The Parliamentary Budget Office (PBO) has released its latest report on Budget 2025, and it questions some of the government’s key fiscal assumptions.
Interim PBO Jason Jacques said in September that his office estimated the budget’s projected deficit would be $68.5 billion, adding that Canada’s fiscal trajectory was “unsustainable” and “shocking.” The deficit for 2025 given in the Nov. 4 budget is $78.3 billion.
While the PBO’s Nov. 14 report uses less charged language to describe the deficit, and even says the government’s finances are “sustainable” over the long term, it raises questions about several numbers outlined in the budget.
Here are seven takeaways from that document.
Definition of ‘Capital Spending’
During the last federal election, Prime Minister Mark Carney said he would separate the government’s operating and capital budgets, and make major changes to each. He said the operational budget would be balanced within three years.
Carney defined capital spending as “anything that builds an asset, held directly on the government’s own balance sheet, [or] a company’s,” which includes investments in machinery, equipment, land, and buildings, as well as incentives to support the formation of private sector capital.
The Conservatives say that this initiative is an attempt to “cook the books with a sneaky accounting trick” and hide some expenditures, while the Liberals say the move is to allow more transparency and better funding prioritization.
The PBO said in its report that the government’s definition of capital investments outlined in the budget is broader than that used in the United Nations System of National Accounts, which is used by most countries. The report said it would not define corporate income tax expenditures, investment tax credits, or production subsidies as capital spending.
Doubts About Balancing Operational Spending
The PBO report said if the government were to have used the PBO’s definition of capital investments in the budget, which includes only “capital transfers, capital amortization, and selected measures targeting the housing stock,” then capital spending would be 30 percent lower from 2025 to 2030.
Capital investments would thus total $217.3 billion during that period instead of the government’s estimate of $311.5 billion. For the 2024–25 fiscal year, capital spending amounts to $25.8 billion under the PBO’s definition, compared to $32.2 billion under Ottawa’s definition.
The PBO said under this definition, “day-to-day operating balance after new measures would remain in a deficit position.” The report added that given the “subjectivity” involved in defining capital investments, the PBO is recommending the government establish an independent expert body to determine which spending categories qualify as capital investments.
‘Unlikely’ Deficit-to-GDP Fiscal Anchor Will be Respected
In addition to the fiscal anchor of balancing operating spending with revenues by 2029, the budget proposes to maintain a declining deficit-to-gross GDP ratio. The previous Liberal government budget had a fiscal anchor of maintaining a declining debt-to-GDP ratio, but the PBO said Ottawa “abandoned” this anchor.
The PBO said it conducted “stress testing” based on historic economic and fiscal shocks, and found there was a 7.5 percent chance that the deficit-to-GDP ratio would decline every year from 2027 to 2030, saying it is “unlikely” that this fiscal anchor will be “respected.”
However, the same stress testing found there was a 35.4 percent chance that the federal debt-to-GDP ratio will be lower in 2029–30 compared to its 2024–25 level, with more than half of the distribution of simulated debt ratio paths lying “above the budget projection in every year of the planning horizon.”
Canada’s net debt-to-GDP ratio in 2024–25 is estimated in the budget to be 13.3 percent. The Liberal government has repeatedly noted that Canada has the best net GDP-to-GDP ratio in the G7 and one of the smallest deficit-to-GDP ratios in the G7.
‘Sustainable’ Fiscal Policy, But ‘Limited’ Fiscal Room
The PBO document gives a rosier view of Canada’s finances when it comes to the country’s long-term debt-to-GDP ratio, saying it is projected to remain “relatively stable over the next 30 years.”
The PBO said Finance Canada has projected the federal debt-to-GDP ratio will rise from its initial level of 41.2 percent in 2024–25 to 43.6 percent in 2033–34, but decline to 37.2 percent in 2055–56. The PBO said this is in “contrast to the sharp declines projected in budgets and updates over the last 3 years.”
However, the PBO said there would be “limited fiscal room to reduce revenues or increase program spending” while ensuring the federal debt-to-GDP ratio is lower by 2055. “This contrasts with fiscal policy settings over the last 3 years that would have provided more fiscal room to address future challenges and risks,” it said.
Questions About Government Savings
The budget states that the government will find savings under its current expenditure review initiative, and will save $13 billion annually by 2028–29, which will total $60 billion over five years alongside other savings and revenues.
While many government departments have been asked to meet up to 15 percent in savings targets over three years, the budget shows that 11 departments are required to find savings lower than 15 percent, including those critical to national security, like the RCMP, the Canadian Border Services Agency (CBSA), and the Department of National Defence (DND).
These agencies—in addition to several dedicated to delivering programs for women and indigenous Canadians, advancing research, and attracting and retaining the top research—had a savings target of just 2 percent.
The PBO said that in order to be consistent with Organisation for Economic Co-operation and Development best practices, spending reviews should “clearly define the scope, methodology, and expected savings,” as well as the anticipated impacts on personnel and service levels.
The PBO said while the budget outlines the scope and methodology used to identify savings and gives “high-level outcomes” associated with the planned savings, it does not have details regarding the impact on individual programs within each government organization, nor does it contain the “potential service level impacts.”
“In the absence of such detail, it is difficult for PBO to assess the fiscal and operational risks to achieving the stated savings,” the PBO said. It added that it has requested more information from several organizations, and intends to publish a follow-up analysis.
Concern About Credit Rating
When the PBO raised concerns about Ottawa’s abandonment of its previous fiscal anchor of reducing the debt-to-GDP ratio, the watchdog noted that the 2024 Fall Economic Statement said this anchor was important “not only for fiscal sustainability, but also to preserve Canada’s AAA credit rating, which helps maintain investors’ confidence and keeps Canada’s borrowing costs as low as possible.”
Two days after the release of Budget 2025, the Fitch Ratings agency said in a statement that the budget underscored the “erosion” of Canada’s finances, and increasing debt levels could put “pressure” on its current AA+ credit rating.
The agency also said while the budget outlined new fiscal anchors, the Canadian government has a “track record of upward deficit revisions, with subsequent budget updates consistently worse than prior projections.”
Fitch had previously downgraded Canada’s credit rating from “AAA” in July 2020, citing the effects of the pandemic on government finances. However, other agencies like Moody’s, Morningstar DBRS, and S&P Global Ratings have kept Canada’s rating at the highest score of AAA.
Attention by Federal Parties
The Conservative Party, which has called for the Liberal government to appoint Jacques to a full seven-year term as the PBO instead of a six-month term, immediately seized on the PBO’s report on the government’s budget.
“No wonder Carney wants to fire the Parliamentary Budget Officer,” Conservative Leader Pierre Poilievre said on X. “Canada’s top Budget Watchdog today published a brutal report exposing how Carney’s costly credit card budget cooks the books, doubles the deficit and promises fake savings.” The government has begun a hiring process to appoint a permanent PBO.
Speaking at a Chamber of Commerce of Metropolitan Montréal event on Nov. 14, Carney was asked about the “generational debt” projected in Budget 2025. Carney pointed to Canada’s deficit-to-GDP ratio being the second lowest among G7 countries and said that starting from next year it is “certain” it will be the lowest.
Regarding the debt-to-GDP ratio, Carney also said Canada’s is the lowest in the G7. Ottawa uses the net debt-to-GDP ratio metric, which includes pension funds assets, to make this argument. Using the metric of gross debt-to-GDP ratio excluding pension assets, Canada has the third-lowest debt-to-GDP ratio in the G7.
“From next year, all deficits will be for investment. For example, probably a quarter of the deficit will be because of private investments, because of the super tax deduction,” Carney said. This deduction outlined in the budget would allow businesses to write off the cost of new capital investments faster, which Ottawa says would make it more attractive for companies to invest in machinery, equipment, and technology.
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