The Parliamentary Budget Officer (PBO) released its June outlook report on Thursday, showing that the federal deficit jumped to C$72 billion in the last fiscal year from C$36.3 billion, nearly doubling in size.
The agency attributed this sharp increase to only a modest rise in revenue, while new policy initiatives boosted overall spending. This data is based on the PBO’s estimates from public accounts; the federal government has not yet released its final accounts figures.
Net new spending will continue from 2025 to 2031, totalling C$68.4 billion. Short-term potential output has been revised downward due to fluctuating trade policies and slowing population growth. The report projects real GDP growth at 1.7% in 2025, plummeting to 1.1% in 2026, before recovering to 1.6% in 2027 and maintaining modest expansion in subsequent years.
Non-energy exports remain under pressure from existing US tariffs, while the conflict with Iran has pushed up fuel prices, casting a shadow over the economic landscape with trade headwinds and geopolitical uncertainty. The PBO projects an average inflation rate of 2.6% for 2026, as rising commodity prices offset downward pressure from oversupply and easing housing costs. The institution predicts that the Bank of Canada will keep its key interest rate at 2.25% this year.
If military pressure from the US and Israel on Iran subsides, the policy rate is expected to gradually rise to 2.5% by mid-2027. In the job market, the unemployment rate was 6.9% in April and may fall to 6.4% next year, and further to 6.1% between 2028 and 2030. Despite the government’s continued push for large-scale restructuring, personnel spending is showing a medium-term upward trend.
The estimated expenditure for fiscal year 2025-26 is CAD 69.2 billion, a decrease from CAD 73.9 billion in the previous fiscal year, but it will surge by CAD 10 billion in fiscal year 2026-27, reaching CAD 86 billion by 2031. Finance Minister François-Philippe Champagne had already instructed cabinet departments to explore “aggressive” cost-cutting measures last July.
Prime Minister Mark Carney stated that the size of the federal workforce would be reduced through natural attrition, with the 2025 budget setting a potential cost-saving target of C$13 billion. A federal notice regarding layoffs stated that the goals would be achieved through restructuring operations, consolidating internal services, adjusting programs to improve efficiency, or terminating underperforming projects.
As of May 6, the Ministry of Employment and Social Development had already eliminated over 5,000 jobs, with nearly 1,000 others included in job adjustments and career transitions; the Ministry of Health had cut over 1,000 positions, impacting a wide range of ministries. Despite frequent layoffs, PBO estimates indicate that the upward trend in labour costs has not yet been reversed, and the gap between government spending control targets and actual spending trajectories is becoming increasingly clear.