Many years ago, when I wore a different cap in the capital markets segment, I would routinely travel to Ottawa for the federal budget lock-up. Nothing like flying in at the break of dawn, driving to a large auditorium where there were hundreds of economists and journalists, grabbing a coffee and stale muffin and then sitting down waiting to be handed a several hundred-page paperback called the Budget. The thickness sometimes told you what the next several hours would hold in terms of reading it, plugging numbers into a spreadsheet and then formulating a report that could be sent to the mother ship once the Finance Minister got out of their chair to deliver the budget speech. As years went by, the level of “official” leakage of salient budget details grew so the level of surprise at the lock-up diminished.

For Tuesday’s budget, we knew that the estimated size of the current year’s deficit would be sizable, with some suggesting it could reach $100 billion. We also knew there would be a heavy reliance on capital investment and program spending control, and that this budget would be somewhat historic in its framing. I don’t know what the lock-up participants were expecting, but the forward to the budget was probably more “out there” than imagined. As stated, “This is the context for Budget 2025. Just as Canadians mobilised in the 1940s to defend freedom and rebuild the global economy, and just as we restored fiscal sustainability in the 1990s to secure future growth, today we stand at another crossroads. A new era of disruption demands a new era of leadership—and a new economic foundation built on resilience, sovereignty, and innovation.”

Source: Department of Finance Canada

The above chart is taken straight from the budget and shows the estimated annual fiscal deficits out to 2030. As you can see, there is no balanced budget forecast in this chart, as the government projects it will still be $56 billion at the end of the forecast period. What’s different in this budget, however, is that it separates out the fiscal balance from day-to-day operations and capital investment. Now, it’s not that we haven’t had capital-intensive budgets in the past, but this is the biggest tilt in modern times. According to the government’s projections, the operating deficit is gone by fiscal year 2029, meaning that the deficits in the final two years of the budgetary period stem only from capital expenditures. Over five years, the government proposes spending $25 billion on housing initiatives, $115 billion on infrastructure (ports, power grids and transportation), $30 billion on defence and $110 billion on productivity and competitiveness.

There are multiple ways we can dissect this budget, and you will have already seen some of the key items that pertain to you and your loved ones, your business and your taxes. Indeed, there were very few direct investment related initiatives.  Capital gains inclusion stays the same, the marginal tax rate is reduced to 14.5% for middle-income individuals as proposed in Bill C-4 and the government tightens up personal trusts treatment with respect to the “21-year rule”. The budget also proposes to eliminate the underused housing tax (UHT) effective this year and it confirms that GST will not be applied to first-time homebuyers for homes under $1 million. And for those of you who are planning on buying a vehicle worth more than $100,000 or a boat/aircraft costing north of $250,000 the budget proposes eliminating the Select Luxury Items Tax. In addition, the budget maintains the cancellation of the consumer carbon tax.

Some have criticized the budget for not delivering more tax incentives at a time when the economy is slowing appreciably.  Yes, it did reinstate the Accelerated Investment Incentive and maintains the previous initiative of allowing companies to immediate expense capital expenditures in areas like manufacturing, digital and technology. While there were no actual reductions to corporate tax rates, the government frames the above incentives as an effective lowering of the marginal tax rate on investments to 13.2% from 15.6% in what it labels the Productivity Super-Deduction. The chart below is taken from the budget.

No, the investment and portfolio takeaways from this budget are going to be less tax driven and more macro and micro related. Usually, when a government faces a cyclical economic shock, the stimulus measures are more front-loaded in order to maximize impact today. In this case, however, the government does not see the Trump storm as cyclical but structural and many of the capital initiatives announced for improving competitiveness, infrastructure, defense, and housing will germinate over the next five years. As the budget states, changing Canada from reliance to resilience won’t happen overnight and few will argue with that.

Coming into the budget, economists had floated fiscal 2026 deficit estimates of as high as $100 billion. As such, the $78 billion number has been viewed constructively by the market. Likewise, market participants have nodded favourably at the program spending discipline outlined in the budget and the $60 billion in expected savings, leading to a balanced operating budget in three years. That discipline and the fact that the Liberals still only have a minority government partly explain why the government didn’t go further on actual tax cuts, while keeping the deficit below the loftier expectations should keep some of the more conservative elements slightly happier. That appears to have been the case given that a Nova Scotia conservative member crossed the isle to join the Liberals after the budget was tabled.

The first place to look for clues as to how the investment community took the budget is in the bond market. Initial reaction to the headlines late yesterday was positive, with yields on Government of Canada notes coming in modestly, as can be seen in the above chart.  The day after, there has been a small retracement, but that’s mainly in response to a larger backup in U.S. treasury yields. Indeed, the fact that Canadian bonds are outperforming their U.S. counterparts after the budget is another indication of investors giving Ottawa the benefit of the doubt, at least for now. In terms of the impact on monetary policy, given that the magnitude of stimulus in this budget was smaller than expected and more back end loaded, it could give the Bank of Canada more wiggle room to follow through with another quarter-point rate cut by year-end.

On the equity side tone has also been constructive, with the TSX doing better the day after and keeping pace with the tech-centric NASDAQ 100. There was some apprehension as to how banks and telecoms would do, given that the budget proposed changes to enhance transparency of fees and increased competition, but even there the results have been pretty insignificant.

At the time of writing, the Liberal government was two seats shy of a majority in Parliament and, even though there is an expectation that it will gather the two votes needed to beat a non-confidence vote, it is not a done deal. On the assumption that the budget is ratified, we would see opportunities in those sectors that will directly benefit from the capital plans proposed, such as housing and infrastructure, LNG, defence and quantum computing.

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.   

Andrew Pyle