Canada Plans to Spend Over $150 Billion of Projected Fiscal Windfall in Nov. 5 Budget
The Canadian federal government intends to spend more than $150 billion of a projected $158-billion fiscal windfall in its Nov. 5 budget, including over $40 billion in business tax relief. Columnist Kevin Yin warns that high interest rates and uncertain growth outcomes make the strategy risky.
The Canadian federal government has projected more than $158 billion in additional fiscal capacity over the next five years relative to its spring forecast, with approximately $120 billion expected to come from higher tax revenues. In the Nov. 5 budget, Ottawa has chosen to spend more than $150 billion of this windfall.
A bit more than $40 billion over the next five years has been committed to business tax relief. This includes the Productivity Mega Deduction as well as expansions to Clean Electricity and Clean Technology tax credits. The remaining windfall is being spent on non-growth-related categories such as Indigenous programs, housing measures, and tariff relief.
Columnist Kevin Yin argues that this spending strategy carries significant risk given current borrowing costs. Two-year yields are at 3.12 per cent and 10-year yields are at 3.65 per cent, levels described as high relative to the last two decades. These elevated interest rates increase borrowing costs for the government.
According to Finance Canada’s estimates, Canada’s effective marginal corporate tax rate was already 13 per cent before the introduction of the mega deduction, which is lower than the United States' rate of 16.9 per cent. Yin suggests that saving more revenue or reducing deficits might have been wiser, noting that the new deductions may not significantly boost productivity or wages.
Supporting this concern, a forthcoming paper in the American Economic Review finds that manufacturing plants benefiting from faster capital expense deductions from 1997 to 2011 increased investment and employment but did not raise wages or productivity.
Furthermore, the classification of certain tax incentives as capital expenditures rather than operating expenses weakens fiscal guardrails. Debt payments are expected to rise to nearly 13 per cent of federal expenditures by 2031, creating the potential for higher debt payments to outpace major spending categories like health-care transfers.