Federal Deficit Could Grow to $117 Billion by 2035: Report

Canada’s current fiscal trajectory will lead the federal deficit to grow to $117 billion by 2035, according to a new report.

While the federal government’s latest budget projects a deficit of just $57 billion by 2029, the report by public policy think tank MEI said that increasing elderly benefits, transfers to provinces, and military spending would put the figure much higher.

“Together, these pressures will cause overall federal spending to grow faster than revenues in the years ahead unless policy adjustments are made,” the report said.

Economists Trevor Tombe and Gabriel Giguère wrote that the Canadian government’s commitment to spend the equivalent of 3.5 percent of GDP on core defence expenditures by 2035 would mean an increase of $100 billion by that year.

Additionally, federal spending on elderly benefits is projected to rise by $45 billion over the next decade. The authors said this will be a “considerable source of expenditure pressure” as Canada’s population ages and more people become eligible for benefits.

Major transfers to provincial and territorial governments, equalization payments, and interest payments on the debt are also projected to outpace government revenue.

To balance the budget by 2035, the federal government must slow its spending relative to revenue, the authors said. With the Canadian economy projected to grow at an average nominal rate of 3.8 percent per year, revenue will grow at around the same pace.

However, elderly benefits are projected to grow 4.9 percent per year, and transfers to the provinces will grow at 3.6 percent. Non-defence-related direct expenses are projected to shrink by 1.2 percent per year.

The report said there are “no easy options” for balancing the budget before 2035, as “tax increases alone are certainly not a credible option.” The GST would need to gradually rise from 5 percent to 12.5 percent to balance the budget, which the report said is “far beyond a reasonable policy option.”

The report said the federal government should maintain the pace of non-defence direct expenditure reductions until 2035, which would reduce the projected 2035 deficit by nearly $51 billion.

It should also slow the growth of elderly benefits to about 2.5 percent per year beyond 2029, which would lower the deficit by $19 billion. Slowing provincial transfers to 3 percent per year after 2028 would also reduce the deficit by almost $6 billion, while reducing non-defence direct expenses would lower the deficit by $24 billion.

In its latest budget, the federal government did not promise to balance the budget, but pledged to balance its operating expenses with revenues by 2028-29. Operational spending is defined as day-to-day costs, such as public servant salaries and benefits given to Canadians and provincial governments.

However, the Parliamentary Budget Office said the budget used an “overly expansive” definition of capital investments that overstates capital spending by $94 billion, and the government would not be able to meet its promise of balancing operational spending by 2028-29 if it used a stricter definition.

While the 2025 budget includes new spending such as $81.8 billion for the military over five years, $10 billion to address the rising cost of living, and $7 billion for “additional actions to support Canadians,” it also says the government will find $13 billion in annual savings under its current comprehensive expenditure review.