Canada’s Budget Watchdog Forecasts $68.5B Deficit, Debt-to-GDP Ratio to Rise

Canada’s parliamentary budget watchdog has warned that Ottawa’s deficit will rise sharply this year, threatening the government’s long-standing fiscal benchmarks.

Interim PBO Jason Jacques now expects the federal shortfall to hit $68.5 billion in 2025, compared with $51.7 billion last year. In his latest outlook, Jacques cautioned that the federal debt-to-GDP ratio is no longer on a declining trajectory — a measure that had been a key fiscal anchor for Ottawa.

The updated fiscal and economic forecast provides lawmakers with a baseline ahead of the Liberals’ fall budget, set for Nov. 4.

The report excludes planned defence spending increases to meet NATO’s revised target of 5% of GDP by 2035, as well as Ottawa’s pledge to trim public service spending over the next three years. However, it does include $115.1 billion in new net spending announced since December’s fiscal update.

According to the PBO, Canada’s ongoing trade dispute with the United States is dampening economic growth and tax revenue, while increased capital outlays are pushing deficits higher.

The watchdog cut its growth outlook, projecting real GDP growth of 1.2% in 2025 and 1.3% in 2026, down from its March forecast of 1.7% and 1.5%. Nominal GDP, which underpins the federal tax base, is expected to average $12.9 billion lower from 2025 to 2029 due to tariff effects.

With weaker revenues and higher expenditures, annual budget gaps are now projected to be $26.6 billion larger on average through 2029-30 than forecast in March. Deficits are expected to ease slightly but remain near $60 billion annually.

Finance Minister François-Philippe Champagne attributed the worsening deficit to global trade turmoil, saying Canadians expect the government to support workers and transition the economy for future growth.

While Jacques questioned whether Ottawa still has credible “fiscal anchors,” Prime Minister Mark Carney insisted that such safeguards remain intact. The Liberals have pledged to maintain a declining deficit-to-GDP ratio and balance the operating budget within three years.

The PBO now sees the deficit-to-GDP ratio widening to -2.2% this year, compared with -1.7% last year, before narrowing gradually by 2029-30. Still, its projections show larger deficits than those outlined in the Liberals’ spring platform.

Meanwhile, the federal debt burden is expected to rise to 43% of GDP in the medium term, up from 41.7% last year, as deficits persist above 1% of GDP.

Jacques, recently appointed interim PBO for six months, is scheduled to testify before the House of Commons committee on government operations and estimates to answer questions from MPs.