First Look at the 2025 Federal Budget

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Douglas Porter, CFA, Dante Rossi, CPA, CA, CFP®, Camilla Sutton, CFA November 06, 2025 Market Insights

Prime Minister Mark Carney’s first budget provided clarity around many previously announced spending plans and laid out the economic priorities of the government.

To unpack what the new measures mean for businesses, investors and households, and how the more than 400-page document will affect key themes like corporate tax competitiveness and affordability, BMO hosted a digital event titled, “First Look at the 2025 Federal Budget.”

The conversation was moderated by Camilla Sutton, Managing Director and Head of Equity Research, Canada & UK, BMO Capital Markets and featured:

Doug Porter, Chief Economist and Managing Director at BMO
Dante Rossi, Director of Tax Planning at BMO Private Wealth

Below are the key takeaways.

Economic outlook

Doug Porter said the budget was a step in the right direction, as it shifted the focus away from operational spending towards long-term investment.

“Let’s face it, they were constrained by a weak underlying economy and still relatively heavy interest costs, and they could not let the deficit go up a lot more than they did,” he said. “Working within those tight constraints, they managed to achieve a lot.”

Overall, the budget added about $5 billion in net new spending over the next year, which is the equivalent of about 0.1% of Canada’s GDP. That wasn’t enough for BMO to alter its forecast for just over 1% in GDP growth after inflation, said Porter. That already accounts for much of the increase in defence spending and measures to boost housing and incentivize capital spending.

Porter doesn’t expect the country to dip into a recession. “It has been a close call this year,” he said. “We actually saw an outright decline in GDP in the second quarter this year, but it now looks like the economy managed some really modest growth in the third quarter and we're expecting some mild improvement in the coming quarters, helped by lower interest rates.”

The labour market

One notable measure in the budget is the way the government is tackling employment, which Porter said has deteriorated over the past year. To accomplish this goal, Ottawa is adjusting immigration targets to slow the growth of the labour force to a little bit above zero for the next few years.

Porter noted the significance of the fact the budget included immigration targets for the next couple of years and how that’s become an important factor in the overall economic outlook in recent years. At the same time, there’s a large wave of Canadians retiring out of the labour force.

“This is quite an important economic story,” said Porter. “They’ve doubled down on the view that they're trying to slow the population growth for a couple years to help the job market better adjust to that prior surge in population, and also to help the housing market get into better balance.”

Affordability

Apart from trying to relieve pressure on the labour force, the government is also looking to address concerns around affordability. “Their overall goal is to continue to really support, especially affordable housing,” explained Porter. “What they're looking at on that front is to keep housing starts growing at roughly 250,000 or more per year.”

Previous rate cuts by the Bank of Canada (BoC) have also helped make housing more affordable. While the BoC suggests they may be done with cuts for a while, Porter isn’t convinced. “Our official view is we happen to believe that, after a bit of a delay here, that the BoC may well be trimming interest rates a little bit further in 2026,” he said.

Dante Rossi added that the budget also confirmed Ottawa’s intention to eliminate the GST for first-time home buyers on the purchase of new homes up to $1 million and reduce the GST for those same buyers on new homes between $1 million and $1.5 million.

Enhanced business write-offs

While corporate and personal tax changes were limited, the biggest headline was the introduction of a super deduction to spur new private capital investments. The enhanced tax incentives will enable businesses to write off or expense a larger share of these investments for tax purposes, Rossi explained.

“The super deduction will make it easier for businesses to recover investment costs faster through the tax system,” he said. “These super deductions are achieved through Canada's capital cost allowance or CCA system, which allows for tax depreciation deduction claims at different percentage rates, reflecting the depreciation of various capital assets.”

Ottawa is also proceeding with previously announced measures like the reinstatement of the accelerated investment incentive, which provides for an enhanced first-year write-off for most capital assets. The flagship proposal allows the immediate expense of manufacturing and processing buildings, although the measure will slowly phase out between 2030 and 2033, explained Dante.

The goal of the $1.2 billion initiative over the next five years is to strengthen Canada's competitiveness with the U.S. by reducing the overall marginal effective tax rate, which could be reduced by more than two percentage points, he said.

Incentivizing innovation

The budget also reaffirmed previous announcements around Scientific Research and Experimental Development (SR&ED) incentives. The SR&ED program offers tax deductions and investment tax credits for eligible R&D expenditures to encourage businesses to conduct research and development in Canada.

Under the incentive program, qualifying expenditures are fully deductible in the year they’re incurred. But on top of that, the expenditures may be eligible for an investment tax credit at an enhanced rate of 35% for Canadian-controlled private corporations (CCPCs), or a non-refundable tax credit at a rate of 20% for all other corporations.

At the same time, the government is looking to increase the annual expenditure limit from $3 million up to $6 million and increase the phase-out level, to allow larger companies to qualify for the enhanced tax credit.

Personal tax credits

From a personal tax perspective, the most important announcements actually came before budget day, including the middle-class tax cut, which dropped the lowest personal marginal tax rate to 14% from 15%, started July 1, 2025. One new initiative was tabled targeting personal support workers. The new temporary personal support workers refundable tax credit is equal to 5% of eligible earnings, up to a maximum credit of $1,100 per year, explained Rossi.

Because Ottawa is lowering the personal marginal tax rate reductions means some of the non-refundable tax credits tied to that lowest tax rate are no longer as valuable. To offset this change, the budget introduces a new non-refundable, top-up credit that would effectively maintain the current 15% rate for non-refundable tax credits claimed on amounts in excess of the first income tax bracket.

Some additional highlights:

Beginning in 2026, the budget will amend existing credits to ensure that an expense claimed under the medical expense tax credit cannot also be claimed under a home accessibility tax credit.
An underused housing tax filing requirement on underused homes has been eliminated, although it still applies to the years 2022 to 2024.
To address inefficiencies and save on administration costs, the government is also ending the luxury tax on aircraft with a value above $100,000 and boats valued above $250,000.
As previously announced, Ottawa will grant CRA discretionary authority to provide prefilled income tax returns on behalf of certain eligible low-income individuals for automatic filings where certain conditions are met. The measure will help ensure that low-income Canadians, specifically seniors, receive their eligible benefits and credit payments that are ultimately delivered through the tax system and which are income tested.

While the budget may be tabled, Rossi said the business community would still like to see Ottawa lay out a timeline to conduct a general comprehensive review of the tax system as a whole to address some of the complexity in tax policy.

“It’s something that continually comes up in the community, and we’ll surely keep an eye out to see if that does pop up sometime in the future,” he said.

Visit our Cross-Border Perspectives hub for more timely insights about international trade’s impact on economies and markets.

Transcript

Speaker 1:

The 2025 Canadian federal budget will be set against a backdrop of global economic uncertainty and evolving trade relationships. What are the key investments and changes in tax policies that the federal government is making? And which corporate sectors will be affected? What will be the impact of the fiscal outlook on growth, federal deficits, and investor confidence? In this episode, listen as BMO experts discuss the economic and tax implications of the first fiscal blueprint under Prime Minister Mark Carney's leadership.

Speaker 2:

Welcome to Markets Plus, where leading experts from across BMO discuss factors shaping the markets, economy, industry sectors, and much more. Visit bmocm.com/marketsplus for more episodes.

Camilla Sutton:

Hello, and welcome to our Canadian budget call. I'm Camilla Sutton, Head of Equity Research for Canada and the UK here at BMO Capital Markets. Yesterday, Minister Champagne tabled the federal budget titled Canada Strong, and today I'm really pleased to be joined by BMO's Chief Economist and Managing Director, Doug Porter for his take on how the key elements of this year's budget may affect the economic outlook over the next 12 months. As well as BMO's Wealth Director of Tax Planning, Dante Rossi, who will share his insights on the most significant personal and small business income tax measures announced in the budget and how that will play out.

Doug and Dante will each kick off with an overview of their thoughts. And from there, we'll turn to Q&A. We received a number of questions from the audience, so thank you for everyone who submitted those questions. They're really helpful for us. And after their quick presentations, we'll turn to a quick Q&A, and we'll wrap up after 30 minutes.

Doug, Dante, thank you both very much for joining us today. Doug, why don't we kick it off with you. Do you want to run us through your thoughts?

Doug Porter:

Sure thing, Camilla, and good afternoon everyone. Thanks for joining us here today.

So it's actually fairly difficult to summarize this budget in a short period of time because in over 400 pages, there was a lot in this budget. I wouldn't say it quite rose to the level of being transformational, as the finance minister and the prime minister suggested. But keep in mind that there had been many, many announcements in the lead up to the budget, many of which are quite important and this is a meaty, important document.

But I have to say that when we really drilled down to what was new on balance in this document, there wasn't really a whole lot there. When we added up, for instance, we estimate that maybe it added a net new spending of about four to 5 billion over the next year. Just to put that in perspective, that's just a little bit more than 1/10 of a percent of GDP and that's roughly what we expect for 2026.

So if we go to the next slide on GDP growth, for instance, so what does this all mean for overall growth? Effectively, we would not be rushing to change our forecast based on this. We had been assuming that there was going to be a lot of fiscal help from the budget. We had taken into account a lot of the defense spending, a lot of the measures to try to boost housing and boost capital spending. So we do see a mild improvement in the overall economy when we get over into 2026. But I think the key message here is we're still looking at growth of just a little bit more than 1%. This is after inflation, both this year and next. And frankly, that's not that different than what this budget was based upon.

Just to put those numbers into perspective, a typical year for the Canadian economy would be growth of just a little bit less than 2%. So we are looking at somewhat below average growth this year and next.

I have to say one of the most common questions I get is are we going into recession? Are we dealing with a recession? it has been a close call this year. We actually saw an outright decline in GDP in the second quarter this year, but it now looks like the economy managed some really modest growth in the third quarter, and we're expecting some mild improvement in the coming quarters, helped by lower interest rates and yes, some of the measures that have been taken in this budget.

If we go to via the next slide, what does this mean for the overall unemployment rate? We've definitely seen some deterioration over the past year. Part of that is due to this very slow economic growth we've seen and also because the labor force had been growing very rapidly up until recently.

An interesting wrinkle in this year's budget is it actually came accompanied by the immigration targets for the next couple of years. That, I have not seen before, that they actually unveil the immigration targets in the middle of the budget. And it shows you too how important the population story and the immigration story has become to the overall economic outlook in recent years.

And the bottom line there is Ottawa is aiming at slowing the population growth for a couple years, of just a little bit above zero for this year and next after that scorching population growth we saw a couple years ago when it rose to more than 3% in a single year in 2023, which was the highest we had seen or the second highest we had seen in the past century. So this is quite an important economic story and that's why I mentioned it as being part of the budget, that they've doubled down on the view that they're trying to slow the population growth for a couple years.

First of all, to help the job market better adjust to that prior surge in population, and also to help the housing market get into better balance. And we're well on the way to that. We have seen a pretty significant improvement in affordability in the last couple of years. We're not quite back to normal yet, but we're getting there.

And I will say that increasing the housing supply, while there wasn't a whole lot new in the budget, that's been a main focus of the Carney government and certainly it was a significant portion of the budget, all the measures that they're taking on that front. Not a lot new on the housing front, but their overall goal is to continue to really support especially affordable housing. So in other words, basically social assisted housing is what they're looking at on that front to keep housing starts growing at roughly 250,000 or more per year.

If we go to the next chart, just in terms of what this might mean for interest rates, the Bank of Canada, we just heard from them last week, they cut interest rates again. They've now cut interest rates by 2 and 3/4 percent from the peak that they reached as recently as last spring. They've been one of the most aggressive rate cutters in the world, cutting rates by less than half.

They indicated last week that they think that they're done. They think that they're done. We're not sure on that front. Our official view is we happen to believe that after a bit more of a delay here, that the bank may well be trimming interest rates a little bit further in 2026. This is an important second leg, above and beyond what we saw in the budget and many fiscal measures, to helping the economy through this very difficult adjustment, with the changed trade landscape that we have with the US. Also, we do believe that this will add, again, more support to the housing market over the next year.

Turning to the last chart, just in terms of the Canadian dollar, I've received a lot of questions in terms of what this budget means for the Canadian dollar. Coincidentally, the currency dropped to its lowest level in more than six months yesterday, dipping back below 71 cents. I happen to believe that that's got nothing to do with what we heard from Ottawa yesterday.

A broader trend in recent weeks and even months has been that after a heavy blow earlier this year, the US dollar more broadly has stabilized against all currencies. It started to make a bit of a comeback, not just against the Canadian dollar, we've also seen a comeback against the yen and the euro. It's a very interesting counter-trade that we've seen.

When we look out into 2026, we think that there are balancing forces at play here. I happen to believe that the dominant story will be that we'll see much more aggressive interest rate cuts from the Fed than what we've seen over the last nine months or so. Effectively, the Fed will be catching up with other central banks and cutting much more aggressively in 2026.

We also think that some of the enthusiasm around AI, not that it's going to go away, it just may dim somewhat in 2026. So two of the biggest drivers for the US dollar that we've seen in recent years will somewhat fade next year. The counterweight to that, the one reason why I would still be a little bit cautious on the Canadian dollar is we still have this overwhelming level of uncertainty over our trade relationship with the US. Unless and until we get more clarity on that front, then I do think a cloud will hang over the Canadian dollar. But the way we see it is on balance, we suspect that the Canadian dollar will slightly strengthen over the next year.

That's my overall view of the budget, I'll now hand it back to you, Camilla. Thank you.

Camilla Sutton:

Terrific. Thank you for that, Doug. Dante, why don't you run us through your side from a wealth perspective.

Dante Rossi:

Thanks, Camilla. So early this morning, we released our federal budget summary outlining details on some of the most significant tax measures, with a focus on individuals, trusts, and private businesses. But before walking through some of the proposed measures, I thought it'd be helpful to set a bit of an overview or context to highlight what was notably not in the budget to address some of the speculation prior budget day.

Starting with individual taxpayers here, there's no further personal income tax rate or tax bracket change announced, and most notably no decrease to the top personal marginal tax rate. However, earlier this year in May, the new government did propose what they referred to as a middle class tax cut by reducing the lowest personal marginal tax rate by one percentage point, from 15% to 14% beginning on July 1st of this year. This change effectively reduces the lowest marginal tax rate in 2025 to 14.5% and to 14% starting in 2026.

Now, outlined in the new Liberal Party's election platform were discussions around reducing mandatory RIF minimum withdrawal rate by 25% for one year, which was an issue retirees and seniors may have been looking to, particularly given the sharp decline in the equity markets that we realized early this year, as well to an increase in the guaranteed income supplement for seniors by 5%. Unfortunately, neither of these measures were noted in this year's budget. Instead, other targeted measures for individuals were released, which we'll highlight shortly.

On the corporate tax front, there's also no broad base change announced to corporate income tax rates, and more particularly, no mention of a patent box regime following a public consultation period that ended earlier this fall, which sought input, potentially offering a preferential tax rate on income derived from intellectual property on research and development activities conducted in Canada or other forms of AI related tax credit measures. Rather, the budget approached the tax changes in a more targeted manner to address Canada's productivity gap and our economic growth and global competitiveness.

So moving on to the next slide here, starting off with the corporate tax measures and continuing on the theme of growth and productivity, I'll start with welcome news in the corporate tax system on what is arguably the biggest headline with respect to tax measures announced in this year's budget. It's found in what the government refers to as a productivity super deduction, which is really just a set of enhanced tax incentives covering new private capital investments that allow businesses to write off or neatly expense a larger share of these investments for tax purposes, with the intention that they will make it easier for businesses to recover investment costs faster through the tax system.

These super deductions are achieved through Canada's Capital Cost Allowance or CCA system, which allows for a tax depreciation deduction claims at different percentage rates reflecting the depreciation of various capital assets. So the government is proceeding with previously announced measures by one, a reinstatement of the accelerated investment incentive, which provides for an enhanced first year write-off for most capital assets. Two, immediate expense, that is a 100% CCA deduction of first year write-offs for manufacturing or processing machinery equipment, as well as other clean energy equipment and other productivity enhancing assets such as patents and data networking infrastructure.

Now, all of these have existed in some form in the past, but the flagship proposal that is new here this year, which is an effort to make Canada's investment environment competitive with the US, is the immediate expense of manufacturing and processing buildings. Specifically, the budget proposes to introduce an immediate first year deduction for a 100% CCA claim for the acquisition of manufacturing and processing buildings acquired on or after the budget day and that are used for manufacturing and processing before 2030. This measure will slowly phase out between 2030 and 2033 and will also include costs for additions or other capital renovations to these types of buildings.

The goal here, as the government describes it, is to reduce the overall marginal effective tax rate. And by their estimates, should be reduced by more than two percentage point, thereby strengthening Canada's competitiveness. For scope, the budget documents anticipate this measure to cost the government approximately $1.2 billion over the next five years.

Next point on scientific research and experimental development or SR&ED here, which is what seems to be a perennial tax topic in past budgets, as it continues to be a driver of innovation. Canada's SR&ED program is essentially a federal tax incentive initiative designed to encourage businesses to conduct research and development in Canada by offering income tax deductions and investment tax credits for eligible R&D expenditures. Budget 2025 confirmed the government's intention to proceed with previously announced enhancements to the SR&ED program with further adjustments in this budget, which include essentially extending the enhanced tax credit, which is a 35% refundable tax credit available only to Canadian controlled private companies and extending that to eligible Canadian public corporations. Currently, public companies would only be subject to a lower 20% non-refundable tax rate.

There will also be an increase in the annual expenditure limit on which the enhanced credit can be earned, from $3 million up to $6 million, and increasing the phase out level which provides just essentially for more and larger companies to qualify for the enhanced tax credit. And lastly, restoring the eligibility of capital expenditures for both the deduction against income and investment tax credit components for the SR&ED program. Lastly, here are some minor technical tax integrity amendments are proposed to limit the ability for Canadian controlled private companies to defer refundable taxes owing on investment income through the use of tiered affiliated corporate structures with mismatched year-ends.

Moving on to my next slide, the last slide here around personal tax measures. In this year's budget, the government introduced some new tax credits and made some tweaks to existing credits, including a new temporary personal support workers refundable tax credit equal to 5% of eligible earnings for a maximum refundable credit of up to $1,100 per year. Consequential to the lowering of the personal marginal tax rate reductions I mentioned earlier that take effect this year, because most of our non-refundable tax credits are tied to that lowest tax rate, the budget introduces a new non-refundable top-up credit that would effectively maintain the current 15% rate for non-refundable tax credits claimed on amounts in excess of the first income tax bracket.

Beginning for 2026, the budget introduces amendments to existing credits to ensure that an expense claimed under the medical expense tax credit cannot also be claimed under a home accessibility tax credit. So just ensuring that there's no double dipping effect on credit claims.

We also saw some tweaks to registered investment plans. Currently, there's different sets of rules that apply to different sets of registered investment plans and the budget proposes to just simplify and harmonize the qualifying investments and small business investment rules that apply consistently to various plans and extends them also to registered disability plans as well.

Early this year, the new federal government abandoned last year's big news proposals to increase the general capital gains inclusion rate. As part of those proposals last year, a new Canada Entrepreneurship Investment Incentive, CEI, was announced, which intended to provide relief via reduction to the capital gains inclusion rate for certain individuals on the sale of certain qualifying private company shares. Now, the budget does acknowledge the abandonment of the proposed increase to the capital gains inclusion rate and consequently announced it would not be proceeding with this new CEI proposal. The government also did indicate that it does intend to proceed with a new increased lifetime capital gains exemption of $1.25 million on the dispositions of qualifying small business company shares and farming property.

In terms of scrapping things, maybe some welcome news here for some folks. For the 2025 year and beyond, there will no longer be an underused housing tax filing requirement or taxes owing for 2025 and beyond, but certainly still for the 2022 to 2024 years. Somewhat expected news, while legislative amendments continue to be in draft form, there will be continuing relief for bare trust information return filings for the 2025 tax year by deferring the annual tax filings for these sorts of trusts by another year starting for 2026 tax year and beyond.

Lastly, it was proposed to grant CRA discretionary authority to provide pre-filled income tax returns on behalf of certain eligible low-income individuals for automatic filings where certain conditions are met, and individuals will have a chance to review and submit changes if they feel is necessary. This measure is proposed to assist with specifically seniors and other low-income individuals to ensure they receive their eligible benefits and credit payments that are ultimately delivered to the tax system and are income tested.

So that's it for me for now as an overall overview. Certainly more to come and a lot of draft legislation yet to be seen on some of these measures, but we'll certainly keep an eye out on it.

Camilla Sutton:

Terrific overviews. Thank you both, that was great. Doug, maybe we can drill in a little bit here. Maybe we can start with the capital investment strategy, 280 billion over five years. What will this really look like? Is there any historical precedent that you can help us put this into context with?

Doug Porter:

Yeah, I think the quick answer is there really is no historical precedent to such a big wave of spending. And I will say if I had to really get down to what the theme of the budget was, it was to try to really boost investment, whether it was home building, defense, infrastructure, or even private sector investment. This is really what the government is trying to get at and ultimately, the goal here is to somewhat reduce our dependence on exports to the US, try to boost productivity.

I personally think it's a decent strategy. I think it's a good shift, trying to move a little bit away from spending on the operations of the government. That's where they're trying to reduce the civil servants by about 10% or so and really trying to focus on investment spending. I think that's a worthy goal.

The key here is it takes time. You cannot flick a light switch and suddenly get all kinds of new capital spending and improve productivity. That's really a multi-year effort. And when they spoke about a generational or a transformational shift here, time will tell whether it really has done that or not. We can't judge that in the here and now. I'm a wee bit skeptical, but again, I think the aim is good. I believe it's the right direction to be headed towards.

And I guess the last thing I would say is a lot of these measures, it sounds very impressive. A lot of them have been announced ahead of time. Again, there really wasn't that much new specifically in this budget. A lot of it was repackaged and sorted out and costed, frankly. So some of it had been announced through the year, but maybe that's the important message is that in a way this really added up a lot. We have heard a lot of policy announcements even before the election back in April and since then. In a way, this was really pulling it all together into one neat package.

Camilla Sutton:

Yeah, it's very true. It makes it nice for us from an analysis purpose too.

So what about on housing, Doug, affordability side in particular? There's clearly some here on the supply, maybe a little bit on the affordability. Can you just talk to some of the specifics on housing?

Doug Porter:

Yeah, and here the really centerpiece is this Build Canada Homes where they've allocated 13 billion over five years to really support a lot of affordable housing. In other words, lower end housing, frankly. And it's not that they're building directly, they're still depending on the private sector actually do the construction work. But they're trying to facilitate things, they're trying to open up federal land, for instance, trying to knock down some regulatory barriers for housing. Again, a worthy goal.

We have long been of the view that demand has been actually the bigger story here driving the unaffordability crisis that we've dealt with. But there's no question we do need some help on the supply side. And if I've had one pleasant surprise this year, it's how well housing starts have held up. Given how weak the condo market has been in places like Toronto and Vancouver, it's actually impressive that we're still going to see about a quarter million housing starts this year, and a lot of it is purpose-built rentals that have been supported by the government.

So I am somewhat more optimistic that we will see a little bit better of a supply response over the next couple of years, even in a very challenging condo market. So I'm a little bit more encouraged that we will see a bit of an improvement in affordability in the next couple years, and part of that as well has been the decline in interest rates. But I would stress we're not back to normal in affordability. When you look at it across the nation, things are still relatively unaffordable, so we got a little bit of a ways to go.

Camilla Sutton:

Dante, let's get you in on this in terms of the housing front. Anything in the tax system that's worth noting? I know that leading into today's event, we did have some questions particularly around things like taxing equity in our homes. Do you have anything worthwhile on the side?

Dante Rossi:

Yeah, it's a good question and there were rumblings in media outlets from the previous Liberal government that could be looking at some sort of home equity tax of sorts. The good news is that there was none of that, anything of that sort mentioned in this year's budget and no indication that there would be any adjustments to even the current principal residence exemption claim, which is helpful to offset capital gains taxes on our primary homes.

With respect to housing and building rental supply though, another tax measure that was not introduced in this budget, but in fact was referenced in their election platform, was the revival of a 1970s tax incentive known as MURBs or multi-unit residential buildings. This was a program designed to stimulate the construction of purpose-built rental by offering incentive to investors and owners of these properties in the form of, again, enhanced CCA or accelerated tax expense claims that can help offset taxes owing. That was something that, as I said, was referenced in the Liberal government's platform. But no mention of that and certainly we'll wait to see what they say on that.

However, I will say that the government did confirm in the budget that it is intending to move forward to eliminate the GST for first-time home buyers on the purchase of new homes up to $1 million, and ultimately reduce the GST for first-time home buyers on new homes beyond that $1 million and up to $1.5 million.

Camilla Sutton:

Thank you, Dante. Doug, can we drill down on the deficit? Maybe try to put it in perspective for us a little bit here. Where are we with the deficit? What does it mean, debt to GDP? And how will some of these kind of spending be offset by maybe more austerity measures in a sense?

Doug Porter:

Yeah, and just to step back for a moment, heading into it, we were expecting roughly a 75-billion-dollar deficit for this year and 70 billion for next based on what we knew heading into the budget. So the numbers are very close, from our perspective, to what had been laid out ahead of time, a little bit higher this year, a little bit lower next year, but on balance, pretty close.

Yes, in dollar terms, this is the third-largest deficit we've ever seen. The two larger ones were in the heart of COVID. But as a share of the economy, it's about 2.5% of GDP this year and about 2% next year. That is a bit larger if you look over, say, the last 50 years, a bit larger than a typical deficit, but not really that different. A little bit larger.

But think about the times we're dealing with. We've basically had our sales to our biggest trading partner in peril. We saw a big decline in exports in the second quarter and not much of a comeback in the third quarter. So to me, it's actually perfectly reasonable for public spending to somewhat step in to support industries that have been challenged by the tariffs. Hopefully, presumably this will only be about a two-year support that we'll need, and as I said, hopefully we'll have a little bit more certainty on the trade front when we get out into the medium term and we'll probably see the deficit come down a little bit further as a share of the economy.

I guess the bad news is there will be some semi-permanent damage to broader finances. And the way to capture that is, well, what's the debt done as a share of the economy? And instead of coming down, we've actually seen the debt-to-GDP ratio slightly creep up. It's still very manageable in the low 40% range.

I guess the one concern I would have there is there's a bit less flexibility in case something else happened. If we ran into some other crisis, something like COVID for instance, there's a little less flexibility on the fiscal side. But overall, I would say our finances are still in relatively manageable shape and we are in a somewhat healthier shape than most other economies, certainly the rest of the G-7.

Camilla Sutton:

What about on the labor side? Any implications from either the cuts to the public service or the immigration changes? And also on your slides, you highlighted youth unemployment being at relatively high levels. Anything in this budget that goes to work towards solving some of that?

Doug Porter:

Yeah, and first of all, when you hear some of the cutbacks in the public sector, as much as 40,000 job losses, it's important to remember, we're talking out of a labor force of 21 million people, so it works out to be about 2/10 of a percent, and that's spread out over a number of years. In any given month, the economy can create or lose 40 or 50,000 jobs, so I think we have to keep some perspective here from a broader lens.

However, I will say it's a bit of tough news coming at a time when the unemployment rate has been creeping higher in the last couple of years. We're long past the days of '22, when we were dealing with one of the strongest job markets, one of the tightest job markets we have ever seen. The job market is now flipped the switch, it's actually a little bit on the loose side.

And who's bearing that? It is newcomers, whether it's new immigrants, students, or young people in general. That's where we've seen the pressure in the job market. It's hard for people to get that first job and to keep their foot on the ladder. It's not a record youth unemployment rate. We have actually seen worse than this, but that's clearly where the challenge is.

Looking ahead, the fact that the population growth is going to slow down a lot over the next year actually will take a bit of pressure off of the labor market. And it's one of the reasons, if you saw on my chart, we actually have the unemployment rates slightly coming down next year. And that's partly just a story that there's a lot, going to be a lot less fewer entrants into the job market at a time when we've got a whole wave of people turning 65 and retiring out of the labor force over the next couple of years.

Camilla Sutton:

Thanks, Doug. Dante, I know we got a lot of questions leading into today's event really in terms of implications for estate planning or a trust or wealth transfers. Did you pick up on anything there that was relevant?

Dante Rossi:

Yeah, well, nothing to write home about, but in prior years there had been rumblings or fears of some sort of wealth tax or other increased state transfer tax. The good news, again is that there's no mention of that in the budget papers this year, nor in the Liberal Party election platform. Again, while not specifically mentioned yesterday, I will note that there have been some technical tax amendments referenced to in budget 2025 to include a beneficial change to the tax laws to provide estates with increased flexibility to engage in certain post-mortem tax planning strategies to ensure individuals and their estates are not punitively taxed.

On this point, the last thing I'll make is that this year's budget extended some anti-avoidance rules surrounding trusts specifically, just to ensure that taxpayers cannot access an indefinite deferral of capital gains tax through the use of trust vehicles.

Camilla Sutton:

Thank you, Dante. We're coming to the end here. Dante, do you want to just spend a quick minute and sum up, at a high level, what is the biggest takeaway from this budget?

Dante Rossi:

Yeah, I think I'll echo on Doug's comments. A lot of lead-up and anticipation in the sort of tone around generational investment. I'll say that from an income tax perspective, nothing major really. As I said, probably that MMP immediate expensing was sort of the highlight.

But one thing I will note is that it seems that every year there's always a web of new tax credits, deductions, or repeals of previous measures where the tax code has become increasingly complex body of legislation. So a long-standing request from the business and tax community is to see the government commit to at least a timeline of sorts to conduct a general comprehensive review of the tax system as a whole to modernize it, and with the goal of addressing this complexity to find a simpler approach to tax policy.

This was something that was briefly mentioned, the Conservative's election platform, but there was no mention of anything of sorts in this year's budget. It's something that continually comes up in the community and we'll surely keep an eye out to see if that does pop up sometime in the future.

Camilla Sutton:

Doug, what about you? Do you want to take a quick minute and give us, at a high level, what is the biggest takeaway from this year's budget?

Doug Porter:

I would say you could tell this budget was shaped by an economist. It's fairly technocratic, it didn't necessarily have a lot for the average person. But I actually view it somewhat positively. I think it was a step in the right direction to try to redirect some of the emphasis of government spending away from operational spending towards actually long-term investment. I do think that should be mildly applauded.

And let's face it, they were constrained by a weak underlying economy and still relatively heavy interest costs. They could not let the deficit go up a lot more than they did, and I think working within those tight constraints, they did manage to achieve a lot. And while I did say there wasn't a lot new in this budget, I think in the fullness of time, when we step back and look all the policy measures that have been introduced this year, we'll see that there really was a lot of meat on the bones and this budget really did sort of bring it all together.

Camilla Sutton:

Well, thank you very much, Doug. Thank you very much, Dante. We really appreciate you sharing your expertise today. I'm sure our clients did as well.

And to our clients who joined us, thank you very much for taking the time to join us today. I hope you found this to be an interesting discussion that was helpful and insightful and shed some light on the budget.

If you do have questions or you have any feedback for us, we're always happy to receive that. You can reach out to your BMO relationship manager. Thank you everyone for joining us today.

Speaker 2:

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