Eric Herzberg
(Bloomberg) — Mark Carney was elected prime minister with a mission to reform the Canadian economy. Now he needs to reassure the market 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 U.S. tariffs still hitting economic growth, the Carney administration’s first budget will focus on the painful structural changes needed to strengthen the domestic economy and non-U.S. exports.
The former central banker, who won Canada’s top political office in March, pledged to reduce dependence on the United States by increasing military spending, accelerating 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 by increasing debt when Finance Minister François-Philippe Champagne presents his budget on Tuesday. Economists surveyed by Bloomberg expect Canada’s budget deficit to soar to $70 billion this fiscal year, with some predicting it will rise to $100 billion, or more than 3% of gross domestic product.
Unless there’s a way to reduce that in the coming years, Carney’s grand plans could be derailed if fickle investors end up demanding higher compensation for buying Canadian triple-A bonds.
The yield on the Canadian government’s 10-year Treasury note is about 3.12%, nearly 100 basis points higher than the average yield over the past decade, including during the COVID-19 pandemic, when yields were well below 1%.
Borrowing costs are rising partly due to expectations that inflation will persist for an extended period of time and that global interest rates remain high. However, while Canadian bond yields remain lower than U.S. Treasuries, the gap has narrowed since May.
Long-term yields matter because Canada’s public debt bill already exceeds 10 per cent of federal revenue.
“With large deficits expected and rising debt-to-GDP ratios, the federal government cannot afford higher long-term bond yields, raising its debt-servicing costs 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 the coming years. But he said investors should expect the federal government to cut operating spending and eventually close the fiscal gap.
“My first priority is to put Canadians back in control by building at home and forging new partnerships abroad so we’re not dependent on the United States,” Carney said in a pre-budget video posted on social media. “To do that, we’re going to have to make some hard choices.”
Analysts, businesses and some policymakers largely agree that Carney will spend billions of dollars in the short term to resolve a broken trade relationship with the United States and try to address weak investment trends and poor productivity growth.
“Pro-growth fiscal policy is needed to address localized weakness and the risk of a freeze in business investment,” RBC Assistant Chief Economist Cynthia Leach wrote in a note to investors.
If government initiatives promote economic growth, corporate and income tax revenue will increase.
“If successful, such a policy could be self-financing in the long term, leaving public finances unscathed. But deficits and debt will come under pressure due to uncertainty and the timing mismatch between spending and expected growth dividends,” Leach said.
civil service cuts
Carney said the budget would use new accounting methods to separate investment spending from government operating costs. Champagne warned that public services would have to shrink as governments try to balance them in the coming years.
Carney also faces the political challenge of persuading some opposition members to vote for his budget or at least abstain from voting against it. His Liberal caucus is three seats short of a majority in the House of Commons and therefore unable to pass the budget on its own.
A new poll from Abacus Data shows support for Carney’s government at 47%, down slightly from mid-October, and disapproval at 34%. “The trend lines indicate minor erosion at key times,” the company said.
Unemployment is rising, growth is weak, and exporters and business investment remain hurt by U.S. tariffs. Carney and Champagne need to convince citizens that if domestic and foreign investment can be allowed to flow, employment, real wages and living standards will eventually rise significantly.
Last week, the Bank of Canada said it was approaching the limits of how much monetary stimulus it can provide without sparking inflation. Gov. Tiff Macklem has repeatedly said he believes fiscal policy is a better tool to offset the damage from the trade war, which he views as negative supply shocks.
“The central bank appears to believe it has done all it can and is now handing over control to the federal government to support the economy through fiscal policy,” David Alexander Brassard, chief economist at Chartered Professional Accountants Canada, wrote in a note.
—With help from Nojoud Al Mallees.
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Last modified: November 3, 2025
