Canada - what lies ahead?
Budget/Tariffs/Defence
Note: Actual Canadian WWI advertisement for “Victory Bonds”, the sale of which were used to finance budget deficits on the rare occasions that expenditures exceeded receipts (E.G. wartime). Thanks to all veterans globally. Canadians have made outsized contributions through the broad history of human conflict via armed warfare.
Pictured: L-R, top to bottom (sourced from Canadian Armed Forces X post of today);
Capt Nichola Kathleen Sarah Goddard
Cpl Joseph Dany Olivier Fortin
Pte Mark Anthony Graham
Company Sergeant-Major Frederick William Hall
Lt Robert Hampton Gray
Sgt Joseph Arthur Guy Desjardins
In Flanders Fields
By John McCrae
In Flanders fields the poppies blow
Between the crosses, row on row,
That mark our place; and in the sky
The larks, still bravely singing, fly
Scarce heard amid the guns below.
We are the Dead. Short days ago
We lived, felt dawn, saw sunset glow,
Loved and were loved, and now we lie,
In Flanders fields.
Take up our quarrel with the foe:
To you from failing hands we throw
The torch; be yours to hold it high.
If ye break faith with us who die
We shall not sleep, though poppies grow
In Flanders fields.
BUDGET:
Carney delivered the first budget of his brief term as Canada’s Prime Minister, having taken office on Mar 14, 2025 at the helm of a minority Liberal government. Mark Carney is the current and 24th Prime Minister is Canada. Aisle-crossers in the past week from the Conservative Party bring PM Carney ever closer to an elusive majority. The appetite for another election, at this critical juncture, is deemed to be low.
The budget was not an austerity budget. Public sector “right-sizing” -40k civil servant jobs by 2029/30 vs. the -70k “feared” (cheered by some seeking smaller government). Deficit for the coming year -C$78.3 bln, equivalent to -2.6% of GDP (C$3.07tln).
Numbers heavy post, but I am a finance guy with my flag planted in Nova Scotia so buckle up!
Deficits must be placed in context. In this regard, Canada might be thought of as the “cleanest dirty shirt”, if one were at the end of their laundry cycle. With federal debt at C$954bln (31% of GDP and C$22,270 per woman, man and child) fiscal capacity vs G10 peers appears strong. Canada remains a AAA/Aaa rated sovereign (highest rating on offer, shared only with Germany at this juncture).
The USA has a deficit of US$38.18tln, a whopping 125% of GDP. The debt ceiling related government shut-down appears be resolved, hence we will see a $40tln “print” by Q1 2026. Persistent annual deficits of 5.0-7.0% of GDP are now the “norm” in the USA. No budget has been balanced since the Year of our Lord 2000, under Republican nor Democrat. The last US budget to approach Canada “prudence” is 1993 which was -2.8% of GDP. Per capita in the USA the deficit is US$111k per citizen and a whopping US$328k per taxpayer. Little wonder “stablecoins” are all the rage.
Canada apparent federal restraint is in some ways masked by burgeoning provincial debt (healthcare a provincial responsibility). As one might expect, given the vast expanse and paltry (relative) population, in comparison to Ont. and Que., the provincial numbers look worst per capita in Atlantic Canada. Atlantic Canadian provincial debt totals C$55.49bln across a population of 2.6 million for a per capita Atlantic Canada provincial total of C$21,340. Combined with federal previously noted of C$22,270 that is C$43,610 per Canadian in accrued federal + provincial debt. Nova Scotia provincial debt stands at C$21.15bln hence with a population only recently cresting 1 million (1,060,000), per capita NS provincial debt is C$20,000 (rounded up from C$19,953).
Regardless of the optics or the practicality of the argument, Canada’s cleanest dirty shirt get cleaner and the USA’s more grimy with each passing budget cycle.
The dent in the goodwill of America is beyond measure and democratic humanity can only hope that a yet unseen saviour can replace tRump 2.0 as a force for good and recapture the excellence premium previously afforded the United States of America on the global stage.
TARIFFS:
Trump’s tariffs currently face a formidable legal challenge. The US Supreme Court is likely to uphold the decision of lower courts that the tariffs imposed are unconstitutional (reversed and returned via a complicated calculus). Delta 0.85. If tariffs = taxes, that is the purvey of Congress. tRump’s jazz hands seemingly know no limit, hence, in the midst of this legal donnybrook he has unilaterally offered an initial US$2,000 tariff dividend to the masses (American woman, man & child).
With CUSMA compliant goods exempt, Canada has done well to avoid the bulk of tRump’s “whack-a-mole” negotiation tactics. Carney’s decorum, intellect and steadfast repudiation of the “three ring circus” has served Canada well thus far. Ill timed recognition of Palestine as an independent state and Premier Ford’s teevee ads have proved to be sharpish speed bumps.
International diplomatic efforts have readied fields, but are yet to bear measurable fruit. China relations, in particular, appear to be in thaw mode with test messaging on the abolition of 100% China EV tariffs (instituted to match the USA’s 4-fold increase) getting a net + response. With Stellantis and others car companies turning tail for the USA as a pivot, Canada may well be best served by taking China EV tariffs to 0%, effectively rolling out the red carpet to China’s BYD (Build Your Dreams) to establish a manufacturing base in Canada to serve North America.
China would most likely lift their retaliatory tariffs on Canada (seafood, canola oil, etc.) as a quid pro quo measure. The mouse and the elephant can perhaps once again “play nice”? BYD recently surpassed Toyota as the largest global car manufacturer by # units and Canada was Toyota’s 1st overseas base of manufacturing outside of Nagoya, Japan. They say if you live long enough, you get to see everything twice.
DEFENCE:
After skipping along for decades with defence budgets well below the 2% of GDP NATO commitment level and hiding behind the apron/shield of the USA, adults have entered the room.
Carney’s aforementioned budget goes big on defence. C$62.7bln for the coming year, approx. 2% of GDP (up from 1.4% prior) ,with aspirations for 5% of GDP by 2035.
The Canadian Armed Forces (CAF) have been running well shy of their recruitment targets for many revolutions of the Sun. -60,000 recruits shy order of magnitude.
A volunteer supplementary reserve made up from a pool of 300k+ Canadian civil servants has been touted as a possible way to “bridge the gap”. Appetite to serve aside, the demand for remote drone pilots (aka “fight from home”) will likely be limited in the early innings of this program.
Borrowing some insightful comments from former consultancy mate with serious defence chops here! Richard Farrington CBE is a highly respected leader with a distinguished career in the United Kingdom’s Royal Navy:
-Defence spending is an insurance policy. We all pay our premiums, but we hope we never have to claim, not least because the “no claims bonus” goes up.
-Defence spending and foreign policy are closely linked.
-Governments in democracies do change and so do their priorities. If you want predictability in policy, seek a dictatorship.
The level of potential waste in defence procurement is jaw-dropping, given the bespoke nature of the kit required. A bidder may deliver something faster/cheaper, but it may prove not “fit for task”.
Much work lies ahead. Canada is up for the challenge. Chin up.
JCG