Budget 2025: Long-term Fiscal Sustainability
This note provides additional analysis to our report on Budget 2025, expanding the long-term fiscal sustainability assessment to include fiscal gap estimates.
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Based on Finance Canada’s long-term baseline scenario in Budget 2025, PBO estimates the federal fiscal gap to be -0.1 per cent of gross domestic product (GDP), or $4.2 billion in current dollars, growing in line with GDP thereafter. That is, the federal government could permanently increase spending or reduce revenues by 0.1 per cent of GDP while returning the federal debt ratio in 2055‑56 to its initial level of 41.2 per cent of GDP.
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PBO estimates that the federal debt-to-GDP profiles in the 2024 and 2022 Fall Economic Statements (FES) would result in significantly larger fiscal gaps of ‑1.3 and ‑1.4 per cent of GDP, respectively. This translates into increased fiscal room of $40.4 billion and $45.1 billion. New measures and revisions since the 2024 FES have used up almost all of the fiscal room that would have been available if the federal debt-to-GDP reduction had been maintained.
Budget 2025 marks a notable shift in the long-term federal fiscal outlook. Under the baseline scenario in Budget 2025, Finance Canada projected the federal debt-to-GDP ratio to remain relatively stable over the next 30 years. This stands in contrast to the sharp declines projected in budgets and updates over the last 3 years. As noted in our Budget 2025 report, there would be limited fiscal room to reduce revenues or increase program spending (relative to the baseline scenario) while ensuring the federal debt ratio in 2055-56 is at or below its initial level. This also contrasts with fiscal policy settings over the last 3 years that would have provided more room to address future challenges and risks.
PBO assesses fiscal sustainability using the fiscal gap—the change in revenues or program spending (relative to a baseline projection) required to stabilize a government’s debt-to-GDP ratio at its initial level over a long-term horizon. A negative fiscal gap indicates that debt is projected to decline as a share of GDP and that there is room available to increase spending or reduce revenues (or some combination of both), while ensuring that the debt-to-GDP ratio projected at the end of a long-term horizon returns to its initial level.
Based on Finance Canada’s long-term baseline scenario in Budget 2025, PBO estimates the federal fiscal gap to be -0.1 per cent of GDP ($4.2 billion in current dollars, growing in line with GDP thereafter). That is, the federal government could permanently increase spending or reduce revenues by 0.1 per cent of GDP while returning the federal debt-to-GDP ratio in 2055‑56 to its initial (2024-25) level of 41.2 per cent of GDP.[^1] As noted in our Budget 2025 report, based on Finance Canada projections, current fiscal policy in Budget 2025 would be deemed sustainable over the long term.
Using the baseline economic projection in Budget 2025, we estimate that the federal debt-to-GDP profiles in the 2024 FES and 2022 FES would result in significantly larger fiscal gaps of ‑1.3 per cent and ‑1.4 per cent of GDP, respectively. This translates into fiscal room of $40.4 billion and $45.1 billion, respectively (in current dollars, growing with GDP thereafter).
Finance Canada
Office of the Parliamentary Budget Officer
Finance Canada
Office of the Parliamentary Budget Officer
The series are presented on a fiscal-year basis where 2024 refers to 2024-25.