Six takeaways from Canada’s federal budget

Canadian Prime Minister Mark Carney has introduced his first federal budget – a blueprint for how he plans to deliver on his promise to make Canada’s economy the strongest in the G7.

The ambitious plan, seen as a key test of the new leader and former central banker, is as much a political document as a spending blueprint.

It warns that Canada is in an era of “significant change” not seen since the fall of the Berlin Wall, which is underscored by its rapidly shifting relationship with the US, once the country’s closest ally.

“There’s some headwinds on the horizon,” Finance Minister François-Philippe Champagne told reporters in Ottawa on Tuesday. “That’s why we need a strong response.”

Here are six takeaways from the spending plan.

The budget includes billions of dollars in spending that could balloon Canada’s deficit to C$78.3bn (£42.6bn) – the second biggest on record.

Carney and Finance Minister Champagne have defended the massive spending plan, which will total C$280bn, as an investment to help boost Canada’s global competitiveness and argued that a strategic injection of funds will attract C$1tn in investment back to Canada in the next five years.

It will fund a broad range of areas: highways, ports, electrical grids, digital corridors, defence, housing, and initiatives promised to boost Canada’s productivity.

But Carney has also warned Canadians of necessary “sacrifices” in his plan to transform the economy, with the budget projecting C$60bn in total spending cuts in the next five years.

They come in part from a reduction of 40,000 jobs in the public sector by the end of 2029 – about 10% of the workforce to be trimmed through attrition, job cuts and the widesread adoption of AI.

Federal ministries could see up to 15% cuts in the coming years, expected to account for more than C$44bn in savings, according to the budget.

For the first time in Canada, the fiscal plan drew distinctions between government spending by operational spending – day-to-day government spending – and capital investment, defined as funding that should help grow the economy.

Due to its proximity and close cultural ties, the US has long been Canada’s largest trading partner, with about 70% of trade moving south.

In the wake of Trump’s tariffs and the uncertainty that came with them, Canada is looking to Europe and Asia, with the aim of doubling non-US exports over the next decade.

Carney’s budget proposes millions in backing for businesses working to develop new export markets, includes help with legal expenses and market research.

There is also a nod to growing cultural ties with Europe, like exploring Canada’s participation in the Eurovision song contest.

With some firms hoping to save on trade costs by moving facilities south to the US, Carney is also proposing a raft of initiatives to make Canada more attractive. That includes a suite of measures that would lower Canada’s marginal effective tax rate to 13.2% from 15.6%.

“This is a great message for investors,” said Champagne, noting the rate will be lower than that in the US.

And with many US universities facing uncertain funding under the Trump administration, the spending plan includes C$1.3bn to attract international researchers to Canadian universities, and money to support their research.

Like other resource economies, Canada has grappled with balancing its need to increase production of commodities like oil and gas while maintaining its climate commitments. Oil-rich provinces like Alberta have lobbied the federal government hard to remove some enviromental initiatives, arguing they hurt development in the region.

Carney’s fiscal plan proposes making Canada a “clean energy superpower” by supporting the development of low-emission energy projects like nuclear reactors and low-carbon liquified natural gas.

At the same time, the government is pushing for the development of carbon capture and storage technologies, as well as enhanced methane regulations.

It is also affirming its commitment to the industrial carbon tax, calling it a policy “that delivers more emissions reductions than any other”.

To encourage investment, the Carney government says it will work with provinces on what that carbon pricing would look like long-term to provide more stability to companies.

These initiatives would replace an oil and gas emissions cap introduced by Carney’s predecessor, former Prime Minister Justin Trudeau.

All of this is billed under a Climate Competitiveness Strategy that the Carney government says is “a central pillar of the plan for Canada to become the strongest economy in the G7”.

Carney has pledged Canada will significantly boost defence spending to hit a Nato target of 2% of GDP this year and 5% by 2035, as the country grapples with an aggressive Russia and more powerful China, as well as threats to Arctic security.

The budget outlines C$81.8bn in defence spending over the next five years, the largest amount in decades for a country that has long lagged in military funding and struggled with procurement.

Spending includes pay increases for the armed forces, funding for digital infrastructure, and plans to develop Canadian supply chains.

There is also C$182.6m over three years for the defence ministry to establish capability for space launches.

Another focus is the Arctic. The Carney government says it is eyeing the development of all-weather, dual-use infrastructure projects in Canada’s north that can be used for both economic and security reasons, devoting C$1bn over four years to the endeavour.

Carney’s first act as prime minister was getting rid of one of his predecessor’s signature climate policies, the consumer carbon tax, which had become politically unpopular.

He has continued to break from Trudeau, who was in power for nearly a decade, pushing back the electric-vehicle sales mandate and cancelling a proposed increase on Canada’s capital gains tax.

The budget shows another major break, on immigration.

Trudeau drastically increased the number of immigrants allowed into Canada, before announcing a sharp cut last year when concerns arose over the growing numbers of people and possible stress on housing and social services.

Carney’s budget significantly cuts targets for new temporary residents from 673,650 to 385,000 next year, and 370,000 in 2027 and 2028. There is also a one-time measure to speed the transition of up to 33,000 work permit holders to permanent residents.

Other Trudeau-era policies now scrapped include the “2 Billion Trees” programme announced in 2019, which saw only around 160 million trees planted by late 2024, and the end of the 2022 luxury tax on vehicles and aircraft priced at more than C$100,000 and boats above C$250,000.

The latter “was costing more to administer” than it collected in tax revenue, Champagne said.

The Trump administration’s trade war is hitting a broad range of Canadian businesses, as it imposes a blanket 35% tariff on Canadian goods not covered by a free trade agreement, along with sector-specific levies on steel, aluminium, lumber and automobiles.

The Carney government wants to spend C$5bn over the next five years to help these sectors , including C$1bn to fund a transition for the steel industry towards new lines of business.

It is also launching a loan facility, valued at C$10bn, intended to support “otherwise successful Canadian businesses” as they weather tariff-related storms. The first loan recipient is Algoma Steel Inc, an Ontario-based producer that has faced layoffs since the US tariffs were imposed.

A proposed Buy Canadian Policy will also prioritise procuring Canadian goods and suppliers for government-funded projects.

Part of Canada’s response to the tariffs will be funded by revenue it has raised from its own countermeasures to US levies. As of October 2025, Canada has made $6.5bn in gross revenues from those measures, according to the budget.