When will we see the benefit of Canadian government spending?

RBC assistant chief economist Cynthia Leach says Ottawa should focus on delivering existing economic commitments rather than introducing major new programs in Budget 2026, warning that rising deficits and debt could put pressure on the federal government’s fiscal targets.

In an Oct. 26 report, Leach said the Carney government’s strategy of borrowing to finance investments remains appropriate, but its economic benefits will take years to materialize.

“Ottawa’s strategy still fits the bill, but deficits and debt are headed higher, and the big lift to growth is years away,” Leach said.

She estimates that approximately $57-billion in new five-year spending commitments, including a $36-billion corporate tax deduction measure, childcare funding and an extension of the fuel tax holiday, have more than offset the fiscal benefits of higher oil prices and stronger near-term economic growth. Combined with a weaker medium-term growth outlook, those commitments could leave annual deficits more than $15-billion higher by 2030-31 than projected in the spring fiscal update. That would nearly eliminate the government’s room to meet its commitment to reduce the deficit as a share of GDP.

“We view later 2027 as a more realistic checkpoint on the private investment pipeline, where real impacts become more visible, or foreseeable,” Leach said.

Leach thinks Ottawa’s second fiscal target, balancing its operating budget by 2028-29, remains achievable because much of the additional spending falls under the government’s definition of capital investment. However, she warned that the broader debt picture could deteriorate more quickly than headline deficits suggest.

“Deficits tell part of the story of government finances; while borrowing tells a lot of the rest,” she said.

The economist estimates that the proposed $35-billion to $44-billion Pacific Link pipeline, other capital commitments and additional deficit spending could increase gross federal debt by more than $110-billion over the next decade. Federal borrowing requirements for 2026-27 are already tracking approximately $35-billion above the $133-billion projected in the spring update.

Leach argued that the government’s investment strategy has begun generating encouraging signs, including increased machinery and equipment imports, greater international investor interest and a growing pipeline of major projects. But, she said, meaningful private-sector investment has yet to appear in economic data.

“We view later 2027 as a more realistic checkpoint on the private investment pipeline, where real impacts become more visible, or foreseeable,” Leach said.

She expects the larger economic benefits to emerge over five to 10 years, as major infrastructure projects are completed and support additional investment.

In the meantime, higher borrowing costs could add to Ottawa’s fiscal challenges. Canadian 10-year government bond yields have increased approximately 40 basis points over four months, reflecting changing inflation expectations and potentially greater concern about government finances. Leach noted that Budget 2025 estimated a sustained one-percentage-point increase in interest rates would add $8-billion to the deficit after four years. Although Canada’s government debt position remains stronger than that of several major peers, she said continued fiscal credibility will be important.

“This is not a free pass,” Leach said.

Rather than introducing major spending initiatives, Leach wants Budget 2026 to provide clearer timelines and progress reports on existing commitments. “Instead of new programs, the budget should focus on a clear accounting of how and when major initiatives are progressing, plus targeted adjustments,” she said.

She also identified housing, health care, defence and childcare as areas where Ottawa faces longer-term funding pressures. Federal housing support is projected to fall from more than $10-billion in 2026-27 to approximately $4-billion by 2028-29, while several provincial health funding agreements are scheduled to expire.

Defence spending presents another substantial commitment. Leach said meeting Canada’s NATO obligations could require more than $65-billion in additional annual cash spending by 2035-36, according to the Parliamentary Budget Officer.

She also expects Ottawa to address its immigration outlook, potentially adjusting temporary resident targets as labour market conditions improve and demand for skilled workers increases. Leach said the government could preserve fiscal flexibility by improving program efficiency and managing contingent liabilities, including Indigenous claims.

The economist estimates the final 2025-26 deficit could include more than $10-billion to $15-billion in contingent-liability expenses.

With much of the government’s major policy agenda already funded, Leach said its next challenge is demonstrating that spending commitments can translate into sustained private investment and economic growth without undermining fiscal sustainability.

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