Carney budget to focus on taxes, shift from Trudeau era

OTTAWA — Tax reform designed to spur economic growth will be a key pillar in Prime Minister Mark Carney’s second budget, government sources say, signalling another policy shift in the governing Liberals from the Justin Trudeau era.

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National Post has learned that the budget, to be unveiled next Thursday, is expected to prioritize tax measures to spur innovation and improved competitiveness as Carney attempts to boost investment and Canadians’ standard of living. Sources say there will also be measures to reduce the red tape that costs businesses time and money.

“It’s a growth and competition budget,” said a senior government source. “We’re trying to create an investment supercycle in Canada.”

Many economists say amending, perhaps even overhauling, Canada’s much-maligned tax system should be a key element in the recipe to improve productivity and growth, which translates into higher wages and jobs.

As reported last week in National Post, the budget will also focus on improving the landscape for Canada’s small and medium-sized businesses. Many economists and others outside the government also expect that Carney’s 2025 campaign promise for a broad review of corporate tax policy, also with an aim to encourage investment and economic growth, will find its way into the Nov. 5 financial plan.

Another key block of Carney’s economic plan, the new productivity mega-deduction that was announced last month at an international investors’ summit in Toronto, may also be formalized as part of the budget. It’s not yet clear if the Liberals will include that tax measure as a budget item or formalize it through separate legislation.

Carney’s primary aim is to improve the Canadian economy’s performance after years of lagging its G7 counterparts. His government’s action to date on that front are in stark contrast to his Liberal predecessor, Trudeau, who focused more on moves to improve economic equality.

Ottawa’s new tax policy measures to boost growth will be part of a suite of moves on this front, as Canada tries to withstand a wide range of new U.S. tariffs, which have hit key industries such as steel, auto, aluminum and forestry.

Other government priorities aimed at the same goals have included re-establishing stronger trade relations with China, India and others, updating infrastructure for exporters, faster approval times for major projects and boosting internal trade.

“There is an opportunity to rebuild the nation and renew its sense of mission,” said a government source.

Canada’s business community now seems more confident about the country’s direction.

Goldy Hyder, chief executive officer of the Business Council of Canada, which represents many of the country’s largest companies, said the productivity mega-deduction was a major step forward for competitiveness and investment and that he looks forward to more reform in the budget. One possibility, Hyder said, would be further changes to capital cost allowance (CCA) rules that dictate how quickly and broadly companies can write off capital costs for things such as machinery, equipment and buildings.

“They’re trying to do what they can.”

The big question for Carney and his finance minister, François-Philippe Champagne, is whether they take a big swing next week at cutting either personal or corporate income taxes after their first budget was seen as mostly tinkering.

Champagne said week that the government’s first priority in making this budget is Canadians’ cost of living. But the second, he said, is economic growth, with the accent on helping small and medium-sized businesses seize opportunities.

He has indicated in recent months that the government will continue to err on the side of what he calls “investments” in the economy, instead of reducing the deficit. Canada has the strongest fiscal position in the G7, Champagne has said many times, and that leaves room to spend or cut taxes or other revenue sources.

“I think Canadians can understand that we have a strong fiscal position and we’re investing in the things that will generate growth to the country,” he said in July

Champagne is expected to speak more about the government’s budget priorities on Monday during a speech in Ottawa.

Many economists argue that corporate and personal income tax cuts, along with other tax reform measures, are the key to improving Canada’s productivity and standard of living. The problem is that they’re also expensive for a government that has already made big spending promises on such items as defence and cutting an array of taxes that helped fill its coffers.

“Canada’s sluggish economic growth and federal fiscal excesses have become a vicious cycle,” said the C.D. Howe Institute think tank in a report released last week. “Canadians’ incomes are not growing nearly fast enough.”

And to many economists, including Carney, tax reform is an important part of the solution.

To date, the productivity mega-deduction, which the government estimates will cost the treasury $36.5-billion over the next five years, has been the biggest play. It was designed to use the tax system to spur investment, particularly in capital-intensive industries such as energy, mining, transportation, and technology and may well be included in the budget.

Unveiled last month at an international investors’ summit in Toronto, the changes are expected to cut Canada’s projected tax rate on new investment, a key metric for large investors, by slightly more than half, to about 6.4 per cent from 13 per cent.

The Carney government has also made a number of moves to trim or eliminate taxes: pausing the federal tax on gas and diesel, eliminating the federal portion of inter-provincial trade barriers, cancelling the digital services tax, making a modest cut to personal income taxes and the super mega-deduction.

While economists say each of those moves should help the economy, they also add to the deficit.

The challenge for Carney and Champagne is that cutting taxes of any type costs government revenue at a time when Ottawa is adding piles of red ink. There’s also concern that the government needs every penny it takes in during a trade war with the U.S., which consumes about three-quarters of all Canadian exports.

But revenue has not been the federal government’s problem.

As reported earlier this week in National Post, Ottawa may be on track to take in almost $20-billion more in taxes and other revenue this year than had been expected less than six months ago. The increase is largely a function of higher market prices for oil and other natural resources, increased revenue from personal income taxes and a modest jump in inflation.

While that should leave the government more room to spend, cut taxes or reduce the deficit, economists warn that much of that money has already been accounted for through announcements for such things as increased defence spending.

The C.D. Howe Institute says Ottawa can make the economy more productive and boost Canadians’ standard of living without blowing its budget. In a “shadow budget” released last week, the institute calls for Ottawa to shift the burden away from the most harmful taxes, including personal and corporate income taxes, towards the less harmful consumption taxes.

The document’s authors, which include Don Drummond, a former high-ranking official at the Department of Finance and chief economist at TD Bank, also offer a recipe that includes a comprehensive review of spending, cutting out inefficient corporate subsidies, tighter controls on spending and a clear plan to eliminate the deficit by 2030-31.

“Responsible fiscal policy means paying the bills for spending as they come,” the report said.

The government also needs to start using more realistic growth projections so that it avoids making its fiscal problems worse.

The problem, economists warn, is that Canada may be facing dark clouds on the economic horizon, notably its ongoing trade friction with the U.S., and that governments should be more prudent with revenue.

In the government’s spring update, Champagne said the 2025–26 deficit was projected to be about $66.9 billion, down from the $78.3 billion that had been projected in last fall’s budget. That drop was due largely to a fiscal windfall from higher oil prices.

But Ottawa has been amassing large piles of debt for more than half a century, the problem has grown substantially over the last few years. The federal government has now accumulated more than $1.3 trillion in total debt, almost half of which has been added over the last five years.

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