Budget 2025: The Role of Federal Spending Review and Reallocation

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By Kevin Page with Clara Geddes and Mikhaeil Ibrahim-Qayyum

September 23, 2025

The 2025 federal budget will be tabled in Parliament on November 4, 2025. It will be close to a year since Canadians have had an updated fiscal plan. A lot has happened during that year, much of it carrying economic implications for Canada and the world.

Relations with the United States, our closest ally, have deteriorated due largely to trade disruption that has not only hit the Canadian economy hard but is also slowing global growth. Wars in Europe, the Middle East and elsewhere persist unresolved. Investment in AI is transforming markets in a prelude to its transformative impact on the wider economy.

We had a federal election. We have a minority Parliament.

Prime Minister Mark Carney — elected in large part because of his credentials as an economist — says the country is facing a hinge of history. Does anyone disagree?

Budget 2025 will focus on three primary objectives: economic growth, policy re-prioritization and fiscal responsibility.

The Canadian economy stopped growing last spring. Declining exports due to both tariffs and tariff chill are a major problem. Unemployment is rising. Economic uncertainty driven by trade upheaval is hurting investment. Budget 2025 needs to address the state of the economy amid an unprecedented cascade of factors which, by and large, either did not exist a year ago or were significantly less impactful.

Prime Minister Carney’s electoral platform included a politically counterintuitive promise to run higher budgetary deficits to finance capital investment that will help stabilize the economy in the short term and support trade diversification and productivity growth in the years ahead. In the midst of geopolitical tension not seen since the Cold War, the government agreed to higher NATO spending commitments. This is a fundamental shift in policy and spending priorities.

Federal debt is elevated from the large deficit-financed fiscal supports that helped Canadians through the global pandemic. Interest costs on the public debt are rising. The government is committed to balancing the operating budget in 2028-29 and run deficits only for capital investments. It will endeavour to lower the debt-to-GDP ratio over the medium term. Whether the debt-to-GDP ratio remains a fiscal anchor, as it was under the previous Liberal government, remains to be seen.

The government’s message on fiscal responsibility is that there is a need for more debt to help drive domestic economic growth and get to a more balanced (featuring less economic exposure) relationship with the U.S. A delay in achieving an operating balance by a few years (Prime Minister Trudeau was on track to achieve an operating balance in 2026-27) and a commitment to use deficit finance only for capital investment are the proposed budgetary constraints. In the end, fiscal targets are political in nature and must be consistent with the political and economic context. Will Parliament and financial markets support these targets?

Chart 1: The Changing Policy and Macro-Fiscal Environment

From a fiscal management and policy perspective, the design and implementation of spending review is a critical success factor for budgets 2025 and beyond. It is the fiscal gasoline that drives the policy engine and maintains fiscal discipline, ensuring a smooth ride with financial markets. It is the mechanism that allows the government to reallocate spending to new priorities such as capital investment and national defence. Canada’s relatively weak economic context is not an environment conducive to raising taxes. Spending must shift.

Further effort is required by political leaders to define the context for change and pre-calibrate expectations in order to foster trust and support. The public dividends from investments in capital spending and sudden increases in national defence capability do not accrue overnight. Canadian households and business are in for a tough stretch. Spending reallocation is difficult. Political leaders have a tendency to think one election cycle at a time. In a minority parliament, Canada needs all political leaders behind the changes required, especially in a context in which further upheaval will only add to economic uncertainty.

In early July, Finance Minister Champagne sent letters to Ministers informing them that they are moving forward with spending review highlighted in the Liberal electoral platform. The Minister asked for saving recommendations totally 7.5 per cent of departmental operating budgets in the fiscal year that begins April 1, 2026, followed by 10 per cent in savings the next year and 15 per cent in the 2028-29 fiscal year.

There are needs and opportunities to tailor a new approach to spending review in the same way the government is thinking about policy shifts and new fiscal targets. Spending review needs to be transparent, fact based, multi-year, open to engagement and implementation-focused. The current government announcements have reiterated only targets for spending cuts needed for reallocation and fiscal responsibility. Much more is required.

Chart 1 illustrates what many economic observers are anticipating – the projected budgetary deficit has gone up since the Liberals published their election platform. The Liberal campaign platform projected a $62 billion deficit in 2025-26. Today, the economy is weaker, and new measures such as additional defence spending and removal of the digital tax were not costed in the platform.

IFSD thinks the budgetary deficit for 2025-26 could range between $75 and $90 billion, but will likely be closer to the lower end of that range, reflecting the limited time to push through 2025 platform initiatives and the possible sticker-shock impact that a high deficit number could elicit from the public, Parliament, media, and financial markets.

Over the medium term, IFSD thinks the budgetary deficit could range $10 to $20 billion higher than the Liberal platform on an annual basis because of the government’s commitment to increasing core military spending from 2 to 3.5 percent of GDP over the next decade (to 5 percent including supporting infrastructure).

The higher deficit projections will likely increase pressure on the federal government to expand the role of spending review and reallocation. The 2025 Liberal platform required the federal government to find about $15 billion in savings to achieve an operating balance in 2028-29. It is likely that the reallocation requirements are at least double because of the weaker economic outlook and defence spending commitments. Should the government wish to build-in some prudence or contingency reserves into the planning outlook (a best practice), it will also need to trim platform commitments.

Chart 2: Federal Spending Base for Review

Chart 2 highlights the growth in government over the past decade and the spending base for review. Much like Prime Minister Stephen Harper’s Deficit Reduction Action Plan launched in 2012, the Liberal government is proposing to find about $15 billion in annual savings (3 years hence) on the operating base of government – currently estimated to be $134 billion. It is a sizeable cut to spending that Prime Minister Harper largely achieved by 2014-15 to meet their fiscal target of a balanced budget.

With the need to finance higher national defence spending, the Carney government will likely need to double the level of reallocation of spending to meet its fiscal target of an operating balance in 2028-29. More savings will require a larger base for spending review. The government will likely need to expand the base to include grants and contributions of line departments that are not statutory in nature. Think transfers to citizens, businesses and other countries. Chart 2 illustrates this was the fastest growing spending component over the past ten years.

Table 1: Canada’s Experience with Spending Reviews 

Source: IFSD

Canada has significant experience with spending reviews. Table 1 provides a chronology of reviews, objectives and takeaways over the past 40 years. The system has muscle memory, although it has been more than a decade since the muscles have been used in a formal exercise.

Prime Minister Carney has talked about Budget 2025 in both austerity and investment terms. The austerity lens is used to reflect spending reductions required to create the fiscal space necessary to fund more capital investment and defence spending. For households, businesses and public servants who will be on the receiving end of restraint, it will feel like austerity. Reallocations of $15 billion (per the platform) to $30 billion per year. For many macroeconomists, the larger deficits will not look like austerity. In the end, it is about reallocation to drive new priorities.

In reallocation review exercises, ministers and deputy ministers are asked to recommend which lowest-priority and -performing programs should have their resources reallocated to higher priority and performing programs. It is a difficult exercise with political repercussions. The bureaucratic and political impulse is to run these exercises behind closed doors with minimal public reporting. Prime ministers Harper and Jean Chrétien ran cut exercises with majority governments. Prime Minister Carney must sell the reallocations to a minority Parliament and maintain its confidence.

Chart 3: OECD Survey: Key Challenges of Spending Reviews

Source: OECD, Spending Review, Results of OECD Survey, 2016

An OECD survey (Chart 3) highlights three significant and common challenges facing spending reviews – information, capacity and political will.

The lack of quality performance information makes it difficult for the government to explain the rationale for spending adjustment. Weak information can be used by public servants to convince cabinet ministers to be less transparent in public reporting. There are systemic weaknesses and/or gaps with data in Canada’s departmental plans and performance reports. Data will be a major challenge.

Capacity challenges are linked to the need for a strong policy framework and evaluation analysis to drive tough decisions. Diligent management and oversight is essential for successful implementation. To date, we have not been informed of the policy framework being used in the review exercise.

It has been said that doing hard things is hard. Reallocating spending is hard. Prime Minister Chretien’s (1990s) program review had a strong policy framework built on five tests (public interest, role of government, affordability, efficiency, federalism) and included multiple rounds of review under Finance Minister Paul Martin. Cabinet solidarity and good bureaucratic processes helped. Prime Minister Carney will need all these and more in a minority Parliament context.

Good pitching is essential to win a World Series in baseball. Good goaltending is essential to go deep in the Stanley Cup playoffs. A successful spending review and reallocation exercise is essential for the government to shift policy priorities and maintain fiscal discipline.

Kevin Page is the President of the Institute of Fiscal Studies and Democracy (IFSD) at the University of Ottawa, former Parliamentary Budget Officer and a Contributing Writer for Policy Magazine.

Clara Geddes is a senior researcher at IFSD.

Mikhaeil Ibrahim-Qayyum is an undergraduate economics student at Western University and was a summer student researcher at IFSD.