Improved revenues shrink deficit, but analysts warn limited room for new policy action
Canada’s Spring Economic Update delivered a better-than-expected fiscal picture, but economists say the government has already committed most of the gains, leaving little capacity to drive new economic growth initiatives.
The federal deficit is now projected at $66.9 billion, an $11.5 billion improvement from Budget 2025, with a gradual decline expected to $53.2 billion in the years ahead.
The stronger outlook reflects a resilient economy, supported by steady job creation and higher commodity prices. Canada’s economy expanded by 1.7% in 2025 and avoided a downturn despite ongoing global uncertainty and trade pressures.
But much of the improvement has already been used.
“The economic changes are lopsided towards improved government revenues rather than any real change in government spending,” says David-Alexandre Brassard, chief economist at CPA Canada. “With revenues revised upward, the government didn’t have to deliver the substantial savings in operating expenses it had outlined and in fact fell short by about $30 billion in projected savings of operating expenses.”
Brassard adds that roughly 80% of the additional revenue has already been allocated, limiting Ottawa’s ability to strengthen its fiscal position or introduce new initiatives.
That assessment aligns with broader market analysis. Scotiabank economist Rebekah Young had expected the government to largely stick to its existing fiscal path, using any upside in revenues to absorb previously announced spending rather than significantly altering the deficit trajectory.
“The government is essentially treading water from a fiscal perspective, choosing to absorb stronger revenues rather than redirect them toward new policy initiatives,” she wrote in her analysis of the update.
“The government has opted for incremental adjustments rather than broad-based tax or spending reforms,” RBC Wealth Management said, adding that while some measures may affect individuals and business owners, the changes fall short of materially reshaping Canada’s tax landscape.
Recent polling from the Angus Reid Institute shows affordability remains the dominant concern for Canadians, with 52% identifying the cost of living as the federal government’s top challenge over the next year. The same data indicates widespread dissatisfaction with progress on key household issues, as large majorities say the government has fallen short on both housing affordability and the rising cost of living.
Economic backdrop
At the same time, the economic backdrop remains relatively stable. Labour markets have held firm, with job gains outpacing those in the US on a per-capita basis, while wage growth has continued to exceed inflation, supporting household incomes.
However, risks remain. Growth forecasts have been modestly revised, and economists point to ongoing global uncertainty—including trade tensions and geopolitical risks—as constraints on stronger expansion.
Despite near-term improvements, longer-term fiscal pressures persist. Debt levels have eased with revised GDP figures, but the debt-to-GDP ratio is still expected to trend higher through the end of the decade.
The update also reinforces a theme of policy continuity. There were no major new tax reforms or large-scale spending programs aimed at transforming productivity.
“The few tax priorities contained in the update will not add undue stress to Canada’s already complex tax regime, leaving us at status quo,” says Ryan Minor, CPA Canada’s director of taxation. “Unfortunately, the changes outlined will not move the needle toward improving Canada’s tax system in the way needed to support long-term productivity and growth.”
While the government continues to emphasize investments in housing, infrastructure, and skilled labour, including initiatives to expand construction capacity and workforce participation, analysts suggest the overall approach remains cautious.
With most of the fiscal upside already spent and public pressure mounting on affordability, economists say Budget 2026 will be a key test of whether Ottawa is willing to shift from incremental policy moves to more ambitious action aimed at strengthening productivity and long-term economic growth.
