By Daniel Béland

August 22, 2025

It is hard to overstate the political importance of the looming federal budget, the first to be tabled by Prime Minister Mark Carney’s government.

This budget has been controversial since even before it was announced. In mid-May, Finance Minister François-Philippe Champagne stated that the government would not present a budget in 2025. Instead, he said that the government would simply outline its spending priorities in a fall economic statement. This approach was poorly received by opposition parties and beyond, and Conservative leader Pierre Poilievre deemed it “unacceptable”. A few days later, Prime Minister Carney announced that a proper budget would actually be tabled this fall.

Regardless of the timing of the 2025 budget, as an exercise in fiscal management it remains particularly tricky. Three main factors help explain this.

First, there is the high level of economic uncertainty created by the trade war between Canada and the United States initiated early this year by President Trump. In the absence of tariff deal between the two countries, such uncertainty remains acute.

Second, another challenge is the estimated size of the federal deficit. In 2023-2024, it reached $61.9 billion and recent estimates published by C.D. Howe suggest a deficit of above $90 billion for 2024-2025 and above $80 billion for each of the following three years. According to that C.D. Howe report, this is the case because, despite additional revenue stemming from counter-tariffs (newly withdrawn at this writing), recent Liberal tax cuts and, especially, the recently-announced NATO spending commitments to boost national defense spending will make it significantly harder for the Carney government to keep the deficit under control.

This issue points to the resurgence of the traditional Guns vs. Butter dilemma in public spending, which is present in Canada as much as in other liberal democracies, especially our NATO counterparts. While the Carney government seems to have moved away from the expansionist social policy agenda of the Justin Trudeau era to focus on economic issues, there is strong political pressure to keep funding the initiatives adopted since 2015 while avoiding cuts to federal transfers, especially the Canada Health Transfer (CHT), as premiers made it clear again recently they want more money, not less. Cutting the CHT, which is valued at about $55 billion in 2025-2026, would also be at odds with the 2025 Liberal campaign pledge to “to protect and modernize Canada’s public health care system”.

Third, this last consideration about the Liberal platform brings partisan politics to the forefront, something particularly crucial in the context of a minority Parliament, which further complicates the task of Finance Minister Champagne and his team. Back in 1995, as Sylvian Bashevkin argued, the Chrétien majority government was able to impose major fiscal losses on the provinces by abruptly cutting federal transfers partly because it faced a divided opposition, including the Reform Party, which supported austerity. In the context of a minority Parliament, the Carney government has much less political wiggle room than the Chrétien government had exactly 30 years ago.

It is likely that both journalists and members of the public will attribute much of the budget’s content to Prime Minister Carney himself.

Although the Liberals have been in a minority situation since after the 2019 federal election, the domestic and international context has changed dramatically at least twice. First, in the aftermath of the global COVID-19 pandemic, which led to a dramatic yet mostly temporary increase in social spending and, second, after the return of Donald Trump to the White House on January 20, which has fostered both government-supported economic nationalism and the push for much higher defense spending tied to Canada’s NATO membership.

To create the much-needed fiscal room for new spending priorities in these two vital areas, the Carney government launched this spring a systematic review of federal government spending, with the hope of cutting operational spending “by 7.5 per cent for the 2026-27 fiscal year, 10 per cent the following year and 15 per cent in 2028-29.” Even if it might be possible to achieve a key part of these savings through attrition, the political risks for the government are real, as public sector unions stand on guard, ready to fight to protect their members, if and when needed. Considering the Carney government’s recent “Air Canada strike debacle,” the Liberals would underestimate at their peril the threat of labour unrest, which has spiked in the aftermath of the pandemic.

Politically, this forthcoming budget raises two other major questions. On the one hand, how much autonomy will Finance Minister Champagne have in crafting his first federal budget knowing that his prime minister holds a PhD in economics from Oxford, served as central banker to two G7 economies and most certainly knows far more about budgeting than he does. There will be human bridges over that gap, including Privy Council Clerk Michael Sabia, former deputy minister of finance.

Regardless of what happens behind closed doors in terms of actual policymaking, it is likely that both journalists and members of the public will attribute much of the budget’s content to Prime Minister Carney himself. If this budget is widely criticized, the buck will stop at him perhaps even more than usual in our highly centralized federal executive.

While recent public opinion data suggest Carney’s “honeymoon” with voters seems to have endured over summer, a very unpopular budget could provide powerful ammunition to opposition parties desperate to score political points against the Liberals. Partly because the recent winner of the Battle River-Crowfoot by-election Pierre Poilievre will return to the House of Commons next month, the government could have a tough time this fall during question period, including and especially with regard to the budget.

On the other hand, the content of the fall budget is likely to be determined in part by the minority parliament situation and the need to secure enough votes for the government to survive the confidence vote needed to pass it. Under Justin Trudeau, after 2019 and, especially, after the signing in March 2022 of the supply and confidence agreement, the Liberals relied primarily on the NDP to stay in power in the context of confidence votes, including those about the federal budget.

The supply and confidence agreement was ended by the NDP last September and, this time around, it remains unclear whether the Liberals could rely on the NDP again or, instead, turn to another party, possibly the Bloc, to pass their budget and stay in power. The Carney Liberals remain quite popular in Quebec and, this spring, Bloc leader Yves-François Blanchet even spoke of a “truce” between his party and the Liberals. The optics of the Bloc propping up the Carney government are not likely to be good for the Liberals in TROC (the rest of Canada), however.

An attenuating factor for the Liberals is that they have a strong minority government, as they are only three seats below the majority threshold. Additionally, because the election was only held in April and the Liberals remain ahead in the polls, opposition parties would not want the government to fall at this stage. This does not mean, however, that the Carney government should act as if it operates in a majority parliament.

The political constraints it faces are real and, when you add the economic and fiscal issues above to the mix, this budget exercise will be a politically complicated one.

Daniel Béland is professor of political science and director (on leave) of the McGill Institute for the Study of Canada at McGill University.