Canada has a peculiar economic story to tell right now.
On the surface, the numbers are beginning to look surprisingly good. The economy grew at an annualised rate of 3.3% in the second quarter. Corporate incomes jumped. Government revenues have come in much stronger than expected. And the federal government’s deficit during the first three months of the new fiscal year was a mere $370 million.
That sounds like a country getting its fiscal and economic house in order.
While it’s good to hope for the best, it’s also wise to take a sceptical view and keep at least one eye open.
Prime Minister Mark Carney is riding high, not least because he stood up to America. But let’s examine the current crosscurrents.
What is good economic planning, and what is luck?
Some of the improvement comes from Ottawa’s planned fiscal deficit of roughly $65 billion. But we should also throw into that mixture the luck of high oil prices — partly driven by the war with Iran — and the still-unknown outcome of the trade war and tariffs.
Let’s start with the number that should concern Canadians.
The federal government is projecting a deficit of roughly $65 billion for 2026–27, following a deficit of about $67 billion in the previous fiscal year.
That is roughly $6,400 for a family of four. A substantial cushion — but also a lot of borrowing. How long will the markets tolerate continued federal spending with revenues falling short of expenditures?
On the plus side, Canada’s federal deficit during the first three months of the current fiscal year was only $370 million.
Against a projected full-year deficit of roughly $65 billion, that is almost nothing. What actually produced the improvement?
We know it isn’t because Canada stopped spending. Program expenses were actually 4.3% higher than during the same period a year earlier. Public debt charges increased by 6.1%.
Government revenues, however, increased 9.8%, driven largely by stronger personal income tax, corporate income tax and GST receipts.
Luck will have it that the war with Iran has contributed to higher oil prices, benefiting the province of Alberta primarily, although some of those benefits are distributed throughout Canada. Higher personal incomes, higher corporate profits and stronger consumer confidence all lead to higher tax revenues.
Then there is the other “gift” from the United States: the trade war, with punitive tariffs on Canadian exports to the U.S., followed by Canadian tariffs on imports from the U.S.
We don’t know what this mixture will give us. We don’t know how long the war will last, and we don’t know when oil prices will come tumbling down again. If history is our guide, we know that oil prices are highly cyclical.
The tariff problem may be the more important part of the mixture. It makes Canadian exports to the U.S. shrink while making consumers pay more for American imports, leaving less money in their wallets. That could lead to lower employment, lower corporate profits and a sudden shift in consumer confidence.
There is a tax-revenue paradox we should not ignore. Ottawa has introduced generous tax incentives and accelerated write-offs to encourage businesses to invest. It can be good economic policy, but only in the context of Canada being a long-term, capital-friendly place in which to invest.
Uncertainty about Canada’s future competitiveness and its access to the U.S. market may cause businesses to postpone investments. Perversely, that could increase government revenue in the short term — because a business cannot write off an investment it did not make.
The remaining question the sceptic should ask is this: Is Canada’s short-term rise the result of cyclical circumstances while the long term remains fraught with danger?
We can point to Canada’s weak productivity, structural deficits, long-term forecast deficits and eventually rising interest costs on borrowing, together with the potential for oil prices to come down.
And all of this comes while Canada does not necessarily feel like the safest investment environment for businesses that depend on access to the entire American market.
So, what is the sceptic’s conclusion?
Don’t equate luck with good economic policy.