The 2025 federal budget plots a path for the Canadian economy to emerge from the current crisis. But it also highlights just how deep a hole the economy is in right now and how small the margin for error is as Canada navigates the perils of a trade war.
“This budget must be generational in its ambition and serve to shape our economy and our nation’s future,” said Finance Minister François-Philippe Champagne. “There is no place for withdrawal, ambiguity or even standing still; only for bold and swift action.”
The budget lays out various scenarios for economic growth over the next five years. The so-called upside scenario envisions a world in which U.S. tariffs are rolled back and global trade works its way back to normal.
Under the “downside scenario,” the Canadian economy would contract through the quarter running from April to June. Unemployment would peak around 7.4 per cent and Canadian growth would be weak for several years.
“Nominal GDP [would be] on average lower by $51 billion per year over the forecast horizon relative to the August 2025 survey forecast,” the budget says.
That scenario would see a further weakening of the Canadian economy — and it’s not far fetched. It is still entirely possible that next month’s GDP numbers will show Canada slipped into a recession this summer and unemployment has been rising for months.
Finance Minister François-Philippe Champagne delivered the Liberal government’s first budget on Tuesday. CBC reporters break down the budget’s political and economic implications, including a major new direction in defence spending.
Will trade chaos end?
The budget makes a clear promise about the road ahead: that Canada will rise relatively quickly from the ashes of two quarters of trade chaos.
But David Macdonald, senior economist with the Canadian Centre for Policy Alternatives, says there is a problem with that promise.
“It’s not clear to me that the chaos ends, and that the impact on Canada ends any time soon,” he said.
Macdonald says the budget promises to rethink the Canadian economy; to help businesses find new markets; and to help industries adjust to a new, less predictable future than the one they ’ve become accustomed to.
It offers billions of dollars in tax incentives for Canadian companies to build new facilities. And it promises vast resources to ensure Canadian products find a market.
But Macdonald says that comes with a high degree of difficulty. And with the Canadian economy already on the precipice of a recession, there isn’t a lot of wiggle room if things go sideways.
“How do we substitute federal government intervention for what used to be trade with the U.S.? How do we substitute international trade for trade that used to be with the U.S.? That is a very challenging proposition,” he said.
And although the budget charts out what a more troublesome economic scenario would look like, it doesn’t offer many remedies if things do indeed get worse, not better.
“If the situation deteriorates on the economic side, this [budget] will have to shift,” says Sahir Khan, co-founder and executive vice-president of the Institute of Fiscal Studies and Democracy at the University of Ottawa.
The situation could deteriorate in any number of ways.
The trade war could deepen. Some other external shock could crash into the economy or, perhaps most likely, it could take longer for the benefits laid out in the budget to be felt.
“I don’t think these measures are going to kick in in the short term. It’s about confidence in the short term, but the results of a major capital strategy and defence strategy are going to be felt over decades,” said Khan.
Damage is already being done
While this budget charts a vitally important new path, the fact remains that there’s very real damage being done to the Canadian economy and to Canadian businesses right now.
So the toughest obstacle to the budget isn’t necessarily just in implementing some sweeping changes (from a government that has previously struggled with implementation). Nor is it even in seeing if the bet pays off.
The hard part will be making sure the Canadian economy keeps its head above water.
Finance Minister François-Philippe Champagne responds to skepticism that his first budget can deliver its claim of $1 trillion in total investment over five years, and defends the value of the budget’s $78-billion deficit. Champagne tells MPs from other parties ‘to think twice’ before deciding not to support the document as it remains unclear where the Liberals will find enough support to pass it.
If Canada can stave off a recession, keep the unemployment rate from rising further and avoid further escalation in the trade war, implementing the changes mapped out in this budget will be much easier.
But that is a tall order — and at least some of it is out of the control of the Canadian government.
