By Erik Hertzberg
(Bloomberg) — Mark Carney was elected prime minister with a mandate to transform Canada’s economy. Now he needs to assure markets about the price tag.
President Donald Trump’s policies have upended decades of assumptions about Canada’s relationship with its No. 1 trading partner. With US tariffs still hammering growth, the Carney government’s first budget will focus on the wrenching structural change needed to strengthen the domestic economy and non-US exports.
The former central banker, who won Canada’s top political office in March, has pledged to reduce dependency on the U.S. by boosting military spending, speeding up infrastructure projects, increasing the pace of housing construction and improving business competitiveness.
It’s a long to-do list — one that will be paid for with an increase in debt when Finance Minister Francois-Philippe Champagne delivers the budget on Tuesday. Economists surveyed by Bloomberg expect Canada’s budget deficit to surge to $70 billion this fiscal year, and some see it rising to $100 billion, which would be more than 3% of gross domestic product.
Unless there’s a path to get that down in the years ahead, Carney’s grand plan could be derailed if fickle investors end up demanding higher compensation for buying Canada’s AAA-rated debt.
The yield on Canadian government 10-year notes is about 3.12%, nearly 100 basis points higher than the average of the past decade, which included the Covid period, when it fell well below 1% for a while.
Higher borrowing costs are due in part to expectations of higher-for-longer inflation and still-elevated rates around the globe. But while Canadian bond yields are still lower than US Treasuries, the gap has narrowed since May.
Longer-term yields matter because Canada’s public debt charges are already more than 10% of federal revenue.
“At a time of expected large deficits and a rising debt-to-GDP ratio, the federal government can’t afford higher long-term bond yields raising the cost of servicing their obligations and putting fiscal sustainability at risk,” said Randall Bartlett, deputy chief economist at Desjardins.
In a recent interview with Bloomberg, Champagne declined to say whether Canada’s net debt as a percentage of gross domestic product would rise or fall in coming years. But investors should look for the federal government to cut operating spending, he said, and eventually narrow the fiscal shortfall.
“My No. 1 focus is to put Canadians back in control by building here at home and building new partnerships abroad so that we’re not reliant on the United States,” Carney said in a pre-budget video posted to social media. “To do that, we will have to make some difficult choices.”
Analysts, businesses and some policy-makers are mostly giving Carney the green light to spend billions in the short term to address the fracturing trade relationship with the U.S., and to try to fix soft investment trends and poor productivity growth.
“Pro-growth fiscal policy is needed to address localized weakness and the risk of frozen business investment,” Cynthia Leach, assistant chief economist with Royal Bank of Canada, wrote in a report to investors.
If the government’s initiatives boost economic growth, higher revenues from corporate and income taxes would result.
“If successful, such a policy could be self-financing in the long term, leaving public finances unscathed. But with uncertainty and a timing mismatch between spending and presumed growth dividends, deficits and debt will be under pressure,” Leach said.
Civil service cuts
Carney has said the budget will incorporate a new accounting approach, splitting investment spending from government operating costs. Champagne has warned the size of the public service will have to shrink as the government tries to balance the latter in coming years.
Carney is also facing a political challenge in convincing some opposition members to vote for his budget, or at least abstain from voting against it. His Liberal Party caucus is three seats short of a House of Commons majority, so it can’t pass the budget on its own.
A new poll from Abacus Data puts approval for Carney’s government at 47%, down slightly from the middle of October, and disapproval at 34%. “The trendline suggests mild erosion at a critical moment,” the firm said.
Unemployment is elevated, growth is weak, and exporters and business investment are still reeling from U.S. tariffs. Carney and Champagne need to convince citizens that jobs, real wages and living standards will eventually shoot higher if they can get domestic and foreign investment flowing.
Last week, the Bank of Canada signalled it’s near the limit of where it can comfortably offer monetary stimulus without triggering inflation. Governor Tiff Macklem has repeatedly said he sees fiscal policy as the better tool to offset trade war damage, which he views as a negative supply shock.
“The bank seems to think it has done all it can and is now handing over the reins to the federal government to support the economy through fiscal policy,” David-Alexandre Brassard, chief economist at Chartered Professional Accountants of Canada, wrote in a note.
–With assistance from Nojoud Al Mallees.
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Last modified: November 3, 2025