Desjardins Predicts Federal Deficit Will Be Highest in 3 Decades

Desjardins forecasts that the upcoming budget on Nov. 4 could include the largest federal deficit in the last 30 years, driven by increased spending and lower revenues.

A report release Oct. 22 by Desjardins economist Randall Bartlett, titled “Federal Budget 2025 Preview: A Budget Like No Other,” estimates the federal deficit could exceed $70 billion, which it notes is almost double the last official projection in the Fall Economic Statement of 2024. The report also indicates some sources have said the deficit could possibly reach $100 billion.

“Deficits could rise to levels not seen in decades outside of a recession or pandemic, and the debt-to-GDP ratio is likely to be headed in the wrong direction,” Bartlett wrote.

The report notes that since Prime Minister Mark Carney took office in the spring, Parliament has featured “a barrage” of new legislation, tax cuts, substantial increases in defence and other spending, and a push to find savings in federal operating expenses.

Bartlett said these actions are expected to equate to bigger deficits and higher debt, putting federal finances on “an unsustainable path.” The upcoming federal budget will be “truly unprecedented,” not only because of its delay, but also because of its planned spending, tax cuts, and savings, he wrote.

Parliamentary Budget Officer Jason Jacques has also called Canada’s fiscal trajectory “unsustainable” as he projected the federal deficit would climb to $68.5 billion in 2025-26.

Ottawa’s commitment to increase defence spending to meet NATO’s target of 2 percent of GDP by the end of the current fiscal year is the “main reason” the federal deficit is expected to be so large, the report says. It notes that tax cuts and other spending commitments, such as those for infrastructure, housing, and tariff relief programs, are also likely to contribute.

Savings

Bartlett also said the deficit would likely be larger if it weren’t for planned savings. Finance Minister François-Philippe Champagne sent a letter to his cabinet colleagues in July asking them to find savings in their departmental budgets over the next three years, starting with a 7.5 percent cut in fiscal year 2026-27, a 10 percent cut in 2027-28, and a 15 percent cut in 2028-29.

Champagne has also said Canada’s public service would need to go through “adjustments” as Ottawa looks to reduce its spending ahead of its budget release, noting “a lot” of people were added to the public service during the pandemic period. Federal ministers have said the budget will carry a “substantial” deficit and “generational investments.”

Carney has promised to rein in spending in the upcoming budget and has cited concerns about the growth in government spending relative to Canada’s economic growth. He has said his government will “finding efficiencies” in spending and that the budget would have both an “austerity” aspect and large federal expenditures to stimulate economic growth.

Meanwhile, the Desjardins report indicates lower revenues will also contribute to the anticipated deficit. Bartlett said removing counter-tariffs on U.S goods and cutting taxes will be positive for the economy, but he noted the benefits may not be enough to offset the revenues that will be lost.

New Budgetary Framework

The Liberal government will present a new budgetary framework starting this year, which includes moving the federal budget release date to the fall, ahead of the new fiscal year, and moving the government’s fiscal update to the spring. It will also separate day-to-day operational spending from capital investment in all federal budgets moving forward.

Champagne said separating operational and capital spending will guide decisions and prioritize investments like major projects, housing, clean energy, and infrastructure, and will provide a “clearer picture” of Canada’s investments.

Bartlett said the government should provide assessments of the expected return on capital investments and compare these with the cost of borrowing for a “better” assessment of whether investments will deliver value for their cost. He noted capital budgeting “poses communication and market risks.”

“Infrastructure projects typically involve significant upfront spending, with returns that aren’t guaranteed or that only materialize over longer time horizons,” Bartlett wrote in the report. “As such, debt-to-GDP metrics may worsen in the near term, even if long-run benefits are positive.”

During the last federal election, Carney’s platform projected there would be a deficit of $62.3 billion in the 2025-26 fiscal year, which was $20 billion more than projected in the 2024 Fall Economic Statement.

Noé Chartier contributed to this report.