Will Higher Oil Prices Justify More Spending in Next Week’s Budget?

From: Don Drummond
To: Canadian taxpayers
Date: October 27, 2026
Re: Will Higher Oil Prices Justify More Spending in Next Week’s Budget?

Federal coffers are filling with an oil-price windfall that is variously estimated at $6 billion a year under current prices by the Business Council of Canada or $11.4 billion over three years (including the overall commodity boom) in a Parliamentary Budget Office (PBO) forecast.

What will Finance Minister François-Philippe Champagne do with that money when he presents his budget on November 5?

One thing he should not do is spend it on new initiatives, the way the federal government did in its spring economic update with its grocery GST credit, apprenticeship grants and GST elimination for new homebuyers, among other things.

There are many reasons why such a strategy would be unwise.

First off, oil prices might not stay high. Resumption of more normal global production and shipping would lower the price. As a reference, the West Texas Intermediate price averaged $US65 in 2025. It would not be prudent budget planning to assume the price stays well above that for years.

Beyond that, analyses such as the Business Council’s are partial in that they keep everything else in terms of economic assumptions and revenues unchanged and examined only the price of oil.

It is prudent to assume modest economic growth for Canada over the next several years given the interacting challenges of weak trend productivity growth, slower population gains due to lower immigration targets and the ever-changing Trump tariffs.

The SEU assumed the level of real GDP will be 8.9 percent higher in 2030 than the 2025 base. Recognizing the challenges, the 2026 C.D. Howe Institute Shadow Budget assumes cumulative growth of 5.3 percent, just 60 percent that of the SEU.

 Recent developments strengthen the case for a prudent view of revenue prospects. The personal income tax is by far the largest source of revenue and the meager 2.3-percent increase in wages from September 2025 to September 2026 – a decline in real terms that is especially relevant given the partially indexed tax system – does not bode well for federal revenues.

Meanwhile, the PBO estimates spending and tax announcements since the SEU already cost more than the revenue windfall from higher energy and commodity prices. This means that nothing is left for new initiatives in next week’s budget and any would drive the projected deficits up further. It is possible recent announcements are even more costly than assumed by the PBO because the government rarely specified how much is incremental spending and how much is a draw against funds already set aside. Further, since the PBO report was released, the government announced $2 billion over eight years to encourage electric heat pumps.

Justifying new spending from windfalls from any source reveals a disturbing lack of concern over serious fiscal imbalances. The SEU projected annual deficits of more than $50 billion for years. Using more appropriate economic assumptions and accounting for policy announcements since the SEU, the institute’s shadow budget projects annual average deficits of $78.8 billion from 2026-27 through 2030-31 with a net debt-to-GDP ratio rising to 45.1 percent by 2030-31. Such a high debt burden requires public debt charges of $83.2 billion in 2030-31, representing 14 cents of every revenue dollar.

The bottom line is there is no windfall available for new initiatives next week. And even if there is extra cash floating around, it needs to be applied to lowering the deficit and debt.

Don Drummond is the Stauffer-Dunning Fellow and an adjunct professor at the School of Policy Studies at Queen’s University, and fellow-in-residence at the C.D. Howe Institute.

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The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.