The biggest Canadian policy development this week may have happened in Washington. Congress’s passage of the One Big Beautiful Bill Act—the Trump administration’s major tax and spending legislation—will undoubtedly influence the Carney government’s own fiscal policy as it prepares for the fall budget.
The U.S. legislation has to be understood as one part economic strategy and one part political strategy. The economics of it are straightforward yet highly debatable: it’s a blueprint for debt-fueled growth in the form of large-scale tax cuts, soaring spending, and record deficits projected to exceed 6-7 percent of GDP.
As a matter of politics, the One Big Beautiful Bill is a study in political triangulation. Traditional supply-side Republicans, committed to tax cuts, have collided with Trump’s new populist wing, which demands spending on working-class priorities like border security and tax relief for tipped workers. The result is a fiscal free-for-all. The U.S. is now doubling down on the 2017 tax cuts while increasing spending. Large-scale borrowing is how the president is attempting to square the circle.
This approach bets on growth to outpace debt—a gamble with no historical precedent. The risks are stark. The Congressional Budget Office projects U.S. debt trajectories resembling a “hockey stick,” while higher treasury yields—the global risk-free benchmark—threaten to elevate borrowing costs worldwide.
For Canada, this is particularly perilous. As a non-reserve currency, our debt markets are priced relative to U.S. treasuries. Even as the Bank of Canada cuts rates, longer-term yields remain stubbornly high, reflecting investor skepticism that Canada can decouple from Washington’s fiscal turbulence. In a world of rising borrowing costs and global capital flows, Canada’s economic sovereignty is increasingly at the mercy of decisions made in Washington.
These risks are even more pronounced by Carney’s own contradictory fiscal policy. He has pledged to balance the budget within three years—a promise already undermined by doubtful accounting that distinguishes “operating spending” and “investment.” Yet its combination of major, new spending commitments, preservation of Trudeau-era entitlement programs, and tax reductions has made a balanced budget seemingly impossible.
The C.D. Howe Institute forecasts a $90 billion shortfall this year alone and an ongoing deficit of roughly $80 billion per year. Averting a future written in red ink requires that Carney choose among lower taxes, higher spending, and a balanced budget. It seems most likely that, like Trump, he’ll forgo the third one. In his defence, the Conservative Party’s election platform essentially made the same choice.
The consequences will extend beyond the federal balance sheet. Large-scale government borrowing is like a wet, cold rag on the economy that crowds out private investment by forcing businesses to compete with state-backed debt issuance. The Trump administration’s favourable expensing rules—allowing full write-offs for capital investments in a single year—are bound to make things worse. Why would a firm choose Canada’s sclerotic regulatory environment and higher taxes when the U.S. offers such powerful incentives?
The irony is bitter. While Ottawa postures about “elbows up” competitiveness, its anticipated deficits and debt risk cement Canada as a second-tier destination for capital. Productivity will continue to suffer. And households, burdened by record personal debt, face a future of higher mortgage rates and costlier credit, regardless of Bank of Canada actions.
There are alternatives, of course, but they’re politically fraught. Carney could suspend his predecessor’s entitlements in favour of defence spending. He could revisit federal transfers to the provinces, which comprise a major share of program spending. Or he could even make the case for higher rates of taxation, though the competitiveness consequences could be significant.
None of these options is palatable. The Trudeau-era coalition, now part of Carney’s base, clings to social spending as a legacy. Middle-class tax hikes in the face of affordability concerns would be a huge risk. And there’s zero political consensus for sacrificing butter for guns. Yet without hard choices, Canada’s debt trap will deepen. The frog in the boiling water may not feel the heat until it’s too late.
Canada isn’t alone on this front. China, Europe, and others are pursuing deficit-fueled growth on the assumption that tax cuts and higher public spending will offset structural stagnation. But the U.S., with its reserve currency privilege, has a unique capacity to absorb profligacy. Canada lacks that luxury. Our triple-A credit rating, once a point of pride, is now at risk.
The lesson is stark: In a world of fiscal incontinence, there are no free lunches—only tabs left for future generations. If Ottawa refuses to act, the bill will come due in higher rates, lower growth, and a diminished standing in the global economy. Trump’s One Big Beautiful Bill has arguably made such actions both more imperative and more difficult.
Generative AI assisted in the creation of this article.
