Is Budget 2025 enough to reverse Canada’s economic decline?

It’s this that’s behind the cost-of-living crisis that is top of mind for Canadians. The Canada-U.S. economic divide This diagnosis was reinforced just days later when Statistics Canada released detailed 2024 economic data across provinces. These once-per-year updates allow for a comprehensive comparison between Canadian provinces and U.S. states by adjusting for population, economic size, and price differences. The results remain as striking today as the last time this comparison was done. Many Canadian regions continue to lag behind every single U.S. state. New Brunswick now holds the unfortunate title of the lowest-income jurisdiction in North America, trailing even Mississippi, with Nova Scotia and Prince Edward Island close behind. Ontario has improved slightly—now above Alabama, rather than being tied with it not too long ago—but it still ranks closest to South Carolina and Idaho in terms of average economic strength. Only Alberta and Saskatchewan crack the upper ranks, largely thanks to their high-value oil and gas sectors. In aggregate, the gap between Canadian and U.S. living standards has not been wider since the Second World War. Budget rhetoric versus reality Budget 2025 aims to confront this. The finance minister rightly acknowledges that this is no time to tinker at the margins. Yet despite strong rhetoric, the budget’s actual measures fall short of the transformational ambition it claims. The government also missed opportunities in this budget, it must be said, including a comprehensive tax review (which was promised in the Liberal platform earlier this year) and bolder regulatory reforms to encourage private investment. In fairness, no single federal budget could likely dramatically alter the trajectory of a $3.2 trillion economy like Canada’s. But gradual and persistent adjustments, nudging each year at the margin, could accumulate to real gains. And the budget did have some positive steps that are worth noting. There are tax changes to encourage new investment through accelerated depreciation allowances—a move first implemented years ago under the previous prime minister, and extended late last fall. The budget also projects significant growth in capital investment, although much of this appears to have already been in motion before the budget came down. The long road ahead But whether or not many of the budget’s measures are truly new, could they move the needle on Canada’s growth? The government doesn’t provide detailed modelling, but early in the budget, they suggest that if Canada could unlock an additional $500 billion in private investment over the next five years—a big “if,” but let’s give the government’s stretch goal the benefit of the doubt—real GDP would be about 3.5 percent higher by 2030. That would close roughly one-fifth of the productivity gap accumulated over the past decade. Put differently, this could raise average annual growth by 0.7 percentage points—a significant boost. I am skeptical this could occur, and the budget’s actual growth projections also seem to discount the possibility. But even if that were achieved, and even if Canada were to outpace U.S. productivity growth by that margin every year going forward, we wouldn’t return to our pre-2015 relative position until 2050. And to actually become the “strongest economy in the G7”? We’d have to maintain that 0.7 percentage point boost relative to the U.S. for more than another quarter century again after that! To put that challenge in historical context: even during Canada’s stronger periods—such as the late 1990s and early 2000s—our productivity only slightly outpaced that of the U.S. To find a period of sustained convergence like the one we now need, you’d have to go back over a century, to the years before the First World War. This should not be read as a critique of Budget 2025. If it indeed represents the first of many more steps to come (much like Budget 1994 laid the groundwork for the landmark 1995 budget that dramatically improved Canada’s fiscal trajectory), then this could mark the beginning of a course correction toward stronger investment, higher productivity, and greater prosperity. Beyond one budget, or one government It will require follow-through across successive governments of different parties. It will also require provinces, since many of the drags on Canadian productivity are provincial in nature. Liberalizing internal trade, which the budget credibly notes could massively boost productivity, requires provinces to mutually recognize each other’s rules and regulations, especially in services and professional credentials. Concerted action by all is the best-case scenario. Even then, results will not come quickly. While digging ourselves into this hole didn’t take long, climbing out of it will take time—and more than just one budget.