Prime Minister Justin Trudeau’s government plans to spend about half of its windfall revenue gains this year, while keeping Canada on track for a balanced budget within five years. 

The fiscal update unveiled by Finance Minister Chrystia Freeland on Thursday shows $29.8 billion (US$21.7 billion) more fiscal room than what was forecast in her April budget, thanks to inflation and high commodity prices. The deficit for the fiscal year that began in March is now US$36.4 billion, down from the US$52.8 billion shortfall previously projected.

However, the document also earmarks $13.4 billion in new spending commitments this year alone. Overall, the Liberal government is on track for $81 billion in bonus revenue through 2026 -- and plans to spend $44 billion of it.

Trudeau and Freeland are attempting to strike a balance between assisting Canadians with skyrocketing costs of living, while not adding fuel to inflation with excessive spending that could undermine the Bank of Canada’s effort to rein in prices through interest-rate hikes.

Long-term forecasts are also on shaky ground, with Canada entering an economic slowdown as higher borrowing costs take their toll. 

The government acknowledged that its growth outlook -- based on a September survey -- may be on the optimistic side, even though it remains a “reasonable” basis for planning. Still, the budget update includes an alternate scenario in which a recession hits that would see the deficit remaining at about $50 billion over the next two years.

“I am confident that we have struck the right approach,” Freeland told reporters. “We know how important it is right now, in this economic moment where we find ourselves, for the federal government not to pour fuel on the flames of inflation.”

The spending outlined in the budget update includes the temporary sales tax rebate and other cost-of-living measures Trudeau announced in September to alleviate the impact of Canada’s 40-year-high inflation rate. But it also makes new promises to boost aid to low-income workers, remove interest on student and apprenticeship loans, and create new incentives for businesses to invest in clean technology.



The update promises Canada will “level the playing field” with the US Inflation Reduction Act, which laid out massive incentives for green technology and advanced manufacturing. But while Trudeau’s government promises “significant additional actions” in next year’s budget, the new spending in the update is largely confined to a 30 per cent clean-tech tax credit worth $6.7 billion over the next five years.

On the revenue side, Freeland will impose 2 per cent tax on corporate stock buybacks, beginning in 2024, that’s meant to nudge firms to invest their profits in their own businesses instead. But that measure is only forecast to raise $2.1 billion over five years.

Despite the spending, the update still projects Canada will progressively shrink its annual deficit and eventually eliminate the shortfall altogether. Under its baseline scenario, the government expects a modest $4.5 billion surplus in the fiscal year that begins in April 2027.

The proportion of federal debt to gross domestic product is forecast at 42.3 per cent this year, dropping to 37.3 per cent over the next five years. Keeping that ratio on a declining path is the government’s main budgetary goal, meant to protect the country’s AAA credit rating.

But with an economic downturn expected, those numbers could change quickly. 

Under the downside scenario included in the update, Freeland forecasts a shortfall of US$49.1 billion this year, with the deficit widening to $52.4 billion in the fiscal year that begins next April. Should that situation materialize, the debt-to-GDP ratio would jump to 44.5 per cent next year and remain above 40 per cent over the entire forecast horizon. 

“Overall, the update is not reflective of what may be lying ahead for the Canadian economy,” Robert Asselin, a former Trudeau aide now at the Business Council of Canada, said in an interview.