Budget Watchdog Raises Doubts That Feds Will Balance Operational Deficit in Three Years

Interim Parliamentary Budget Officer Jason Jacques waits to appear before the Senate Banking, Commerce and the Economy committee in Ottawa on Oct. 2, 2025. The Canadian Press/Adrian Wyld

The Liberal government’s budget has an “overly expansive” definition of capital investments that overstates capital spending by $94 billion, and would not be able to meet its promise of balancing operational spending by 2028-29 if it used a stricter definition, according to the Parliamentary Budget Office (PBO).

The PBO said in its Nov. 14 budget analysis report that the government’s definition of capital investments outlined in Budget 2025 is broader than that used by some other countries, such as the United Kingdom.

Ottawa’s latest budget defines corporate income tax expenditures, investment tax credits, and production subsidies as capital spending. The PBO said it would not define these categories as capital formation, as government spending under the categories would not necessarily reflect how much new private-sector investment would occur in Canada’s economy as a result.

According to the report, if the government were to use the PBO’s definition of capital investments, then spending in that category would be 30 percent lower from 2024-25 to 2029-30. Capital investments would thus total $217.3 billion during that period instead of the government’s estimate of $311.6 billion.

“Moreover, based on PBO’s definition, the day-to-day operating balance after new measures would remain in a deficit position,” the Nov. 14 report said.

The report said that given the “subjectivity” involved in defining capital investments, the PBO is recommending that the government establish an independent expert body to determine which spending categories qualify as capital investments.

The federal government did not promise to balance the budget, but to balance operating spending 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, while capital spending is any expenditures or tax incentives that “contribute to public or private sector capital formation,” such as those that relate to infrastructure and other fixed assets.

The Nov. 4 budget projected a deficit of $78.3 billion for this fiscal year, which the PBO noted is “more than double” the $48.3 billion the 2024 fall economic statement (FES) had projected. The PBO said this “deterioration” in finances was primarily due to “‘day-to-day’ operating measures and increased provisions for liabilities.”

Budget 2025 includes new spending such as $81.8 billion for the Canadian Armed Forces over five years, $10 billion to address the climbing cost of living through cutting taxes, building homes, and cancelling the consumer carbon tax, and $7 billion for “additional actions to support Canadians.”

The budget also said the government will find savings under its current comprehensive expenditure review, saving $13 billion annually by 2028-29 alongside other savings and revenues, which will total $60 billion over five years.

The PBO said that even with Ottawa’s efforts to reduce spending, the federal debt-to-GDP ratio is projected to be higher than the FES, and is no longer on a declining path. Finance Canada projects that ratio will increase from 41.2 percent in 2024-25 and remain slightly above 43 percent from 2026‑27 to 2029-30.

While the latest budget proposes the fiscal anchors of balancing operating spending with revenues by 2028-29 and maintaining a declining deficit-to-gross GDP ratio, the PBO said it conducted “stress testing” and found there was just 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.”

The report also states that the government “abandoned” its previous fiscal anchor of reducing the federal debt-to-GDP ratio, with the PBO noting that the 2024 FES said maintaining a falling ratio was key to preserving Canada’s ‘AAA’ credit rating.

The Fitch Ratings agency warned on Nov. 6 that Ottawa’s finances were eroding, and that this could put “pressure” on its current ‘AA+’ credit rating. While Fitch downgraded Canada’s credit rating from AAA back in 2020, other agencies like Moody’s, Morningstar DBRS, and S&P Global Ratings have kept Canada’s rating at the highest score of AAA.

The Conservative Party has said they cannot vote in favour of the government’s budget bill due to its high spending and deficits. The Liberal government has said the budget responds to the “fundamental” changes in the international order and trading system. Finance Minister François-Philippe Champagne said on Nov. 4 that the budget makes “generational investments” in infrastructure, productivity and competitiveness, defence and security, and housing.