Canada’s PBO slashes economic forecasts, warns debt will rise

Canada’s Parliamentary Budget Officer, or PBO, is a federal budget watchdog. It provides Parliament with independent analysis of the government’s economic and financial plans. This matters because lawmakers need evidence about expected growth, revenues, spending, and deficits when assessing public policy.

The PBO builds economic forecasts and budget projections. For example, it reduced its real GDP growth forecast to 0.9 per cent this year and 1.5 per cent in 2027. It also projected a $63.3-billion deficit for 2026-27. These figures offer a benchmark for judging the government’s fiscal position.

The PBO’s work does not set government policy. Instead, it shows how changing conditions, including U.S. tariffs and Canadian counter-tariffs, may affect the outlook. Its revised numbers indicate weaker growth and larger deficits than in June. Parliament and the public can use that information to understand the likely costs and risks of government plans.

The PBO lowered its real GDP growth forecast from 1.1 per cent to 0.9 per cent for this year. For 2027, it reduced the estimate from 1.6 per cent to 1.5 per cent. Those cuts are small in percentage-point terms, but they signal a weaker economy than previously expected.

The fiscal projections are larger. The PBO now expects a $63.3-billion federal deficit in the 2026-27 fiscal year. It projects that the deficit will peak at $70.2 billion in 2027-28. A deficit means the government’s spending exceeds its revenues during a fiscal year.

Compared with the June outlook, the deficits are $3 billion higher per year on average from 2026-27 through 2030-31. The PBO attributes the change to new spending measures that more than offset stronger revenues. The combined picture is slower growth alongside greater projected borrowing needs.

A tariff is a tax charged on goods entering a country. A counter-tariff is a retaliatory tariff imposed after another country introduces trade barriers. Governments may use them to pressure trading partners, but they can make cross-border commerce more expensive and difficult.

For example, a U.S. tariff on Canadian goods can raise the price paid by American buyers. Canada’s counter-tariff can then raise the price of selected U.S. goods for Canadian buyers. Businesses may face smaller sales, higher input costs, or disrupted supply chains. They may respond by delaying investment, reducing production, or cutting jobs.

Those effects can spread through the economy. Lower exports reduce revenue for affected companies, while higher prices can restrain household spending. The source links new U.S. tariffs and Canadian countermeasures with the PBO’s weaker outlook. It projects growth of 0.9 per cent this year and 1.5 per cent in 2027, below its June forecasts.

A budget deficit depends on the gap between government revenues and spending. Stronger revenues improve that balance only if spending does not rise by more. A government can therefore collect more money and still run a larger deficit when new expenditures increase even faster.

The PBO provides this exact mechanism in its revised outlook. Compared with June, it expects deficits to be $3 billion higher per year on average from 2026-27 to 2030-31. The reason is that new spending measures more than offset stronger revenues.

The result is a projected $63.3-billion deficit in 2026-27, followed by a peak of $70.2 billion in 2027-28. This means the improved revenue outlook is not enough to prevent larger shortfalls. Unless spending or revenues change later, the government would need to finance those deficits through additional borrowing or other measures.

Trade with the United States is central to Canada’s economy because the two countries are deeply connected through cross-border buying, selling, and production. The source does not provide a trade share or dollar value, so it does not measure the relationship’s exact size. It does identify the United States as the country involved in the tariff dispute.

When U.S. tariffs make Canadian goods more expensive for American buyers, Canadian exporters may lose sales. Canadian counter-tariffs can also make U.S. inputs or products more expensive in Canada. Businesses may face weaker demand and higher costs, while workers can be affected if companies reduce production or delay hiring.

The dispute matters because trade talks broke down at the end of August, followed by new U.S. tariffs and Canadian counter-tariffs. The PBO subsequently lowered its growth forecasts to 0.9 per cent this year and 1.5 per cent in 2027, indicating weaker expected economic activity.

A budget deficit occurs when a government spends more than it receives in revenues during a fiscal year. To cover the gap, it generally borrows money. Public debt is the accumulated total of past borrowing, adjusted for repayments and other financial changes.

For example, a projected $63.3-billion deficit in 2026-27 would add to the government’s borrowing needs if it were financed through debt. A later deficit, such as the projected $70.2 billion in 2027-28, would add another shortfall. Repeated deficits therefore tend to increase the debt balance unless surpluses or other repayments offset them.

Higher debt can also create larger interest costs, although the source does not provide an interest forecast. The PBO says deficits will be $3 billion higher per year on average from 2026-27 to 2030-31 than in its June outlook. That points to greater borrowing needs across the period, assuming the deficits are financed through borrowing.

Real gross domestic product, or real GDP, measures the inflation-adjusted value of goods and services produced in an economy. Removing price changes makes it easier to identify changes in actual production. That is why real GDP growth is widely used to judge whether an economy is expanding or contracting.

Suppose total sales rise because prices increase but the economy produces the same quantities. Nominal GDP could grow, but real GDP would show little or no underlying expansion. If businesses produce more goods and services, real GDP can rise even after inflation is removed. The measure therefore focuses on changes in economic output.

The PBO uses real GDP in its forecast. It now expects growth of 0.9 per cent this year and 1.5 per cent in 2027, down from 1.1 per cent and 1.6 per cent in its June outlook. The revisions suggest weaker inflation-adjusted expansion than previously expected.