OTTAWA
The federal government is spending more than $150 billion of a projected revenue windfall on corporate tax incentives and infrastructure in a budget strategy that some economists warn is a costly gamble on uncertain growth.
With energy profits rising from the Iran war, the government has projected more than $158 billion in additional fiscal capacity over the next five years relative to its spring forecast, about $120 billion of which is from higher tax revenues.
"The fear is that we are borrowing quite a bit at a time of high interest rates, for a growth plan that is deeply uncertain," said Kevin Yin, a contributing columnist for The Globe and Mail and an economics doctoral candidate at the University of California, Berkeley. "In such circumstances, it may have been wiser to save more of the windfall revenues and reduce deficits."
Since the spring forecast, a bit more than $40 billion over the next five years has been committed to business tax relief like the Productivity Mega Deduction, expansions to the Clean Electricity and Clean Technology tax credits, and changes to the Scientific Research and Experimental Development tax credit.
The deduction reform allows companies to front-load their capital deductions instead of spreading them across years, which provides more cash upfront for reinvestment.
The rest of the windfall is being spent on non-growth-related categories such as Indigenous programs, housing measures and tariff relief, among others.
While corporate tax cuts should be good for growth, Yin notes that growth is an extremely hard problem, and the question is whether this will help enough to justify spending every extra dollar of windfall tax revenues.
He points out that while almost all G7 economies have cut corporate taxes in the last few decades, none except the United States have seen real per-capita growth rates higher than 1 per cent since 2010.
"That doesn’t mean tax cuts don’t work, growth would likely have been even slower in the absence of cuts, and Canada’s tax environment is now more generous, but it does suggest they are not a miracle cure," Yin wrote.
The micro-level evidence on accelerated tax deductions is also mixed. A forthcoming paper in the American Economic Review finds that manufacturing plants that could deduct capital expenses faster from 1997 to 2011 increased investment and employment but did not raise wages or productivity.
Yin also argues that from a taxation standpoint, Canada was already quite competitive internationally before the new measures.
By Finance Canada’s own estimates, Canada’s effective marginal corporate tax rate was 13 per cent before the mega deduction, lower than that of comparable advanced economies including the United States at 16.9 per cent.
"This was thanks to the pre-existing super-deduction from the 2025 budget," Yin wrote. "Together this suggests that the mega deduction did not need to be so generous, or at the very least should have been funded with cuts elsewhere."
It is also an expensive time to be borrowing, with interest rates high relative to the last two decades.
Two-year bond yields are at 3.12 per cent and 10-year yields at 3.65 per cent. Debt payments are expected to rise to nearly 13 per cent of federal expenditures by 2031, which will outpace major spending categories like federal health-care transfers and unemployment insurance.
The government’s objective of balancing the "operating" budget could have been a reasonable fiscal anchor, Yin argues, if its definition of operating versus capital budget made sense.
However, by classifying many tax incentives as part of the capital budget, the government makes its own fiscal guardrail artificially permissive.
"Buying or building assets should be separated from operating expenses because the government can earn return on those assets, and/or privatize them at a later date to pay off debts," Yin wrote. "Operating expenses, on the other hand, are simply gone."
He notes the current definition of a capital expense includes things like tax incentives for investment and R&D, as well as housing grants, none of which creates any asset on the government’s balance sheet.
This is not to say that we should not run deficits at all, Yin concludes. Canada's net-debt-to-GDP ratio remains low by advanced economy standards, as do projected deficits as a percentage of GDP.
"But spending every dollar of additional revenue is a gamble, one that bets aggressively on growth relative to interest payments," he wrote. "Only time will tell whether this gamble will pay off."
e2gold.ca reported in November that the 2026 budget projects a $62.3-billion deficit and aims to boost private-sector investment through tax cuts and other supports.
This story was written by the e2gold.ca newsroom from reporting by The Globe and Mail and richtv.io. Quotes are checked word for word against that reporting.