Canada’s federal finances are on a challenging path, with a new report warning that the country’s deficit could climb to $117 billion by 2035 far exceeding current government projections.
The analysis, published by the Montreal Economic Institute (MEI), suggests that rising costs tied to an aging population, increased transfers to provinces, and expanded military commitments will significantly strain public finances over the next decade. This stands in contrast to the federal government’s latest budget forecast, which estimates a much lower deficit of $57 billion by 2029.
According to economists Trevor Tombe and Gabriel Giguère, a key driver of future spending will be Canada’s commitment to boost defence expenditure to 3.5 percent of GDP by 2035. This alone could add approximately $100 billion in spending. At the same time, elderly benefits are expected to surge by $45 billion over the next ten years as more Canadians qualify for support programs.
The report highlights that these spending pressures will likely outpace government revenues, which are projected to grow at an average annual rate of 3.8 percent, in line with nominal economic growth. However, elderly benefits are expected to grow faster, at 4.9 percent annually, while transfers to provinces will increase by around 3.6 percent.
Additional fiscal strain will come from equalization payments and rising interest costs on government debt. Together, these factors create what the report describes as a widening gap between spending and revenue unless significant policy changes are implemented.
The authors argue that balancing the budget by 2035 will require difficult decisions. They caution that relying solely on tax increases is not a realistic solution. For example, raising the Goods and Services Tax (GST) from its current 5 percent to 12.5 percent would be necessary to close the gap an option they consider politically and economically unfeasible.
Instead, the report recommends a combination of spending restraint measures. These include maintaining reductions in non-defence direct spending, which could cut the projected deficit by nearly $51 billion. Slowing the growth of elderly benefits to 2.5 percent annually after 2029 could reduce the deficit by another $19 billion. Limiting the growth of provincial transfers to 3 percent per year could yield additional savings of about $6 billion.
Despite these recommendations, the federal government’s latest budget stops short of committing to a fully balanced budget. It does, however, pledge to balance operational spending day-to-day expenses such as salaries and benefits by 2028–29.
This target has been questioned by the Parliamentary Budget Office (PBO), which argues that the government’s definition of capital spending is too broad. According to the PBO, capital investments are overstated by $94 billion, meaning the government may fall short of its operational balance goal under stricter accounting standards.
The 2025 budget also includes significant new spending initiatives, such as $81.8 billion for defence over five years, $10 billion to address affordability challenges, and an additional $7 billion in support measures for Canadians. To offset some of these costs, the government plans to achieve $13 billion in annual savings through a comprehensive expenditure review.
Overall, the report paints a sobering picture of Canada’s fiscal outlook, warning that without decisive action, the country could face sustained deficits and growing debt burdens in the years ahead.
