Federal deficit could top $100B by 2035, economist warns

OTTAWA — One of Canada’s leading economists is warning that the country’s already historic federal deficit is on pace to top $100 billion in the next decade.

University of Calgary economist Trevor Tombe writes in a new study for the Montreal Economic Institute that, if current fiscal policy holds, the baseline federal deficit will grow to $117 billion by 2035.

The 2025-26 federal budget, tabled in November, projected a $78.3-billion deficit , the largest in Canadian history outside of the COVID-19 pandemic.

Tombe and collaborator Gabriel Giguère forecast that Canada’s new international commitments to boost military spending will exert the most pressure on federal finances. To hit NATO’s new target of 3.5 per cent on core defence spending by 2035, military expenditures must increase by roughly $100 billion, or 10 per cent a year.

Federal spending on elderly benefits is slated to grow by about 50 per cent, or $45 billion, in the next decade. Health transfers, equalization and debt interest payments are also projected to grow faster than revenues.

“Together, these pressures will cause overall federal spending to grow faster than revenues in the years ahead unless policy adjustments are made,” writes Tombe.

Tombe warns that, on the current course, Canada’s finances run the “looming risk of a 1990s rerun,” falling back to a fiscal position where “debt-servicing costs consumed roughly one-third of federal revenues, and overall public net debt … was both high and rising, at roughly two-thirds of GDP.”

Tombe told National Post that, even if Ottawa ditches the 3.5 per cent defence spending target, it will continue to run deficits well into the tens of billions of dollars.

“Even if we hold the amount of direct defence spending at two per cent of GDP, we still end up with a deficit in 2035 roughly as large as what we’re seeing over the next five years,” said Tombe.

The latest budget forecasts annual deficits in excess of $55 billion through 2029-30 and puts forward no timeline to balance the budget.

Tombe added that raising taxes alone isn’t a credible pathway to balancing the budget within the next decade.

He calculates that, to balance the budget by 2035 with no non-discretionary spending cuts, the GST would need to more than double from its current rate of five per cent to 12.5 per cent.

Tombe said that “trimming” elderly benefits to around the rate of economic growth could be a prudent place to start bringing the budget back toward balance.

“It wouldn’t be an outright cut,” said Tombe. “We’d still see elderly benefits grow every single year, but they wouldn’t grow more quickly than the GDP.”

He added that federal policymakers could mix spending restraint with measures to promote economic growth, such as reducing regulatory burdens on businesses, estimating that a 0.5 per cent annual increase would translate into $20 billion in additional revenue by 2035.

The federal government has run a budget deficit in each of the past 18 years since the 2008-09 global financial crisis. Another decade in the red would constitute the longest stretch of consecutive deficits ever recorded since 1867.

National Post rmohamed@postmedia.com

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