Carney made a big, bold $150-billion budget bet. Will it pay off?

Kevin Yin is a contributing columnist for The Globe and Mail and an economics doctoral candidate at the University of California, Berkeley.

As energy profits rose from the Iran war, the government has projected more than $158-billion in additional fiscal capacity over the next five years relative to the spring forecast, about $120-billion of which is from higher tax revenues. With the Nov. 5 budget, Ottawa has chosen to spend more than $150 billion of this windfall, with a significant portion on corporate tax incentives and various infrastructure projects. While it will take years to see whether this growth strategy pays off, there are more than a few reasons for caution.

The fear is that we are borrowing quite a bit at a time of high interest rates, for a growth plan that is deeply uncertain. In such circumstances, it may have been wiser to save more of the windfall revenues and reduce deficits.

Since the spring forecast, a bit more than $40-billion over the next five years has been committed to business tax relief like the Productivity Mega Deduction, expansions to the Clean Electricity and Clean Technology tax credits, and changes to the Scientific Research and Experimental Development tax credit. The deduction reform allows companies to front-load their capital deductions instead of spreading them across years, which provides more cash upfront for reinvestment. The rest of the windfall is being spent on non-growth-related categories such as Indigenous programs, housing measures and tariff-relief, among others.

Corporate tax cuts should be good for growth, but because growth is an extremely hard problem, the question is whether this will help enough to justify spending every extra dollar of windfall tax revenues.

While almost all G7 economies have cut corporate taxes in the last few decades, none except the United States have seen real per-capita growth rates higher than 1 per cent since 2010. That doesn’t mean tax cuts don’t work – growth would likely have been even slower in the absence of cuts, and Canada’s tax environment is now more generous – but it does suggest they are not a miracle cure. The micro-level evidence on accelerated tax deductions is also mixed. As a forthcoming paper in the American Economic Review finds, manufacturing plants that could deduct capital expenses faster from 1997 to 2011 increased investment and employment but did not raise wages or productivity (arguably the most important thing for growth).

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If the purpose is to compete for international capital, Canada was already quite competitive from a taxation standpoint as of last year. By Finance Canada’s own estimates, Canada’s effective marginal corporate tax rate was 13 per cent before the mega deduction, lower than that of comparable advanced economies including the United States (16.9 per cent.) This was thanks to the pre-existing super-deduction from the 2025 budget. Together this suggests that the mega deduction did not need to be so generous, or at the very least should have been funded with cuts elsewhere.

It is also an expensive time to be borrowing. Most of the 2027-28 deficits will be financed with bonds of a maturity of two years or greater, where the interest rates have soared in recent years. Two-year yields at 3.12 per cent and 10-year yields at 3.65 per cent are high relative to the last two decades. Debt payments are expected to rise to nearly 13 per cent of federal expenditures by 2031, which will outpace major spending categories like federal health-care transfers and unemployment insurance. As global interest rates rise from foreign and AI borrowing demand, this cost will only rise over time.

The government’s objective of balancing the “operating” budget – that is, all recurring expenditures – could have been a reasonable fiscal anchor to counteract these forces, if its definition of operating vs. capital budget made sense. However, by classifying many tax incentives as part of the capital budget, the government makes its own fiscal guardrail artificially permissive.

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Buying or building assets should be separated from operating expenses because the government can earn return on those assets, and/or privatize them at a later date to pay off debts. Operating expenses, on the other hand, are simply gone. However, the current definition of what is an capital expense includes things like tax incentives for investment and R&D, as well as housing grants. None of these creates any asset on the government’s balance sheet, which is the entire purpose of distinguishing capital expenditures.

This is not to say that we should not run deficits at all. Our net-debt-to-GDP ratio (debt minus assets, not including social security assets) remains low by advanced economy standards, as do our projected deficits as a percentage of GDP. And none of the objectives are wrong in and of themselves. But spending every dollar of additional revenue is a gamble, one that bets aggressively on growth relative to interest payments. Only time will tell whether this gamble will pay off.