By Daniel Béland  

October 6, 2025

On November 4, Finance Minister François-Philippe Champagne will table the 2025 federal budget, the first of the Carney government.

This will be a budget of the highest importance for the country, in part because the government pledged to make large new investments in the economy and the military while trying to control federal spending, in a context in which the Parliamentary Budget Office (PBO) projects that the 2025-2026 deficit will reach $68.5 billion or 2.2 per cent of GDP, up 1.7 percent from the previous year.

In that challenging fiscal context, it might be tempting for the Carney government to cut federal transfers to the provinces and territories, as Jean Chrétien’s Liberal government did back in 1995. As part of that year’s controversial budget, the Chrétien government cut federal transfers through the replacement of both the Canada Assistance Plan (CAP) and the Established Programs Financing (EPF) by the Canada Health and Social Transfer (CHST), a single bloc grant that supported the provinces and territories in areas such as health care, social assistance, and post-secondary education.

As University of Calgary economist Trevor Tombe shows, the 1995 federal budget “reduced total transfers by over 15 percent or $4.5 billion in fiscal year 1997-98 relative to what EPF plus CAP would have been. Specifically, the CHST was projected to transfer $25.1 billion in 1997-98 but would have been a combined $29.6 billion had the EPF and CAP continued.” These were significant savings at the time, which helped improve the fiscal situation of the federal government, although it was done at the expense of the provinces and territories.

While it might be considered an option to cut transfers again to improve the federal fiscal situation, Mark Carney already made it clear that this would not be the case in his government’s next budget. There are two main reasons why his government should indeed avoid cutting these transfers.

First, unlike in 1995, the Liberals only have a minority government, and they need to receive support from at least one opposition party to survive the confidence vote on this fall’s budget. Because cuts in fiscal transfers would create a political backlash from the provinces, they would make the Carney government’s task to survive that vote even harder.

Moreover, back in 1995, the Liberals faced an especially fragmented opposition in which the Reform Party advocated for austerity and cuts in social programming, which facilitated the task of the Liberals at the time. Also, to reduce provincial mobilization against the cuts in federal transfers, by phasing out CAP and most of the strings attached to federal funding for social assistance, the 1995 budget increased provincial autonomy in that policy area, something meant to reduce provincial opposition, especially in Quebec, at the time when national unity was an urgent concern.

The provinces and territories need predictable fiscal support from the federal government, which is why they should be consulted extensively when the time comes to once again reform fiscal federalism in Canada.

Second, the fiscal situation of the federal government today is less problematic than it was back in 1995. For instance, the debt-to-GDP ratio of the federal government is much lower now than it was in the mid-1990s. Partly because of that, today there is also less support for austerity in general than back in the 1990s.

While this reality complicates federal budgeting in general, the idea of fiscal imbalance and the fact that provincial debt should increase faster than federal debt moving forward raises real questions about the fairness of any cuts in federal transfers at a time when needs in health care and social services are increasing amid accelerated population aging.

In light of these two factors, the Liberals would be well advised to keep Prime Minister’s Carney’s promise to refrain from cutting transfers to the provinces and territories in his government’s first budget. Yet, this does not mean that, moving forward, his government should neglect fiscal federalism. In fact, there are meaningful ways in which the Carney government could improve fiscal federalism in this country.

On the one hand, the time has come for the federal government to rethink and perhaps move beyond the Canada Health Transfer as we know it, in ways that would help provinces and territories better cope with issues such as demographic aging and regional inequality, which are related in this country. On the other hand, at some point, the politically controversial yet successful equalization program will have to be revised to adapt to changing economic and fiscal circumstances.

The current equalization formula, which has been in place since the early Harper years, is not without flaws and, considering ongoing criticisms of the program, the appointment of a new expert panel on equalization similar to the one the Liberals created back in 2005 should occur sooner rather than later. Equalization is a politically contentious topic, and it should be handled with care.

Reassessing the program is a task the Carney government should not neglect despite its other priorities. In 2025, unlike in 1995, rethinking fiscal federalism should be done through a consultative reform process rather than through sudden and unilateral budget processes.

The provinces and territories need predictable fiscal support from the federal government, which is why they should be consulted extensively when the time comes to once again reform fiscal federalism in Canada.

Daniel Béland is professor of political science and director of the McGill Institute for the Study of Canada at McGill University. He co-edited Fiscal Federalism in Canada (University of Toronto Press, 2023).