Budget Watchdog Projects Larger Deficits Than Forecast in Ottawa’s Spring Economic Update

The Parliamentary Budget Office (PBO) estimates that the federal government’s budget deficit for 2026 will be $4.6 billion higher than it projected in its spring economic update, and that economic growth will also be lower.

The PBO’s June 4 Economic and Fiscal Outlook, which outlines its 2026 projections for economic growth, government spending, and inflation, comes a week after Canada entered a technical recession due to two consecutive quarters of GDP contraction.

While the federal government’s April update had projected a $66.9 billion deficit for the 2025-26 fiscal year, the PBO’s June 4 Economic and Fiscal Outlook forecasts $72 billion “as modest revenue growth is outpaced by growth in expenses.”

While the Liberal government also projected that the deficit would decline to $53.2 billion by 2030-31, the PBO report said it foresees it falling to $58.2 billion, “assuming no new measures are introduced and existing measures sunset as scheduled.”

According to the report, new measures recently announced by the government are contributing to higher deficits, while stronger tax revenues are partially offsetting the increase.

The report also said the federal debt-to-GDP ratio is projected to increase from 41.3 percent in 2025-26 to 42.5 percent by 2030-31, which reflects persistent deficit spending. Each Canadian’s share of the federal debt will rise from $32,138 to $38,943 over that period.

The federal deficit-to-GDP ratio is predicted to decline from 2.2 percent in 2025-26 to 1.5 percent in 2030-31, according to the PBO, but the likelihood of the ratio declining every year until 2030 is “less than 1 percent.” A PBO document from November 2025 said there was just a 7.5 percent chance the ratio would continue declining every year from 2026-27 to 2029-2030.

The government’s Budget 2025 had the twin fiscal anchors of balancing operating spending with revenues by 2029, as well as maintaining a declining deficit-to-GDP ratio. The 2023 and 2024 budgets mentioned a declining debt-to-GDP ratio as a fiscal anchor, but Budget 2025 did not.

The report projects that the debt-to-GDP ratio will rise from 41.3 percent to 42.5 percent over the next five years, and said the odds of this figure declining instead over that period were around 40 percent.

Economic Growth, Inflation

Canada’s economic growth for 2026 and 2027 is also expected to be lower than the PBO projected in September 2025. While the PBO’s previous forecast projected GDP growth of 1.3 percent in 2026 and 1.8 percent in 2027, it now says the economy will grow by 1.1 percent in 2026 and 1.6 percent in 2027.

Amid news from Statistics Canada that the GDP fell by 1 percent in the fourth quarter of 2025 and by 0.1 percent in the first part of 2026, the Liberal government has pointed to optimistic growth projections by the Organization for Economic Co-operation and Development. The June 3 report said Canada’s economy will grow at the second-fastest pace in the G7 for the next two years—at 1.2 percent in 2026 and 1.7 percent in 2027.

The PBO projects Canada’s inflation rate will average 2.6 percent in 2026, with higher commodity prices offsetting “downward pressure from excess supply and easing shelter costs.”

The report also said the Bank of Canada is likely to hold its key interest rate steady at 2.25 percent in 2026, before raising it to 2.5 percent in mid-2027. It said the economy faces downside risks to inflation of heightened trade uncertainty, reducing business investment and economic growth, as well as upside risks to inflation of higher energy prices from the war in Iran increasing prices.

The Bank of Canada chose to keep its rate at 2.25 percent in April for the fourth straight meeting, and said Canada’s economy faced both downward inflationary pressure from potential U.S. tariffs, and upward inflationary pressure from higher oil prices.