Canada's federal budget deficit is widening faster than expected, and that could leave the government with less firepower to fight the next recession, according to a new analysis from Rosenberg Research.
In a note released Tuesday, the economic research firm raised its forecast for the federal deficit in fiscal 2027 to CA$62.3 billion — a dramatic jump from the CA$8.4 billion projected in April 2022. The revision comes even though the economy has grown more strongly than anticipated and revenues are now estimated to be about CA$44 billion higher.
The culprit, Rosenberg says, is spending. The firm now expects federal expenditures to reach CA$603 billion in fiscal 2027, up CA$97 billion from the earlier estimate of CA$506 billion. Even after stripping out higher debt-service costs, program spending is seen at CA$543 billion — roughly CA$80 billion above the original projection.
Why the deficit is widening
Rosenberg's analysis points to a structural shift in Ottawa's fiscal trajectory. The government has committed to new programs and increased existing ones, and those costs are compounding over time. While stronger growth and higher revenues have helped, they haven't kept pace with the spending increases.
The firm also cautions against reading too much into improvements in the debt-to-GDP ratio — a key metric that investors watch. Rosenberg argues that a better-looking debt ratio is largely a byproduct of inflation lifting nominal economic output, not a sign that budgets have become more disciplined. In other words, the denominator (GDP) is growing faster because prices are higher, not because the numerator (debt) is shrinking.
That distinction matters for the next downturn. When a recession hits, tax receipts typically fall and automatic stabilizers — like unemployment insurance and other social benefits — kick in, pushing the deficit higher. Rosenberg warns that in such a scenario, Canada's deficit could exceed CA$100 billion, forcing the government to borrow heavily at exactly the wrong time.
What it means for your money
For everyday investors and borrowers, the size of the federal deficit isn't just a number on a government spreadsheet. It has a direct line to the interest rates you pay on mortgages and other long-term loans.
When the government runs a large deficit, it typically finances it by issuing more Government of Canada bonds. If the supply of those bonds rises, investors often demand higher yields to lend for longer periods. Those yields serve as a benchmark for banks' own long-term funding costs, which in turn feed into fixed mortgage rates and other multi-year loans.
So even if the Bank of Canada cuts its policy rate during a recession — as it did in past downturns — household borrowing costs could be slower to follow if federal borrowing needs are climbing at the same time. That's a key dynamic for anyone with a fixed-rate mortgage or planning to take out a loan in the coming years.
Rosenberg's warning comes as Canada's weak jobs run cools odds of a December rate hike, and as Bank of Canada watchers see rates hitting 2.75% by March 2027. The central bank's path is one thing, but the government's fiscal path is another — and both matter for your borrowing costs.
For investors, the widening deficit also raises questions about the government's ability to respond to future shocks. With less fiscal room, Ottawa may have fewer options to stimulate the economy if growth stalls. That could make recessions deeper or longer than they might otherwise be.
Rosenberg's analysis echoes concerns raised by other economists about the sustainability of Canada's fiscal trajectory. While the government has argued that spending is necessary to support growth and address social needs, critics say the lack of restraint leaves the country vulnerable.
In a broader context, Canada is not alone in facing fiscal pressures. Vietnam is targeting a 4.5% budget deficit for 2027 with spending cuts and a push on e-commerce taxes, showing that governments worldwide are grappling with how to balance budgets. But Canada's situation is particularly notable because of its reliance on bond markets to fund its deficits.
For now, the immediate focus for investors is on the Bank of Canada's next moves. CIBC says the Bank of Canada may be overstating inflation risks, which could influence the pace of rate cuts. But the fiscal backdrop is an underappreciated factor that could keep long-term rates higher than many expect.
As Rosenberg puts it, the improved debt-to-economy ratio is "flattering" but not necessarily a sign of fiscal health. In a downturn, the true test will be whether Ottawa can afford to act — and at what cost to future generations of borrowers.
