Prime Minister Mark Carney announced significant fiscal measures during his keynote address at a government-sponsored investment summit in Toronto on September 15, unveiling a major tax reform aimed at capital investment alongside an accelerated timeline for balancing the operating budget.
The proposed tax reform allows businesses to immediately expense the full cost of a broad range of capital investments, expanding the types of assets eligible for this "productivity mega deduction" from 15 percent in last year’s budget to 65 percent. The Finance Department estimates that this measure will reduce government revenues by approximately $36 billion over five years, beginning in the current fiscal year.
Despite this sizeable tax expenditure, Carney declared that the federal operating budget would be balanced a year earlier than previously forecast. At first glance, the coexistence of a costly tax incentive and a sooner-than-expected budget surplus may seem contradictory. However, this can be understood through the government’s redefinition of budget accounting launched last year, which separates the federal budget into “operating” and “capital” components.
Under this framework, the operating budget covers day-to-day government expenses, while the capital budget captures investment-related expenditures and is excluded from the deficit calculation. The government classifies the new tax reform as capital spending because it is intended to stimulate investment, thereby keeping its cost off the operating deficit ledger.
The Parliamentary Budget Officer (PBO) has raised concerns about this classification, noting in a recent report that the government’s definition of capital spending is broader than those used in other countries with similar accounting practices. The PBO highlighted that including corporate income tax expenditures, investment tax credits, and operating subsidies within capital spending blurs the line between operating expenses and investment, potentially understating the operating deficit.
The PBO further cautioned that Ottawa’s current classifications “appear contradictory” and lack transparent methodology, making it difficult to independently verify or forecast how future spending will be categorized. This opacity may obscure the true fiscal impact of government policies.
While Ottawa still publishes traditional deficit figures that encompass all spending, differences between these and the operating deficit are substantial. The spring economic update projected a $10.5 billion deficit for day-to-day operations in the current fiscal year, improving to a $900 million surplus by 2028-29. In contrast, the traditional deficit was forecast at $65.3 billion this year and $57.7 billion by 2028-29, with the gap between these measures expected to widen from $54.8 billion to $58.6 billion.
These figures suggest that the current government has reversed the tighter fiscal discipline of its predecessor, with deficit reductions expected to be modest throughout the decade. Observers note that presenting the budget through the operating versus capital split provides a more favorable fiscal narrative for the government but may not fully reflect the underlying financial position.
As the Liberals continue to promote their economic agenda, scrutiny remains on the evolving budget accounting methodology and the implications for transparency in federal finances.