Macro & Strategy - October 2026

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« Kickstart My Heart »

Budget 2026: How Ottawa can revive Canadian investment without testing the bond market

« Kickstart my heart, give it a start
Woah, yeah,
Baby,
Woah, yeah,
Kickstart my heart, hope it never stops. »
– Mötley Crüe

The federal government is expected to table its budget in October. Its aim appears straightforward: to kickstart an investment cycle in Canada.

This approach would solve some much-discussed issues that have been plaguing the country for years: weak productivity, inadequate business investment, expensive housing, and strained relations with the United States.

On a more cyclical basis, the Canadian economy is doing better than many were expecting 18 months ago, when Donald Trump took over the White House. As we argued in our September Monthly, I’ll Sleep When I’m Dead, the economy has been more resilient than the prevailing narrative would suggest:

• Real consumption per capita has started to recover after two years of decline.
• The unemployment rate fell from 7.1% in September 2025 to 6.4% in July.
• Business confidence has risen from its 2024 lows.
• The trade balance has recovered, helped by energy and early gains from diversification.
• Real GDP grew at an annualized pace of roughly 3.4% in the second quarter.

No one would mistake these metrics for an economy firing on all cylinders. The August employment report reminded us that the recovery remains fragile, and the trade conflict is likely to be long and winding. Even so, the evidence does not point to a uniform collapse in domestic demand.

That matters because it should influence the way Ottawa approaches the coming federal budget. A broad stimulus package designed to lift every boat would be poorly matched to the problem. At the same time, the federal government’s role can go beyond shielding Canadian businesses from changes in the trade status quo. Canada needs a more focused strategy, one that protects viable productive capacity, clears obstacles to private investment, and preserves the fiscal credibility that global investors continue to value.

With that goal in mind, we have seven prescriptions for the fall budget. Each would help Canada become more resilient to trade shocks and make it a more natural destination for investment.

1. Protect Canada’s credibility advantage

Canada’s fiscal credibility is an immense economic asset. The federal balance sheet is still strong compared with those of most large, advanced economies. Canada has the lowest net debt-to-GDP ratio in the G7 and is one of only two G7 countries with an AAA-equivalent rating from most major agencies.

We can already see the value of that credibility in financial markets. Canadian long-term bond yields have risen less than those of several peer countries in 2026, which helps keep the cost of capital lower throughout the economy. Investors are giving Canada credit for the strength of its institutions and balance sheet, but we shouldn’t assume they will do so indefinitely.

The Spring Economic Update 2026 projects a deficit of $66.9 billion for 2025–26 and $65.3 billion for 2026–27. The federal debt ratio is expected to rise from 40.7% of GDP in 2024–25 to 41.9% in 2028–29 before edging down.

The more revealing numbers are the ones showing the cost of servicing the debt. Federal public debt charges are projected to increase from $54 billion this year to almost $81 billion by 2030–31. They consume roughly 11 cents of every revenue dollar today and are heading toward 13 cents by the end of the decade.

These numbers are multiple orders of magnitude lower than the dire situation in the United States, where close to 30% of government revenue goes to pay the interest on the debt.

But Canada’s situation looks worse when compared with other AAA-rated countries. The consolidated picture across all levels of government calls for caution. Comparable data, compiled by the World Bank and available only to 2024, show that AAA countries spend on average less than 3% of their revenues on interest costs. Canada is clearly at the top of this range, spending roughly three times that amount.

Canada’s leeway is gradually narrowing. As interest costs absorb more revenue, new priorities must compete with the cost of past borrowing. Fiscal flexibility tends to disappear quietly. Its value becomes obvious only when a recession arrives and governments discover that much of it has already been used.

The budget should reinforce three guardrails:

1. Balance day-to-day operating spending as early as possible, using a definition that cannot be stretched whenever a new program needs shelter.
2. Ensure the federal debt ratio is lower at the end of the five-year horizon, with annual deviations clearly explained.
3. Publish a prudent range for debt-service costs as a share of revenue and take corrective action before that range is breached.

Recurring operating spending should not grow faster than trend nominal GDP. A severe recession or national emergency would justify an exception, provided the government published a path back to the fiscal anchor.

These guardrails would give the government the credibility to invest aggressively without asking bond investors for a blank cheque.

2. Stop calling every dollar an investment

Last year, Mark Carney’s government unveiled a new framework that separates operating spending from capital investment. That distinction is useful, but it leaves plenty of room for creative accounting. The Parliamentary Budget Officer found that the federal definition placed $311.5 billion in the investment column between 2024–25 and 2029–30. Using a definition closer to international practice, the PBO arrived at $217.3 billion. The difference is $94.2 billion, a non-trivial amount that calls into question the credibility of the new framework.

A similar issue arises with the government’s claim that Budget 2025 would support $1 trillion in total investment. The PBO found that 85% of the activity behind that figure was connected to spending already in place. New budget measures accounted for $41 billion and could lead to $166 billion in total investment.

That contribution is meaningful, but it should be described accurately because it does not amount to $1 trillion in new activity. The figure that really matters is additionality: How much investment took place that would not have occurred without government action?

Every major initiative presented as an investment should answer seven questions:

1. Additionality: Would the project proceed without federal participation?
2. Capacity: What asset, technology, skill, or export capability will be created?
3. Mobilization: How much private, provincial, or municipal capital is expected to follow?
4. Execution: When will permits be secured, construction begin, and the asset enter service?
5. Resilience: Will the project diversify markets, inputs, or critical infrastructure?
6. Lifecycle cost: What operating, maintenance, and replacement obligations will follow?
7. Evaluation: What result would tell us whether the intervention worked?

A simple public dashboard could track dollars committed, non-federal capital mobilized, permitting status, expected service date, capacity created, and main risks.

We can do this without building another bureaucratic layer. Ottawa needs one reliable public scoreboard. Announcements may win the news cycle, but measurement gives projects a better chance of being completed.

3. Turn a good tax measure into a durable investment regime

Ottawa already took a useful step in Budget 2025 with the introduction of a Productivity Super-Deduction that applies to machinery, manufacturing equipment, computers, data-network infrastructure, patents, and research spending, covering roughly 15% of capital costs. At the Canada Investment Summit in September, Carney announced that this Super-Deduction would be become a Mega-Deduction covering two-thirds of all capital costs. The Department of Finance estimates that the measure will lower Canada’s marginal effective tax rate (METR) on investment from 15.6% to 6.4%, giving Canada the lowest rate in the G7. It also made the measure permanent.

The measure is a genuine competitive advantage, provided companies can rely on it. We fully expect many businesses will accelerate their investment plans now that there is clear visibility rather than temporary measures.

Yet, Canada’s corporate tax systems are still highly complicated, with many credits and deductions that vary depending on the sector and the type of activity that businesses choose to engage in.

For example, the new METR on agriculture is -6% whereas it is 19% on retail trade. And if the tax rate on new investment projects matters, so does the overall tax rate. On that score, Canada still has a higher tax rate than the OECD median.

The goal should be a tax regime that has a lower tax rate but fewer deductions. Work remains to done to achieve a broader, simpler, and more competitive tax regime.

Stable rules would also reduce the need for project-by-project courtship. Bespoke subsidies tend to favour companies with the resources and connections to negotiate them. They leave other businesses wondering whether a competitor obtained a better deal and whether holding out for government assistance is wiser than investing immediately. That is probably the biggest downside of the Major Projects Office. Plenty of good projects may not have the kind of political backing that gets them onto the list.

Canada will not outbid the United States one factory at a time. It can compete by offering durable, competitive tax rules and reliable institutions. Together, those advantages can raise the after-tax return on investment and lower the cost of getting projects built.

4. Let Canadian companies grow up

Canada gives preferential tax treatment to small businesses. While this may seem like a noble approach, it makes growth unexpectedly expensive.

The wider policy system contains a series of thresholds such that tax preferences, grants, reporting requirements, and program eligibility can change abruptly. A growing company can cross several of these thresholds at once and discover that its next employee or its next dollar of revenue carries a surprisingly high cost. At the heart of this system is the small business deduction (SBD).

Ottawa made the SBD phaseout more gradual in 2022, which was a sensible change. But there is still work to do: The budget should examine these cliffs, as a system rather than one program at a time. Transitions should be gradual, and temporary provisions should protect firms that cross a threshold when they invest, hire, or export. Ottawa should offset any fiscal cost by eliminating tax expenditures that do not produce measurable growth.

The principle is simple: Public policy should reward expansion rather than skill at navigating government regulation.

Canada’s internal market presents a larger version of the same problem.

More than $500 billion in goods and services crosses provincial borders every year, yet firms still encounter different permits, standards, and licensing rules across the country.

The federal government has removed its remaining exceptions under the Canadian Free Trade Agreement. Its new mobility law also recognizes comparable provincial requirements in areas of federal jurisdiction. Both changes represent real progress, although federal reform can address only part of the problem.

The various levels of government should continue to work on making the internal market less fragmented. Canada has the population to support more national champions. Clear improvements in the regulatory backdrop will most likely lead to more investment and higher productivity, at little fiscal cost.

5. Protect productive capacity, not every business model

The trade shock is real, although its effects are not evenly distributed. After the latest escalation, our estimates suggest that roughly 5% of Canadian GDP and employment is directly exposed to the various tariffs on Canadian exports to the United State. That share has been declining in recent years, showing that the Canadian economy is moving away from sectors targeted by the Trump administration. It is small enough to have a limited macroeconomic impact but it represents close to one million jobs and cannot be brushed aside.

Government support can make sense if a company was viable before an external shock and management has a credible plan to adjust. Assistance should be targeted, helping firms find new markets, redesign supply chains, and preserve specialized teams that will still be valuable after the immediate disruption passes.

Eligibility should require four things:

1. Demonstrated exposure to tariffs
2. Viability before the shock
3. A funded adaptation plan
4. An automatic expiry date

Unfortunately, protectionist policies are here to stay. Support programs should be temporary, not prop up industries that are no longer viable in today’s and tomorrow’s economy.

6. Invest in careers and in places where workers must live

Workers carry skills, experience, professional networks, and ties to particular communities. When an industry contracts, preserving every existing position indefinitely may be costly and ineffective. Protecting a worker’s future earning power is usually more humane and more productive.

Federal support should pay for short, recognized training programs designed with employers. Funding should follow the worker, and payments should be tied to certification, placement, and earnings outcomes rather than course enrolment alone.

Workforce policy belongs at the centre of an investment strategy because money and machinery cannot create productive capacity on their own. Projects also need engineers, electricians, technicians, tradespeople, and digital specialists.

In fact, as a new cycle of investment is set to commence, the need for labour will be vast across many sectors. One of the blockers identified by foreign investors at Carney’s Investment Summit was in fact a shortage of skilled construction workers. Meanwhile, job displacement is set to occur across other sectors, particularly those targeted by new protectionist policies. Matching these displaced workers with new opportunities will be a key challenge. If that does not happen, Canada could be stuck with labour shortages and high unemployment at the same time.

Housing must be part of the calculation as well. Businesses cannot recruit people to communities where those workers cannot find a place to live. Federal housing and infrastructure funding should reward concrete results, such as faster permits.

Many policies are still geared to housing demand but helping buyers compete for a fixed number of homes may change who gets the keys, without expanding the economy’s capacity. Making it easier to build does.

7. Make the new Canada Strong Fund prove its value

The 2026 Spring Economic Update launched a new sovereign fund – the Canada Strong Fund – with $25 billion in federal seed capital over three years. Its mandate is to take minority equity positions alongside private investors and earn market-rate returns. Ottawa also plans to offer Canadians a retail investment product with principal protection.

The fund may sound appealing, but many questions are unanswered. Canada already has the Business Development Bank of Canada, Export Development Canada, the Canada Infrastructure Bank, the Canada Growth Fund, and the Canada Indigenous Loan Guarantee Corporation. What distinct role would the Canada Strong Fund play relative to these institutions? An in- depth reviews of this financing ecosystem should be done before the fund makes major commitments.

The proposed retail product deserves particular scrutiny. If investors receive the market upside while taxpayers protect their principal, the guarantee carries both value and risk. Federal accounts should show each of them transparently.

The fund needs a clearly identified market failure. Public capital should be directed toward gaps that private markets and existing institutions cannot reasonably fill. It should complement private investment rather than compete with it, duplicate a federal mandate, or move fiscal risks outside the headline deficit.

Credibility is part of the investment strategy

Public investment and fiscal discipline can be presented as competing goals, but they can also reinforce each other when the policy is well designed. Investors generally understand that governments have a role in building infrastructure, developing skills, and correcting genuine market failures. Their concern begins when definitions become vague, risks are hidden, and expected returns cannot be explained.

A credible investment budget would strengthen Canadian assets through several channels. Better infrastructure and a durable tax regime can raise growth. Higher productivity can support profits without depending solely on population growth. Internal trade reform and export diversification can reduce concentration risk. Clear fiscal anchors can preserve the relative attraction of Government of Canada bonds and lower financing costs across the economy.

A budget built around broad stimulus, permanent program growth, and loosely defined investment spending would work differently. It would add borrowing without necessarily adding productive capacity. If investors concluded that public debt was financing current consumption rather than future growth, long-term yields would rise and the Canadian dollar would lose an important source of support.

For that reason, the composition of the budget matters more than the headline deficit alone. Financial markets will look beyond the press release.

Investors will want to know whether policy has changed the expected return on investment or merely changed the language used to describe government spending. The federal budget can provide the spark to kickstart the heart of Canada’s economy, but private capital must keep it going.

Positioning

We remain overweight equities. The fundamental backdrop continues to support a constructive stance, with profit growth remaining the main engine of market returns, rather than a broad expansion in valuation multiples. The artificial intelligence investment cycle is still translating heavy capital spending into revenues across many sectors, while the largest platforms are beginning to demonstrate clearer monetization. The current cycle is also broadening beyond a narrow group of technology companies, as capital expenditure, domestic industrial policy, and stronger nominal activity support cyclicals and other investment-sensitive sectors. With that in mind, higher bond yields now create more meaningful constraints to further rallies, but we are encouraged by the relative resilience of equities to the latest jump in financing costs. As long as profitability remains resilient and the rise in yields is orderly, we think the balance of risks continues to favour equities in broad asset allocation.

We have become more cautious again on government bonds. The recent improvement in carry and valuations following the rise in yields is increasingly offset by a structural deterioration in the supply-demand balance for long-term capital. Fiscal policy is not showing credible signs of consolidation, government borrowing requirements remain large, and the public sector must now compete more directly with an expanding private investment cycle from hyperscalers. This competition for capital should keep term premia elevated and makes duration a less reliable portfolio hedge, particularly when inflation remains above target and central banks have limited room to accommodate fiscal pressure. A sharp growth slowdown could still produce a bond rally, but we do not see this yet. As a result, we return to our long-held skepticism on fixed income.

We maintain an overweight allocation to commodities. The global investment cycle is creating constraints in the physical world. These forces are redirecting capital toward scarce resources after a long period of underinvestment in supply, and they are encouraging governments and companies to favour resilience, inventories, and domestic capacity over the lowest-cost supply chain.

Commodities also remain useful portfolio diversifiers in a regime of persistent fiscal expansion, geopolitical fragmentation, and less dependable stock-bond diversification. This also supports a positive strategic view on commodity-exporting markets (such as Canada, Norway and Australia as well as many emerging markets) and their currencies.