Canada’s federal government has set a bold course with Budget 2025, placing substantial emphasis on investment-led growth even as the fiscal room for manoeuvre remains tight. According to the team at Royal Bank of Canada (RBC), the plan is characterized by sizable new spending, a significant deficit increase compared with earlier projections and a delicate balance between ambition and discipline.

At the heart of the document lies a dual-track – on one side, elevated capital expenditures; on the other, the pledge to bring the operating budget into balance by 2028-29 and to reduce the deficit as a share of GDP. RBC highlights that the actual deficit for the 2025-26 fiscal year is projected at approximately $78 billion, or around 2.5 per cent of GDP, up markedly from earlier estimates. Without savings from a broad expenditure review, the drag on the budget would have been even larger.

The composition of spending is shifting. The government is reclassifying more outlays as “capital” rather than “operating”, which improves the operating balance while leaving the overall deficit intact. In RBC’s view, this manoeuvre supports the operating budget balance mandate but does not fundamentally change the size of the total fiscal gap. Capital spending is set to rise to about 1.7 per cent of GDP in coming years, up from a historical average near 1 per cent.

RBC emphasizes that the growth assumptions feeding into the budget are fairly modest, and the forecast path for nominal GDP has been revised lower compared to the previous Fall Economic Statement. That weaker growth outlook contributes to the elevated deficit projections. The government’s hope is that the large investment push will pay dividends in terms of productivity and private sector participation, potentially bringing the debt-to-GDP ratio on a downward track in the mid-2030s. But execution risk remains large.

On the deficit and debt front, RBC points out that the net-debt burden is expected to rise to about 43.3 per cent of GDP by 2027-28 and plateau thereafter, before any meaningful decline. The prior fiscal anchor of a falling debt-to-GDP ratio has effectively been replaced by the twin objectives of a declining deficit ratio and a balanced operating budget. The narrow buffer against downside risks means any adverse economic shock or implementation slippage could upset the fiscal trajectory.

Tracing how we arrived here, the budget reflects years of slow trend growth, heightened global uncertainty, tariff pressures and an aging demographic. The government appears determined to pivot from traditional spending toward infrastructure, defence, housing and industrial strategy as drivers of future growth. RBC highlights the government’s target of catalyzing up to $500 billion in private investment over five years as a central element of the framework. If successful, this could significantly strengthen the fiscal position. But the metrics and measurement of that target remain opaque.

In sum, the budget stakes are high and the margins narrow. With little room for error and few buffers in place, progress hinges heavily on timely and effective implementation of the investment agenda, favourable external conditions and credible savings realization. The shift toward a “balanced” operating budget by reclassifying and ramping capital spending offers a path, but it is not without risk. If growth disappoints or if investments under-deliver, Canada’s fiscal outlook may come under renewed pressure.

This analysis draws on the RBC Economics report “High stakes, narrow margins: Canada’s federal budget bets on investment-led growth”. RBC