Canada Set to Add $119 Billion to Deficits as Growth Stalls

Mark Carney Photo by SeongJoon Cho /Photographer: SeongJoon Cho/Bloo

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(Bloomberg) — Canada is set to rack up larger deficits under Mark Carney, who used his first budget as prime minister to inject tens of billions of dollars into defense, housing and major projects intended to help the country increase exports to overseas markets.

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Carney and Finance Minister François-Philippe Champagne unveiled a budget on Tuesday that foresees an extra C$167.3 billion ($118.7 billion) in total budget deficits over five years, compared with the last fiscal projection under Justin Trudeau.

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The deficits are fueled by the government’s push to direct more federal money into capital projects, but also by a softer outlook for tax revenue. That’s because of an earlier income tax cut and weaker economic growth as Canada’s export-driven economy copes with tariffs from the US and China.

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Carney promised a “bold” budget to tackle what he has called a crisis – the trade war launched by President Donald Trump and the resulting friction between Canada and the US, its longtime ally and No. 1 trading partner. The two countries had been in discussions for months about tariffs, and Canada made a number of concessions to the White House, including dropping most of the retaliatory tariffs that Trudeau had implemented on his way out in March.

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But last month Trump abruptly called off talks, irked at a television ad campaign by the provincial government of Ontario that used an old speech by Ronald Reagan to make an argument against tariffs. Carney apologized to Trump for the ad.

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The economic outlook is soft. Last week, the Bank of Canada cut its forecast for economic growth to a little over 1% for this year and next. In light of that, some analysts were surprised Carney didn’t go further in the budget to stimulate growth. The government announced few significant changes to corporate taxes other than an extension of writeoffs designed to make it cheaper for companies to invest.

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“The deficits are roughly in line with expectations, and markets are likely to receive this budget well,” Randall Bartlett, deputy chief economist with Desjardins, said in an interview. “But they didn’t go far enough to make the transformative impact to the economy and investments they had telegraphed.”

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That caution may reflect the fact that Carney’s government doesn’t have a majority in the House of Commons and needs help from at least one opposition party for the budget to pass.

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Canada bonds rallied across the curve, and yields on the government two-year note were down 1.9 basis points as of 4:18 p.m. Ottawa time. The loonie held losses against the greenback to trade at C$1.4103 per US dollar.

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For the fiscal year that ends in March, the deficit is pegged at C$78.3 billion, representing 2.5% of Canada’s gross domestic product. That’s roughly in line with the median estimate in a Bloomberg survey of economists, though some analysts had predicted a shortfall as high as C$100 billion.

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Overall, it’s more of an “incremental” budget than the game-changer Carney had promised, said Theo Argitis, senior vice-president with the Business Council of Canada, a lobby group that represents the CEOs of many of the nation’s largest companies.