Canada is Facing Threats. A Bad Budget Shouldn’t be One of Them: C.D. Howe Institute Shadow Budget

March 18, 2025 – Stagnant living standards and US trade aggression mean the federal government must put growing Canada’s economy first, says the C.D. Howe Institute’s 2025 Shadow Budget.

In “Putting Canada’s Economy First: The C.D. Howe Institute’s 2025 Shadow Budget,” authors William B.P. Robson, Don Drummond and Alexandre Laurin respond to Canada’s long-standing fiscal challenges and immediate threats with a federal budget focused on defence, budget surpluses and a falling debt burden, and growth-enhancing tax relief for Canadians.

The authors note that the numbers in the tardy 2024 Fall Economic Statement (FES) showed a startling overshoot of the 2023/24 budget’s deficit target and an increase in the ratio of federal net debt to GDP, notwithstanding a growing economy. Undisciplined public finances and stagnant living standards put Canada in a poor position to deal with US President Donald Trump’s economic attacks.

The Institute’s Shadow Budget restores surpluses by 2028/29, lowering the debt ratio from its current level above 42 percent to 35 percent by 2029/30. It brings federal program spending $28 billion below the 2024 FES projection by 2029/30, returning it to its pre-pandemic share of GDP, and sets Canada on a path to increase its defence spending to meet its 2 percent NATO commitment, increasing defence spending $16 billion compared to plans.

“A centrepiece of this Shadow Budget is a comprehensive review of non-defence spending,” says Robson, C.D. Howe Institute President and CEO. “Encompassing tax expenditures that are spending programs in disguise, the review will make programs more effective and efficient, allow needed increases in spending on defence and border security, and limit future governments’ recourse to borrowing.”

A core component of this proposed plan is a legislated multiyear ceiling on expenses such as federal payroll that do not vary with the economic cycle. The Shadow Budget also begins a badly needed shift of the tax burden from taxes that undermine work and investment to a system that will create the investments Canada needs to bolster its economy in the near term and make it more resilient over time. It proposes raising the GST rate two percentage points over two years to help pay for higher defence spending while lowering personal and corporate income taxes.

Further, the Shadow Budget would reduce the corporate income tax rate on income from patents and other intellectual property generated by activity in Canada, increase the effectiveness of the SR&ED tax credit, and introduce an exemption from taxation on capital gains realized on the sale of certain publicly traded small-business shares.

Notably, Robson, Drummond and Laurin propose a national commission with a mandate to review taxes from all sources and make the tax system more supportive of work and investment as well as competitive internationally.

The C.D. Howe Institute’s Shadow Budget also highlights fiscal transparency and accountability. It presents the key numbers more accessibly than recent federal budgets have done. It also proposes that Ottawa deliver its annual budget before the end of February each year; that it table the Main Estimates with the budget in a format that lets parliamentarians understand each item requiring their approval. The Shadow Budget also proposes earlier dates for the publication of the federal public accounts and commits to restoring fall economic statements to their original purpose as updates, rather than mini-budgets featuring major spending increases and tax changes.

“This is a stark and timely change of direction, setting the stage for renewed growth in productivity, competitiveness and living standards, and making Canada stronger whatever the United States may do,” conclude the authors. “It is the ‘economy-first’ budget Canada needs from the federal government in 2025.”

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For more information contact: William B.P. Robson, President and CEO, C.D. Howe Institute; Don Drummond, Fellow-in-Residence, C.D. Howe Institute; Alexandre Laurin, Vice-President and Director of Research, C.D. Howe Institute; and Lauren Malyk, Manager, Communications, C.D. Howe Institute, 416-873-6168 or lmalyk@cdhowe.org