We give the federal budget a ‘D’

Published in the Financial Post

For anyone hoping that the federal budget would signal a much-needed turn in economic and fiscal policy, the very appearance of the document is a warning. Like its recent predecessors, it is hundreds of pages of condescending graphics and politicized prose. The key fiscal numbers are buried in an annex on page 326. And it is billed as the budget for 2026, which is ludicrously late: the 2026-27 fiscal year started on April 1 and is now more than half over.

Plunge into the document, and the disappointment deepens. Canadians have suffered a decade of stagnating living standards — a combined result of weak investment, negligible growth in productivity and U.S. trade aggression. The opening letter from the prime minister and the minister of finance — a peculiar innovation itself, symbolic of the department’s overshadowing by the PMO — talks about a turbulent world, Canadian sovereignty, and a generational plan. But instead of the major changes this language should have heralded — the needed refocusing of federal spending on top priorities, the overdue overhaul of growth-stifling taxes, the end to excessive federal borrowing that is diverting saving from productive investment and raising interest costs — the opening highlights of the budget are populist handouts. A top-up in the “groceries and essentials” benefit. A giveaway to homeowners. A new handout for workers. All funded from more borrowing.

Read further, and the gap between what Canadians need and what the budget delivers becomes starker. For a decade now, federal spending has grown far faster than population, inflation and the economy, with no commensurate improvement in the services Canadians get from Ottawa. But instead of the focused spending review the government should have launched, relentlessly asking which programs deliver value for money, the budget ring-fences major transfer programs and promises unspecified restraint to lower the growth rate of expenditures.

To get the higher investment in infrastructure and productive capacity that really would make Canada more competitive, resilient and prosperous, we need to reduce the taxes that discourage work and investment. The government has promised an overhaul of business taxation. The “productivity mega deduction,” which should have been a budget measure, does help, but it is far from sufficient and treats different sectors very unevenly. The budget itself delivers nothing new on this vital front.

To limit the erosion of Ottawa’s fiscal position, Canadians needed a credible path to a balanced budget. The budget gives us nothing of the kind. Its baseline shows a remarkable windfall — a dramatically smaller deficit than projected in last spring’s fiscal update. But the budget, like its recent predecessors, spends the windfall to produce almost the same deficit and debt profiles as in the spring update — an average deficit of $57.7 billion from 2026-27 through 2030-31 and a net debt burden remaining above 40 per cent of GDP. Notwithstanding the government’s attempts to distract from its actual bottom line with a jury-rigged “day-to-day operating balance,” these deficits signal that Ottawa’s capacity to deliver services in the future is deteriorating. Not what Canadians need.

The budget also fails basic tests of transparency. It does not explain how the spring update, released almost a month after the 2025-26 fiscal year ended, got the deficit so wrong — $27.5-billion wrong — nor why the government, after concealing this information for months, assumes that the unexpectedly buoyant revenue that helped produce the surprise will continue. It mixes old and new announcements, making readers work needlessly hard to figure out what the budget actually changes. And it does not present clear numbers on the government’s biggest new commitment: defence.

As serious as any of those deficiencies is the fact that the budget projects massive borrowing, far beyond the amounts needed to finance the government’s deficits and capital expenditures. Over the next three years, the budget shows an astonishing $537 billion of borrowing, $257 billion of which will finance “loans, investments and advances” — money that will flow through Crown corporations such as the Canada Mortgage and Housing Corporation, Export Development Canada, the Business Development Bank of Canada and all the new banks and funds that have proliferated in recent years.

It’s not at all clear what kinds of returns the government will get on these investments. What is certain is that the debt it issues to finance them will require higher interest payments. In recent years, the yield on the government’s investments has been lower than the cost of its debt — which suggests that at least some of the money shown as loans, investments and advances was not loaned on commercial terms and should instead have been shown as spending. The budget’s headline message is about protecting Canadians, yet a careful look at the buried numbers shows increasing exposure to debt-related risk.

Canadians needed a bold change of direction. The 2026 federal budget does not deliver. From format and timing, through populist gimmicks instead of fundamental reforms of spending, revenues and fiscal discipline, to failures of transparency, it falls badly short. Against the grading criteria we set out prior to the budget’s release, we assign the budget a D.

Don Drummond, Stauffer-Dunning fellow and adjunct professor at the School of Policy Studies at Queen’s University, is a fellow-in-residence at the C.D. Howe Institute, where William B.P. Robson is president emeritus.