Carney uses higher oil revenue to spend on tax incentives, infrastructure in second Canadian budget

Prime Minister Mark Carney plans to use windfall oil revenue to boost Canada's productivity and build infrastructure over the next five years while keeping his previous fiscal goals intact, his second budget showed on Thursday, as he seeks to reduce economic dependence on the United ‌States. Almost 20 months of tariffs on some Canadian goods from the United States, Canada's largest trade partner by far, have upended supply chains, shrunk exports to the US and hit growth. But higher oil prices due to the Iran war have given Ottawa a fiscal boost.

The oil revenue allowed Finance Minister Francois-Philippe Champagne to propose increased investments in infrastructure such as an oil pipeline and electricity generation and ‌raise GDP projections. Canada will keep its key fiscal ratios, such as debt to GDP and deficit to GDP, mostly in line with previous estimates. Economists hailed the investments as a step ‌in the right direction as the measures could ease affordability concerns and upgrade infrastructure, but said the government's projections are based on a rosy outlook for continued GDP growth and increasing revenue.

"This budget is a continuation of the same focus that (was) highlighted earlier," said Helen Lao, executive director of economics at CIBC Capital Markets. LOWER DEFICIT

Lao said the government's deficit was much lower for the last fiscal year 2025-2026 than it projected earlier, allowing for more spending. The biggest unknown is the extent ⁠to which investments ​will attract economic growth in the coming years, she ⁠said. The budget must pass parliament, where Carney's Liberals have a majority of seats.

The fiscal deficit for the previous year dropped to C$39.3 billion from C$66.9 billion projected in the government's last economic update in April. Mainly higher oil revenue has ⁠given the government additional fiscal room of C$158.3 billion ($113.2 billion) since April, of which it plans to spend up to C$142.1 billion, along with an additional C$10 billion announced since April 2026, over the next five years, ​the budget shows.

Most new spending will go to the government'spermanent tax incentive, which helps businesses expense project costs upfront. It will also fund a tax incentive for Canadian builders, infrastructure, ⁠a top-up of a grocery rebate for consumers, social housing incentives and defence. "The government is hitting the right pieces in this budget," said Pedro Antunes, chief economist at Signal 49 Research, an independent firm.

"But the risk is that its debt ⁠stays ​elevated and debt financing cost keeps increasing," he cautioned, adding that if bond yields increase, debt servicing costs could be challenging. Economists said Canada is earmarking none of the oil windfall to reduce debt and debt payment charges.

The budget shows the federal debt increasing to C$1.59 trillion in 2030-2031 from C$1.37 trillion in the current 2026-2027 fiscal year. However, due to higher GDP projections, federal debt-to-GDP ⁠stays elevated but flat. The government expects its debt financing cost, a metric economists and analysts closely watch, to climb to 13.6% in the next five years from 11% this year.

Higher revenue ⁠and an assumption that new spending will boost ⁠productivity enabled the government to project a slightly higher growth rate from its fiscal update in April. Nominal GDP is expected to grow this fiscal year by 1.5 basis points more than the government's previous estimate. The government said it will achieve its two main fiscal goals — to balance day-to-day ‌operating spending against revenue by 2028-2029 ‌and to maintain a declining deficit-to-GDP ratio.