Economist Warns Federal Deficit Could Exceed $100 Billion by 2035
A prominent Canadian economist has issued a stark warning that the country's federal deficit is on track to surpass $100 billion within the next decade, with new military spending commitments identified as the primary driver of this fiscal pressure.
Alarming Fiscal Projections
University of Calgary economist Trevor Tombe, in a comprehensive study conducted for the Montreal Economic Institute, projects that if current fiscal policies remain unchanged, the baseline federal deficit will balloon to $117 billion by 2035. This forecast comes against the backdrop of the 2025-26 federal budget, which already projected a $78.3-billion deficit—the largest in Canadian history outside of pandemic-related spending.
Military Spending as Primary Pressure Point
Tombe and collaborator Gabriel Giguère identify Canada's new international commitments to increase military expenditures as the most significant factor straining federal finances. To meet NATO's revised target of 3.5 percent of GDP dedicated to core defence spending by 2035, military expenditures would need to increase by approximately $100 billion, representing an annual growth rate of about 10 percent.
"Together, these pressures will cause overall federal spending to grow faster than revenues in the years ahead unless policy adjustments are made," Tombe writes in the study.
Additional Fiscal Pressures
The study identifies several other areas contributing to the growing deficit:
- Federal spending on elderly benefits is projected to increase by approximately 50 percent, or $45 billion, over the next decade
- Health transfers, equalization payments, and debt interest costs are all forecast to outpace revenue growth
- The current budget projects annual deficits exceeding $55 billion through 2029-30 with no timeline for achieving balance
Historical Parallels and Potential Solutions
Tombe cautions that Canada's current fiscal trajectory risks repeating the challenging economic conditions of the 1990s, when debt-servicing costs consumed roughly one-third of federal revenues and public net debt approached two-thirds of GDP.
Even if Ottawa abandons the 3.5 percent defence spending target, Tombe warns that deficits would still persist in the tens of billions of dollars. He emphasizes that tax increases alone cannot realistically balance the budget within the next decade, noting that the GST would need to more than double from its current 5 percent rate to 12.5 percent to achieve balance without spending reductions.
Tombe suggests that "trimming" elderly benefits to align with economic growth rates could serve as a prudent starting point for fiscal adjustment. "It wouldn't be an outright cut," he clarifies. "We'd still see elderly benefits grow every single year, but they wouldn't grow more quickly than the GDP."
The economist's analysis underscores the significant fiscal challenges facing the federal government as it balances international commitments with domestic spending priorities, highlighting the need for strategic policy adjustments to avoid unsustainable debt accumulation.
