Ottawa is boasting of fiscal anchors, but the latest stress test is about to give taxpayers that sinking feeling. This morning, the Parliamentary Budget Officer (PBO) released its 2026 Economic and Fiscal Outlook, reviewing Ottawa’s fiscal projections and the probability of meeting them. The non-partisan agency found the federal plan stands up on paper, but it hasn’t quite developed its sea legs, pegging the odds of success at less than one percent.
To Infinity, and Beyond: Canada’s Federal Deficit Set To Double
The Parliamentary watchdog crunched the numbers and warned that Canada’s deficit is set to double. The budgetary deficit nearly doubled (+98.3%) from 2024-25 to $72.0 billion in 2025-26. The PBO projects this will push the deficit-to-GDP from 1.2% to 2.2% over the same period. A sharp climb, but necessary due to fallout from the US-led trade war, right? Not exactly.
Revenue slipped 0.56% (-$2.9 billion) to $508.1 billion, notes the report. Higher commodity prices should have helped cushion revenues, but the benefit was overwhelmed by explosive spending growth. Expenses climbed 6.0% (+$32.1 billion) to $580.1 billion over the same period. The PBO attributes $68.4 billion in net new spending between now and 2031 to new measures.
“…as modest revenue growth is outpaced by growth in expenses — largely reflecting the introduction of new measures,” explains the PBO.
Canada Set For Aggressive Debt Growth Despite Fiscal Anchors
What happened to the “fiscal anchors” that were widely promoted by policymakers? “The Government reaffirmed its commitment to two fiscal anchors: maintaining a declining deficit-to-GDP ratio over the projection horizon and balancing operating spending with revenues by 2028-29,” notes the PBO.
While Ottawa can still claim the deficit-to-GDP anchor survives, that improvement is doing a lot of work. The government is still projected to run deficits every year, while federal debt rises by $318.1 billion and the debt-to-GDP ratio climbs from 41.3% to 42.5%. In other words, the deficit ratio improves, but the debt burden still grows.
“Due to persistent budgetary deficits of on average 1.8 per cent of GDP over the projection horizon, the federal debt-to-GDP ratio is anticipated to increase…,” notes the PBO.
Ottawa projects the deficit-to-GDP ratio will decline, but the PBO isn’t quite sold on its optimistic assumptions—and they explain why.
PBO Warns Canada’s Deficit Path Has Less Than 1% Chance of Success
Public debt charges—interest payments—are projected to increase by 49% (rising $26.5 billion) to $80.2 billion, with the debt service ratio rising from 10.6% to 13.1%. That’s nearly one in eight dollars of revenue dedicated solely to maintaining debt payments.
“That said, stress testing reveals uncertainty surrounding this path,” notes the PBO. “Based on historical shocks and the EFO projection, we estimate that the likelihood that the deficit-to-GDP ratio will decline in every year over 2026-27 to 2030-31 is less than 1 percent.”
The less-than-1% probability is already grim, and assumes no new crisis, emergency, or “unexpected” spending pressure. That’s highly unlikely for a country that has rarely returned to balanced spending since the Global Financial Crisis (2007-2008). It’s hard to determine if Canada is the Ziggy of economies—perpetually down on its luck, requiring borrowed spending, or addicted to debt and constantly in search of a crisis to justify its habit.
In short, the PBO suggests that while Ottawa’s fiscal anchor looks intact on paper, the odds of staying on that path are razor thin. For now, most credit markets are likely to continue assuming the forecast is accurate. However, with such unlikely odds, the market will inevitably face reality. That won’t just have a big impact on fiscal spending, but will deliver shocks to your cost of borrowing.
