Economic and Fiscal Outlook – September 2025

Summary

This report provides a baseline projection to help parliamentarians gauge potential economic and fiscal outcomes under current policy settings. Our outlook incorporates economic data up to September 11 and new measures announced by the Government since the 2024 Fall Economic Statement. These include measures announced up to and including August 11 as well as the Government’s September 5 announcement.

The outlook does not include incremental measures to achieve the North Atlantic Treaty Organization (NATO) Defence Investment Pledge of investing 5 per cent of annual gross domestic product (GDP) by 2035.[^1]

Similarly, the outlook excludes the Government’s Comprehensive Expenditure Review (CER)[^2] as well as any unannounced commitments from the Liberal Party of Canada’s Platform.

Our baseline projection assumes that the tariffs and countermeasures in effect on September 5 will remain in place throughout the 2025‑26 fiscal year. Further, we assume that Canadian tariffs on goods from the United States will be gradually phased out, with full elimination achieved by December 31, 2026.[^3]

The following provides a condensed overview of PBO’s Economic and Fiscal Outlook (EFO). Projection details are provided in Appendices A to I.

Economic outlook

The Canadian economy posted stronger-than-expected gains in the first quarter of 2025 as some trade activity was pulled forward in anticipation of U.S. tariffs. These gains were more than unwound in the second quarter, with real GDP contracting by 1.6 per cent at an annualized rate, as tariffs were imposed and trade frictions intensified.

We expect growth to remain subdued through the second half of 2025 with a gradual recovery extending into 2026 as firms adapt to the evolving trade environment and exports begin to recover from depressed levels. To help offset the contractionary effects of trade disruptions and support domestic demand, we assume the Bank of Canada maintains its policy rate at 2.5 per cent before returning it to its neutral level of 2.75 per cent in late 2026.

Overall, we project real GDP growth of 1.2 per cent in 2025 and 1.3 per cent in 2026 (Table 1), down from 1.7 per cent and 1.5 per cent, respectively, in our March outlook.

Statistics Canada and Office of the Parliamentary Budget Officer.

Statistics Canada and Office of the Parliamentary Budget Officer.

The projection period covers 2025 to 2030. The unemployment rate and the Bank of Canada policy rate are end-of-period values.

Beyond the short term, growth is expected to strengthen with real GDP rebounding to 1.8 per cent in 2027, driven by robust household spending and a recovery in exports and business investment. Over 2028 to 2030, we project growth will average 1.7 per cent, which is slightly higher than our estimate of potential output growth (1.6 per cent) over the same period. However, we estimate that trade policies and uncertainty will reduce the level of real GDP by 0.5 per cent by 2030.[^4]

The labour market has also softened in line with the broader slowdown in economic activity. The unemployment rate increased to 7.1 per cent in August 2025, as employment declined more sharply than the labour force. We expect the unemployment rate to remain close to its current level over the remainder of the year before gradually declining to 5.6 per cent by the end of the projection horizon.[^5]

Inflation[^6] is projected to average 1.9 per cent in 2025, as upward pressure from tariffs is offset by excess supply and a stronger Canadian dollar, as well as the removal of the federal fuel charge. Consumer price inflation is expected to fall to 1.6 per cent in 2026, reflecting the impact of lower energy prices and easing shelter price inflation. As tariff-related price effects are absorbed and the output gap narrows, inflation is projected to stabilize near the Bank of Canada’s 2 per cent target over the remainder of the projection horizon.

Reflecting weaker real activity and lower prices, our outlook for nominal GDP—the broadest measure of the Government’s tax base—has been revised down compared to our March outlook. We project the level of nominal GDP to be $12.9 billion lower annually, on average, over 2025 to 2029 primarily due to the impact of tariffs and less favourable trading conditions with the United States.

Fiscal outlook

Our status quo fiscal outlook includes new measures announced since the 2024 Fall Economic Statement up to and including August 11, as well as the Government’s September 5 announcement. Combined, these measures amount to $115.1 billion in (net) new spending over 2024‑25 to 2029‑30.[^7]

Our outlook includes $8.3 billion in increased funding to the Department of National Defence in 2025‑26 announced on June 9 and provisions $6.6 billion annually, on average, on an ongoing basis.[^8] Due to limited information provided, the outlook does not fully reflect the Government’s North Atlantic Treaty Organization (NATO) commitment to increase defence expenditures to 3.5 per cent of GDP by 2035 and the additional 1.5 per cent of GDP spending commitment toward critical defence and security-related expenditures.

In absence of final financial results for the past fiscal year, we estimate that there was a budgetary deficit of $51.7 billion (1.7 per cent of GDP) in 2024‑25 (Table 2).[^9] For the current fiscal year, 2025‑26, we project the deficit to increase sharply to $68.5 billion (2.2 per cent of GDP), reflecting weaker economic growth and additional measures impacting both revenues and expenses.

Assuming no new measures are introduced and existing temporary measures sunset as scheduled, the budgetary deficit is expected to decline slightly but remain close to $60 billion through the medium term as growth in revenues only slightly outpaces growth in expenses.

In total, we expect the Government to collect $8.0 billion in countermeasure tariff revenues over 2024‑25 to 2026‑27, all of which are assumed to be returned to affected sectors.[^10]

Finance Canada and Office of the Parliamentary Budget Officer.

Finance Canada and Office of the Parliamentary Budget Officer.

The projected level of federal debt for 2024‑25 includes the $6.2 billion in net remeasurement gains reported in the [March 2025 Fiscal Monitor](https://www.canada.ca/en/department-finance/services/publications/fiscal-monitor/2025/03.html).[^11] Fiscal year 2024-25 is an estimate. The projection period covers fiscal years 2025‑26 to 2030‑31. Totals may not add due to rounding.

We project the debt service ratio (that is, public debt charges relative to total revenues) to increase to 10.7 per cent in 2024‑25 from 10.3 per cent in 2023‑24. As federal debt grows faster than revenues, the debt service ratio is projected to increase further, reaching 13.7 per cent in 2030‑31, well above its pre-pandemic record low of 7.0 per cent in 2018-19.

In 2024‑25, we expect the federal debt-to-GDP ratio to fall (temporarily) to 41.7 per cent (Figure 1). Due to persistent budgetary deficits of over 1 per cent of GDP, the federal debt-to-GDP ratio is projected to increase from 41.7 per cent in 2024‑25, rising above 43 per cent over the medium term. Compared to our March outlook, the federal debt-to-GDP ratio is 4.5 percentage points higher in 2029‑30 and is no longer projected to be on a declining path over the medium term.

Finance Canada, Statistics Canada and Office of the Parliamentary Budget Officer.

Finance Canada, Statistics Canada and Office of the Parliamentary Budget Officer.

Data are in fiscal years (2024 corresponds to fiscal year 2024‑25). Fiscal year 2024‑25 is an estimate. The projection period covers fiscal years 2025‑26 to 2030‑31.

Compared to our March outlook, we project budgetary deficits that are $26.6 billion higher, on average, over 2024‑25 to 2029‑30. This upward revision is largely due to new measures announced by the Government that reduce projected revenues and increase program expenses (Table 3).[^12]

Office of the Parliamentary Budget Officer.

Office of the Parliamentary Budget Officer.

Additional measures include those announced in the 2024 Fall Economic Statement. Fiscal year 2024-25 is an estimate. The projection period covers fiscal years 2025‑26 to 2029‑30. Totals may not add due to rounding.

Risks and uncertainty

Our outlook provides a baseline projection to help parliamentarians gauge potential economic and fiscal outcomes under current policy settings (that is, a “status quo” baseline). Setting aside new measures that are likely to be announced in the Government’s upcoming budget and excluding risks related to the imposition of threatened U.S. tariffs and retaliatory measures, we judge that the risks to our economic and fiscal outlook are roughly balanced.

Key downside risk: Prolonged trade uncertainty

Heightened trade uncertainty could delay the recovery in business investment and exports. If trade conditions fail to improve, economic activity could slow more than anticipated, leading to weaker employment growth, lower overall demand and higher-than-projected budgetary deficits and federal debt.

Key upside risk: Stronger domestic demand

If interest rates are reduced further or population growth is higher than projected, household consumption and residential investment could be stronger than expected, resulting in lower-than-projected budgetary deficits and federal debt.

Detailed economic outlook

Statistics Canada and Office of the Parliamentary Budget Officer.

Statistics Canada and Office of the Parliamentary Budget Officer.

The unemployment rate and interest rates (3-month treasury rate and 10-year government bond rate) are end-of-period values.

Composition of nominal GDP

Statistics Canada and Office of the Parliamentary Budget Officer.

Statistics Canada and Office of the Parliamentary Budget Officer.

Detailed revenue outlook

Finance Canada and Office of the Parliamentary Budget Officer.

Finance Canada and Office of the Parliamentary Budget Officer.

Totals may not add due to rounding.

Detailed expense outlook

Finance Canada and Office of the Parliamentary Budget Officer.

Finance Canada and Office of the Parliamentary Budget Officer.

Totals may not add due to rounding.

Employment Insurance Operating Account

Finance Canada and Office of the Parliamentary Budget Officer.

Finance Canada and Office of the Parliamentary Budget Officer.

Totals may not add due to rounding. The projection period covers 2025 to 2033.

Direct program expenses

Finance Canada and Office of the Parliamentary Budget Officer.

Finance Canada and Office of the Parliamentary Budget Officer.

Totals may not add due to rounding.

Federal debt outlook

Finance Canada and Office of the Parliamentary Budget Officer.

Finance Canada and Office of the Parliamentary Budget Officer.

\* Borrowing requirements under the *Borrowing Authority Act* pertain to the sum of Government of Canada and agent Crown corporation market debt. At present, the maximum amount that the Minister of Finance is approved to borrow is $2,126 billion. Based on our current outlook we project that the Government’s borrowing requirements will begin to exceed the maximum amount in 2026‑27, which will likely require amending the maximum borrowing amount and providing an assessment to Parliament in accordance with the *Borrowing Authority Act*. Projected borrowing requirements for agent Crown corporations are unchanged from our March outlook as Crown corporations have not yet published new corporate plans. This amount may differ slightly from what is reported in the Public Accounts, which incorporates an adjustment for amortized cost. Totals may not add due to rounding.

Comparison to March 2025 outlook

Finance Canada and Office of the Parliamentary Budget Officer.

Finance Canada and Office of the Parliamentary Budget Officer.

Totals may not add due to rounding.

Comparison to Fall Economic Statement 2024

Finance Canada and Office of the Parliamentary Budget Officer.

Finance Canada and Office of the Parliamentary Budget Officer.

Totals may not add due to rounding. The comparison excludes new announcements since our March 2025 outlook and countermeasure tariff revenues.