Six takeaways from Canada’s federal budget

Canadian Prime Minister Mark Carney presented his first federal budget, a blueprint for how he plans to deliver on his promise to make Canada’s economy the strongest in the G7.

The ambitious plan, seen as a key test for the new leader and former central bank governor, is as much a political document as a spending blueprint.

He warns that Canada is going through an era of “major change” not seen since the fall of the Berlin Wall, which is underscored by its rapidly changing relationship with the United States, once the country’s closest ally.

“There are some headwinds on the horizon,” Finance Minister François-Philippe Champagne told reporters in Ottawa on Tuesday. “That’s why we need a strong response.”

Here are six takeaways from the spending plan.

The budget includes billions of dollars in spending that could increase Canada’s deficit to C$78.3 billion (£42.6 billion) – the second largest on record.

Carney and Finance Minister Champagne defended the massive spending plan, which will total C$280 billion, as an investment to help boost Canada’s global competitiveness, and said the strategic infusion of funds will attract C$1 trillion in investment to Canada in the next five years.

It will fund a wide range of areas: highways, ports, electrical grids, digital corridors, defence, housing and initiatives promised to boost Canada’s productivity.

But Carney also warned Canadians of the “sacrifices” necessary in his plan to transform the economy, as the budget expects to cut total spending by C$60 billion in the next five years.

This comes in part from the reduction of 40,000 public sector jobs by the end of 2029 – about 10% of the workforce will be reduced through attrition, job cuts and widespread adoption of artificial intelligence.

Federal departments could see cuts of up to 15% in the coming years, expected to represent savings of more than C$44 billion, according to the budget.

For the first time in Canada, the fiscal plan distinguished between government spending through operating spending – day-to-day government spending – and capital investment, defined as financing that should help the economy grow.

Due to its proximity and close cultural ties, the United States has long been Canada’s largest trading partner, with about 70% of trade moving south.

In the wake of Trump’s tariffs and the uncertainty that has accompanied them, Canada is looking to Europe and Asia, with the goal of doubling non-U.S. exports over the next decade.

Carney’s budget proposes millions in support for companies developing new export markets, including assistance with legal expenses and market research.

There is also reference to growing cultural ties with Europe, such as an exploration of Canada’s participation in the Eurovision Song Contest.

With some companies hoping to save on trade costs by moving facilities south to the United States, Carney is also proposing a range of initiatives to make Canada more attractive. This includes a package of measures that would reduce Canada’s marginal effective tax rate to 13.2% from 15.6%.

“This is a great message to investors,” Champagne said, noting that the price will be lower than its counterpart in the United States.

With many American universities facing uncertain funding under the Trump administration, the spending plan includes C$1.3 billion to attract international researchers to Canadian universities, and money to support their research.

Like other resource economies, Canada has struggled to balance its need to increase production of commodities such as oil and gas while maintaining its climate commitments. Oil-rich provinces such as Alberta have put strong pressure on the federal government to remove some environmental initiatives, arguing that they harm development in the region.

Carney’s fiscal plan proposes to make Canada a “clean energy superpower” by supporting the development of low-emission energy projects such as nuclear reactors and low-carbon liquefied natural gas.

At the same time, the government is seeking to develop carbon capture and storage technologies, as well as strengthen regulations on methane.

It also reaffirms its commitment to an industrial carbon tax, describing it as a policy that “achieves more emissions reductions than any other policy.”

To encourage investment, the Carney government says it will work with provinces on what carbon pricing will look like in the long term to provide more stability for businesses.

These initiatives would replace caps on oil and gas emissions introduced by Carney’s predecessor, former Prime Minister Justin Trudeau.

All of this is described under the Climate Competitiveness Strategy, which the Carney government says is “a key pillar of Canada’s plan to become the strongest economy in the G7.”

Carney pledged that Canada would significantly boost defense spending to meet NATO’s target of 2 per cent of GDP this year and 5 per cent by 2035, as the country grapples with an aggressive Russia and a more powerful China, as well as threats to Arctic security.

The budget sets C$81.8 billion in defense spending over the next five years, the largest amount in decades for a country that has long lagged behind in military financing and faces procurement difficulties.

The spending includes pay increases for the armed forces, funding for digital infrastructure, and plans to develop Canadian supply chains.

There is also C$182.6 million over three years for the Department of Defense to establish space launch capability.

Another focus is the Arctic. The Carney government says it is looking to develop all-weather dual-use infrastructure projects in Canada’s north that can be used for economic and security reasons, and has committed C$1 billion over four years to the endeavour.

Carney’s first act as prime minister was to get rid of one of his predecessor’s signature climate policies, the consumer carbon tax, which had become politically unpopular.

He has continued to break with Trudeau, who has been in power for nearly a decade, scrapping the mandate for electric vehicle sales and scrapping a proposed increase on Canada’s capital gains tax.

The budget shows another big gap regarding immigration.

Trudeau dramatically increased the number of immigrants allowed into Canada, before announcing a sharp cut last year when concerns emerged about the growing numbers of people and potential pressure on housing and social services.

Carney’s budget sharply cuts targets for new temporary residents from 673,650 to 385,000 next year, and 370,000 in 2027 and 2028. There is also a one-time measure to accelerate the transition of up to 33,000 work permit holders to permanent residents.

Other Trudeau-era policies that have now been scrapped include the “2 Billion Trees” program announced in 2019, which saw only about 160 million trees planted by late 2024, and the end of the 2022 luxury tax on vehicles and planes over C$100,000 and boats over C$250,000.

The latter “cost more to administer” than it raised in tax revenue, Champagne said.

The Trump administration’s trade war is hitting a wide range of Canadian businesses, imposing a across-the-board 35% tariff on Canadian goods not covered by the FTA, along with sector-specific duties on steel, aluminium, lumber and automobiles.

The Carney government wants to spend C$5 billion over the next five years to help these sectors, including C$1 billion to fund the steel industry’s shift toward new business lines.

It is also launching a C$10 billion loan facility, aimed at supporting “successful Canadian companies” as they weather the tariff storms. The first beneficiary of the loan is Algoma Steel Inc., an Ontario-based production company that has faced layoffs since the U.S. tariffs were imposed.

The proposed Buy Canada policy would also prioritize the procurement of Canadian goods and suppliers for government-funded projects.

Part of Canada’s response to the tariffs will be funded by revenue it raised from its countermeasures to the U.S. tariffs. As of October 2025, Canada has generated $6.5 billion in total revenue from those measures, according to the budget.