Prime Minister Carney’s First Budget: Balancing Cuts, Confidence, and Canada’s Future

Prime Minister Carney’s first budget responds to a global economy jeopardized by American tariffs with new spending on tax incentives to prompt corporate investment, targeted industrial investment, and cuts to the public service. In contrast to the austerity telegraphed in statements by Carney and Finance Minister Francois-Philippe Champagne, $90 billion in new spending overshadowed approximately $50 billion in reductions in program spending and public service headcount.

Champagne framed today’s budget as a response to the rapidly shifting global order that is “threatening our sovereignty, our prosperity, and our values.” A $78.3 billion deficit was defended as necessary to avoid eliminating the social programs and capital investments he argues Canada needs, while pledging to reduce the deficit to GDP ratio each year.

The core of the budget contains measures aimed at incenting private sector investment, ranging from a lower effective corporate tax rate to accelerated depreciation on capital equipment to generous tax breaks in AI, natural resource development and R&D. The government also pledges a massive investment in defence spending, which includes Canadian Armed Forced pay raises to infrastructure spending against a cyber-attack.

Ultimately, the budget further frames Carney’s election pitch: Canada faces existential threats and investment today will secure our future.

The Sales Pitch

The title of the budget is Canada Strong, mirroring the tag line of the Liberal election platform. More generally, the government’s communications since the election have also stressed the importance of Canada focusing on what we “can control” and by “empowering” Canadians and workers and shifting from “reliance to resilience.” These same words which position Canada as confident country, committed to self-reliance, are at the heart of this year’s long-awaited budget.

Why it matters: In the weeks leading up to its release, the Prime Minister stated that this budget would have to make difficult decisions and that “we will have 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.” Both the Prime Minister and Minister of Finance have consistently described this budget as a generational one. At the same time, Liberals have also pre-positioned the vote on the budget as a question of principles, warning that opposing it will jeopardize the government’s mandate to transform Canada’s economy.

The details:  The measures outlined in this year’s budget are framed as necessary solutions to meet the moment and they will serve as a roadmap for the government’s future actions, while also trying to put some of the onus to retool Canada’s economy onto the private sector through significant tax incentives.

The bottom line: The overarching narrative of this year’s budget is about reorienting government spending toward long-term investments in defence, major projects, tax incentives and housing to build a stronger Canadian economy. Whether this narrative can punch through the stream of expected criticism over the government’s “comprehensive expenditure review” while attracting long-awaited private sector investment during an ongoing tariff war remains to be seen.

Distinguishing Between Capital and Operating Spending

As promised, Annex 2 outlines the details of the government’s new Capital Budgeting Framework which distinguishes day-to-day operational spending from capital investments that the government argues will enable them to “identify and prioritize initiatives that deliver long-term economic returns” – a theme that is persistent throughout the budget document.

Why it matters: This major change to the way government presents its accounting is framed by the government as a way to enhance financial reporting and fiscal transparency. The government has plainly laid out that of the $89.7 billion in new spending, $32.5 billion of this will be considered capital investment under its new framework. This includes funding for the Build Communities Strong Fund, the Productivity Super-Deduction, Build Canada Homes, and the Defence Industrial Strategy.

The numbers:

• The government’s spending cuts through a “Comprehensive Expenditure Review” – identify $12 billion in annualized savings and cuts over five years to government spending and a reduction of 40,000 public service jobs by 2028-29 compared to the peak of 2023-2024.
• The budget is spending $450 billion, over five years, in “generational capital investment.” The government argues that this will enable $1 trillion in investments.
• Moving forward, the government will be guided by two fiscal anchors: balancing day-to-day operating budget by 2028-29 and maintaining a declining deficit-to-GDP ratio.

The bottom line: While the reorientation of public spending signals the government’s willingness to make tough decisions and trade-offs, the success of this approach rests on whether the government can convincingly communicate the tangible results of these investments and trade-offs. Ultimately, Canadians must be convinced these difficult decisions will have a near-term, positive impact on their day-to-day lives.

The Government’s Budget Priorities

Budget 2025 organizes its measures around clear themes: Building a Stronger Canadian Economy, Shifting from Reliance to Resilience, Empowering Canadians, Protecting Canada’s Sovereignty and Security and Creating a More Efficient and Effective Government.  Expect to hear these broad themes repeatedly – Build, Empower, Protect.

Why it matters: As the first fully Carney-government document, these priorities, and the measures tied to them, are expected to guide the government’s actions in the coming months, similar to the Prime Minister’s single mandate letter.

Go deeper:

• Build – key measures include The Productivity Super-Deduction, the Building Communities Strong Fund, investments in AI and a new Climate Competitiveness Strategy.
• Empower – key measures include investments in housing, the middle-class tax cut, and protecting CBC/Radio-Canada.
• Protect – this mostly means protecting Canadian sovereignty and security. Key measures include the new Defence Investment Agency, the new Financial Crimes Agency, and a Canada Community Security Program.
• Shifting from Reliance to Resilience – key measures include protecting Canada’s strategic industries and a new Trade Infrastructure Strategy.
• Creating a More Efficient and Effective Government – key measures include the Comprehensive Expenditure Review, cutting regulatory and operational red tape, and more tax efficiency.

The bottom line: This new government’s first budget has signaled a focus on redrawing Canada’s traditional way of operating while trying to unlock elusive private sector investment, working in partnership with the federal government to transform Canada’s economy.

The Politics Behind the Budget

Politically, this budget is a defining moment for the Liberals: Will they have a free hand to lead or be forced to compromise constantly with opposition parties to maintain confidence?

Why it matters: In the coming weeks Ministers and Liberal MPs will need to defend the decisions the government has made, while also consistently pushing forward the narrative that this reorientation of government spending is what is needed to build a stronger Canadian economy, and ultimately improve the lives of Canadians.

The details:

• Pierre Poilievre’s reply in the House of Commons was focused on excess government spending, branding this budget as the “most costly and largest budget deficit in history, outside of COVID.”
• Yves-Francois Blanchet and the Bloc Quebecois expressed disappointment that their budget demands were not met. Their criticisms were focused on the lack of investment in healthcare, too many strings attached for investments in housing and disappointment with a lack of investments to combat climate change.
• The interim leader of the NDP, Don Davies, was non-committal on taking any position on the budget, vowing to consult with stakeholders and working Canadians to review this budget to see if it passes their lens of working for Canadians.

The bottom line: For the government, the political gamble lies in convincing Canadians that a period of cuts and long-term investment incentives can still deliver impact for ordinary Canadians. With polling showing that Canadians are increasingly concerned about the cost of living, the government must present a clear narrative about how these long-term investments will help Canadians today.

What’s Next

The 2025 Budget is the first test of Prime Minister Carney’s agenda in a minority House. The Liberals are three votes short of a majority government and must secure support or abstentions to avoid being defeated by a vote in the House of Commons. But the Liberals may be gaining momentum; CPC MP Chris d’Entremont crossed the floor to the Liberals, with hints at further Conservative defections to follow.

After the budget is tabled, four days of mandatory debate will conclude the week of November 17, with amendments and sub-amendments also in play. The first vote on the budget as a whole is expected as early as November 18, 2025.