Economic and Fiscal Monitor – June 2025

Economic developments

The Canadian economy showed resilience in the fourth quarter of 2024 and the first quarter of 2025, as real GDP grew at an annualized rate of 2.1 per cent and 2.2 per cent, respectively, higher than projected in our 2025 Election Proposal Costing baseline (Table 1).

First quarter growth was primarily fueled by a rise in exports and inventory buildup, as firms frontloaded trade orders in anticipation of U.S. tariffs (Figure 1). By contrast, domestic demand stagnated due to a slowdown in the growth of household consumption and a sharp contraction in residential investment.

Statistics Canada and Office of the Parliamentary Budget Officer.

Statistics Canada and Office of the Parliamentary Budget Officer.

The contribution to growth from the statistical discrepancy is not shown.

Based on recent monthly data,[^1] we expect real GDP to be flat in the second quarter of 2025. This is lower than the growth of 2.3 per cent projected in our EPC baseline, which did not include the impact of U.S. tariffs or retaliatory measures from Canada and other countries. Net exports are expected to be a significant drag on growth, reflecting the unwinding of pre-tariff stockpiling from the first quarter and the impact of new U.S. tariffs. Business investment is also expected to remain subdued due to elevated uncertainty.

First quarter GDP inflation was roughly in line with our EPC baseline projection after a significant acceleration in the fourth quarter of 2024, which was largely attributable to higher export prices (Table 2).

Due to higher-than-expected GDP inflation and real GDP growth in the fourth quarter, nominal GDP—the broadest measure of the government’s tax base—was marginally higher ($3 billion, 0.1 per cent) in 2024 than projected in our EPC baseline.[^2]

2024-25 budgetary balance

We estimate that the Government will report a deficit of $46.0 billion (1.5 per cent of GDP) in 2024-25. Consistent with the better-than-anticipated economic results, this is:

• $4.3 billion lower than our projection in the 2025 Election Proposal Costing baseline (Figure 2); and

• $2.3 billion lower than Finance Canada projected in its 2024 Fall Economic Statement (FES).

Finance Canada and Office of the Parliamentary Budget Officer.

Finance Canada and Office of the Parliamentary Budget Officer.

The revision to our estimated deficit reflects a $5.2 billion increase in our estimate for revenues in 2024-25, somewhat offset by a $1.0 billion increase in our estimate for expenses.

Revenues are expected to be higher mostly due to stronger-than-expected year-to-date corporate income tax revenues and yields, as well as incremental customs import duties from the countermeasures responding to U.S. tariffs.[^3] Program expenses, particularly other transfer payments, are expected to be higher mainly due to larger anticipated contingent liabilities reflected in the 2025 March Fiscal Monitor.

It should be noted that these amounts are estimates. Certain categories tend to be adjusted between the March Fiscal Monitor and the final year-end results reported in the Public Accounts of Canada, notably income taxes and contingent liabilities.

The new fiscal anchor

In the Speech from the Throne, the Government introduced a new Operating Budget fiscal anchor.[^4] It committed to:

• Balancing this “budget” by 2028-29 by “cutting waste, capping the public service, ending duplication, and deploying technology to improve public sector productivity”.

• Reducing the annual growth in operating spending to 2 per cent, from the current annual growth rate of 9 per cent.

The new fiscal anchor will replace the previous anchor and fiscal commitment. These pertained to reducing the debt-to-GDP ratio over the medium-term and maintaining annual fiscal deficits below 1 per cent of GDP, respectively.

Unlike the previous fiscal anchor, the Government has not defined how the new Operating Budget targets will be measured. Specifically, there is no commonly accepted definition of what is defined as “operating” or “non-operating/capital” spending. Hence PBO is unable to assess whether the Government’s recent fiscal policy initiatives presented in Parliament (Main Estimates, Supplementary Estimates, Ways and Means motion) are consistent with achieving its new fiscal objective.

PBO also notes that the Government could fulfill its Operating Budget goals, and yet at the same time the federal debt-to-GDP ratio could grow because of additional borrowing for non-operating spending (for example, new acquisitions of weapons systems for the Canadian military). This means that the Government could achieve its fiscal objective and yet be fiscally unsustainable.

Parliamentarians may wish to seek additional clarity regarding how the Government plans to measure its fiscal anchor and how it will ensure federal finances remain sustainable.