. The government has put more emphasis on industrial policy to try to incentivize private sector investment, but the reliance remains on the private sector to make it happen.

At the same time, the new spending being announced is significant, even with large savings from a reduction in the public service. Much of that new spending is tied to defence, which helps us align to our NATO target and helps to strengthen our sovereignty, but the economic multiplier on defence spending, especially equipment purchases, tends to be low. To improve that multiplier, military spending must meet broader goals, such asbuilding international relationships, supporting our innovation agenda, and increasing our self sufficiency.

Overall, the budget was a step in the right direction of thinking about Canada with a grander vision. There is a clear strategic focus on making Canada self-reliant, with a focus on infrastructure, building our resource industries and expanding our military. These will all improve our posture in the world. However, a more thorough plan for catalyzing investment, both residential and non-residential, through getting the right workers in Canada and building enough incentives for firms to locate in Canada rather than the U.S. is likely needed. In all, time will tell if this budget met the mark, but if progress is limited in the next year on getting businesses to invest, diversify and innovate, next year’s budget will likely need to come with a significantly higher price tag.

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