Where the Federal Government Might Look to Make “Tough Choices”

“To seize this hinge moment, we will have to make tough choices.”

Prime Minister Mark Carney, October 22, 2025 

The Office of the Parliamentary Budget Officer forecasts that the federal budget deficit could reach $68.5 billion in 2025-26. Desjardins anticipates an even larger deficit of $74.5 billion. Driven in part by the increase in defence spending to meet NATO’s 2% target this fiscal year, both figures represent a dramatic increase from the $42.2 billion deficit projected in the 2024 Fall Economic Statement (FES). 

The Carney government is overhauling the budget process and how surpluses/deficits will be presented by modifying timelines and definitions. Expenses will now be categorized as either “capital” or “operating” spending.  

According to Finance Canada, capital investment will be defined as “any government expense or tax expenditure that contributes to public or private sector capital formation” Pretty much everything else will be considered operating spending, including transfers to citizens and the cost to run government. 

Prime Minister Carney and Minister Champagne have reiterated the commitment to balance the operating budget in three years. Based on the Liberals’ election fiscal and costing plan, this would require eliminating platform operating balance deficits of over $9 billion for this fiscal year and the next by 2028-2029. This commitment marks a clear rupture from the Trudeau years when recurring deficits became the norm. 

Carney promised to cut “wasteful” government spending. He also warned that Canadians will need to “do less of some of the things we want to do, so we can do more of what we must do to build a bigger, better Canada.”  

The federal ecosystem is buzzing: what could this mean in practice? This article assesses where the government might look to reduce spending. 

Spending Categories 

Federal budgets and FES have grouped expenses into six broad categories that have various degrees of “cut potential” 

• Major transfers to persons 
• Major transfers to provinces, territories, and municipalities 
• Pollution pricing proceeds returned to Canadians 
• Direct program expenses 
• Public debt charges 
• Net actuarial losses 

Expense Categories in the 2024 FES 

Given they are tied to long-term engagements and factors outside its control (namely interest rates), the federal government could not deliberately reduce spending in the “public debt charges” and “net actuarial losses” categories in the short term. 

Many line items in the “major transfers to provinces, territories, and municipalities” category are long-standing programs, some of which are tied to predetermined funding formulas and rates. With the Prime Minister committing to maintain the national childcare program, there are likely no substantial cost savings to be found in this category in the short term. 

Under its current definition, “major transfers to persons” may increase in the coming years. The Liberal platform committed to temporarily boosting the Guaranteed Income Supplement for low-income seniors. With the recent government commitment around automatic tax filing for low-income individuals, demand for the Canada Child Benefit and other benefits will likely grow.  

As the economy and the labour market suffer due to U.S. tariffs, expenses to support Canadian businesses and workers through tariff relief and social safety net measures will rise. The number of Canadians receiving regular employment insurance benefits was up 11.5% year-over-year as of August 2025.  

This leaves the “direct program expenses” category as the most likely candidate for cuts as the government attempts to rein in operating spending.  

Potential Cuts to Direct Programs Expenses 

Direct programs expenses traditionally incorporate “other transfer payments” and “operating expenses.” The 2024 FES included a variety of expenses in the “other transfer payments” subcategory such as “the Canadian Dental Care Plan, support for electric vehicle battery manufacturing, and major economic investment tax credits.”  

Some of these transfer payments dedicated to supporting businesses will likely be classified as capital spending and will not count toward the government’s operating balance.  

During the summer, federal ministers were asked to identify opportunities to reduce spending over three years. The government hopes to find $25 billion in savings. 

Social programs constitute operating spending. While the Carney government already publicly committed to keeping several major Trudeau-era programs, many smaller and/or targeted initiatives could be candidates for cuts.  

Programs and funding that do not align with the priorities highlighted in the Prime Minister’s mandate letter to his ministers will be particularly vulnerable (for instance, culture and arts were not mentioned in the mandate letter or in Carney’s recent pre-budget address). These initiatives could be modified, reduced in scope and funding, consolidated, not renewed, or terminated early.  

As an example, a wide array of training and skills initiatives were rolled out in the last decade. The Carney government might look to consolidate and re-focus these measures to better align them with its priorities. Pre-budget announcements indicated a focus on apprenticeships in trades (ties to infrastructure and housing) and re-skilling training programs (ties to the labour impacts of U.S. tariffs). A new talent strategy is also expected. 

Government Operations 

Program spending reduction could also be done via cuts to operating expenses, which the 2024 FES defined as “the cost of doing business for more than 100 government departments, agencies, and Crown corporations.”  

While the Liberals committed on the campaign trail to capping but not cutting public service employment, Minister Champagne has since stated that “adjustments” to the civil service are coming. The government also indicated it would seek to leverage technology like AI to automate tasks, improve efficiency, and reduce “the need for additional hiring.” 

The automation of routine tasks could enable staffing cuts at the working levels of the civil service (e.g., administrative, clerical, and translation roles). Cuts might also take place at the executive level. While smaller in absolute terms, this category grew at a faster relative rate (+47.3%) than the total number of non-executive workers (+39.1%) between 2014-2015 and 2024-2025.  

Outsourcing and external consulting costs could see cuts. This expense category has grown significantly over the years. The government spent $17.8 billion on outsourced contracts for professional and special services in 2023-2024. 

Source: Public Accounts of Canada 

The Politics of Spending Cuts 

The federal government will have to navigate spending reductions with caution as program cuts are usually a hard sell to the public. Governments generally need weeks or even months to build the justification to reduce spending.  

The Liberal caucus has not had to defend notable budget cuts in the last decade. This will be a test for the Office of the Prime Minister as it looks to structure post-budget communications. Cuts to social programs could lead to the government and Liberal Members of Parliament facing criticism from impacted civil society groups and advocates. 

Outside of the Ottawa region, cuts to the federal civil service might be easier to justify and less controversial if they do not impact services to Canadians.  

Several collective agreements for the civil service are set to expire in 2026. Unions will likely be looking for salary increases for their members, which could put pressure on the government’s ability to reduce operating spending.  

In the House of Commons, an austerity approach reduces the likelihood of the NDP lending their votes to prop up the minority Liberal government. This will limit potential dance partners for Mark Carney as he tries to keep the confidence of the House.