With budget, Carney the politician will tussle with Carney the economist
‘We expect this budget will formally frame the fiscal parameters for wide-ranging decisions over the course of this government’s mandate,’ writes Scotiabank economist Rebekah Young. / SCOTIABANK PHOTO
Prime Minister Mark Carney’s first budget will take a long-term view of the economy, says Scotiabank’s Rebekah Young, who doesn’t believe the opposition parties will defeat the government.
“Prime Minister Carney — a politician today but an economist at heart — knows that a credible fiscal framework is a multi-year map, not an annual spending plan,” Young, Vice President and Head of Inclusion and Resilience Economics, wrote in a report this week ahead of the Nov. 4 federal budget. “We expect this budget will formally frame the fiscal parameters for wide-ranging decisions over the course of this government’s mandate. (And we don’t expect other parties to curtail that minority mandate just yet).”
Young said the budget’s success will hinge on Canada’s ability to shift from short-term consumption toward sustainable growth. “Canada’s model of ever-rising current consumption is unsustainable, especially under a new global regime increasingly dictated by U.S. policy,” she said.
“Simply priming near-term demand without fixing structural issues would leave Canada looking more like its low-growth European peers,” she said. “On the other hand, across-the-board austerity would weaken the country now and leave it less prepared for whatever is coming.”
Turning point
Not all of Ottawa’s new spending will deepen the deficit, Young said. “The government will split the bottom line into operating and capital accounts with the intention of balancing the ‘operating budget’ within three years,” she said, adding this new approach marks a turning point.
“A fiscal regime change is underway. The operating budget framework should force discipline on program spending and headcount and explicitly calls for ‘sacrifice,’” she said. “The new capital budget, by contrast, is designed to spend — but with broad definitions and a promised ‘results-oriented’ test that will take time to prove out. The credibility test is whether they commit not just to measuring outcomes, but to being held to them.”
Young said Carney’s first budget will aim to “unlock large-scale investment in Canada’s productivity,” spanning infrastructure, housing, defence, and climate priorities. “The question now is not whether Ottawa will lean on its balance sheet, but how and how hard,” she wrote.
The broader environment leaves little room for missteps. Young said “the path forward is narrow but non-negotiable,” warning that “Canada’s model of ever-rising current consumption is unsustainable, especially under a new global regime increasingly dictated by U.S. policy.”
Done easing
Derek Holt said Canada is entering a new phase of economic management — one in which the Bank of Canada has stepped back, and fiscal policy will take the lead in guiding the country through an uncertain global landscape.
Holt, Scotiabank’s head of capital markets economics, said the Bank of Canada’s 25-basis-point rate cut to 2.25% “was widely expected,” but the message was clear: the easing cycle is done. “It also employed the language of central bankers to convey the message that they are done with easing unless big, negative shocks emerge.”
Holt noted a “hawkish bias relative to markets” and an expected slow economy “backs up” the central bank’s view “that they've done enough to achieve the target over the medium term.” Holt said he expects the Bank of Canada’s next move is to increase rates “but after a lengthy pause.”
Both Young and Holt said markets will focus less on the absolute size of the deficit and more on the credibility of Ottawa’s fiscal path. Holt suggested that the Bank of Canada has “passed the torch to Carney” to carry the next phase of economic management.
Shifting to supply
Markets, Young noted, “are unlikely to parse every line item in the budget.” Instead, they’ll focus on the government’s attempt to shift the economy “from consumption to supply by leveraging its relatively healthy balance sheets.” That approach, she said, “usually earns more tolerance for deficit-financed activity, particularly when the debt path eventually bends down.”
While Canada’s debt levels remain moderate by G7 standards, Young warned that “it lacks the reserve currency status of some peers” and faces “middling liquidity,” leaving it more exposed to external shocks — especially as major provinces face tariff-related strain.
“The near-term backdrop is unforgiving,” she wrote. Canada’s dependence on U.S. trade policy “coincides with tariff risk, bilateral tensions, and looming CUSMA renewal.” Any shift in Washington’s stance “could overshadow a budget narrative built on a long-horizon strategy.”
In a volatile environment, she concluded, Canadians will need to stay focused on the long game. “Patience coupled with disciplined risk-taking may be the best bet in the long run for Canadians.”
