Economic and Fiscal Outlook – March 2025
This report provides a baseline projection to help parliamentarians gauge potential economic and fiscal outcomes under current policy settings.
Summary
This report provides a baseline projection to help parliamentarians gauge potential economic and fiscal outcomes under current policy settings. Our outlook incorporates economic data up to February 14 and new measures announced by the Government in the 2024 Fall Economic Update.
Given the evolving uncertainty around trade actions, our baseline projection does not include threatened U.S. tariffs but does account for heightened economic uncertainty. Recognizing the potential impact of a trade conflict with the U.S. on the Canadian economy, our risk assessment includes impact estimates derived from an illustrative trade conflict scenario to help parliamentarians understand the economic implications of potential U.S. tariffs and Canadian retaliation.
The following provides a condensed overview of PBO’s Economic and Fiscal Outlook (EFO). Projection details are provided in Appendices A to I.
Economic outlook
After slowing in the third quarter, recent data suggest that the Canadian economy advanced by 1.8 per cent (annualized) in the fourth quarter of 2024, driven by steady household consumption and a pickup in residential investment.[^1] We estimate that real GDP (gross domestic product) advanced by 1.3 per cent in 2024 (Table 1).
Since October 2024, our outlook for real GDP growth in 2025 and 2026 has been revised downward by 0.5 percentage points, primarily due to weaker population growth following new federal immigration policies.[^2] Additionally, even in the absence of new tariffs, rising uncertainty surrounding trade actions is expected to weigh on consumer and business spending. However, we anticipate that lower interest rates will help sustain economic activity as the effects of previous rate cuts continue to work through the economy. Overall, we expect economic growth to outpace growth in potential output, gradually reducing the economic slack over the projection horizon.
In the second half of 2024, the labour market softened with the unemployment rate rising to 6.7 per cent in the last quarter of the year. As population growth slows, PBO expects the employment rate to increase, resulting in a declining unemployment rate that eases to 5.5 per cent by the end of our projection horizon.
Inflation returned to its 2 per cent target in late 2024.[^3] The Government’s temporary HST/GST holiday helped reduce inflation between December 2024 and February 2025. Its expiration will lead to a slight uptick in the second quarter of 2025. However, with the economy currently operating below its productive capacity, inflation should remain stable, averaging 1.8 per cent between 2026 and 2029.
Given our outlook for inflation and the output gap, we expect the Bank of Canada to lower its policy rate by a further 25 basis points in the second quarter of 2025 to reach its estimated neutral level of 2.75 per cent.
Compared to our October 2024 EFO, accounting for historical restatements our outlook for nominal GDP—the broadest measure of the government’s tax base—is now higher. Overall, the level of nominal GDP is projected to be about $2 billion higher annually, on average, over 2024 to 2029 compared to our October 2024 outlook.
Fiscal outlook
PBO prepared its October 2024 EFO prior to the tabling of the Public Accounts of Canada 2024.[^4] The final audited results for 2023-24 reflect a deficit of $61.9 billion (2.1 per cent of GDP), significantly higher than our estimate for 2023-24 of $46.8 billion (1.6 per cent of GDP) in October.[^5] As noted in our Fall Economic Statement Issues report, this principally reflects higher-than-anticipated contingent liabilities.
Our status quo outlook includes new measures announced in the 2024 Fall Economic Statement. These amount to $20.6 billion in net new spending over 2024-25 to 2029‑30.[^6]
For the current fiscal year, 2024-25, we expect the deficit to decline to $50.1 billion (1.6 per cent of GDP). This is principally due to higher revenue growth, offset by higher expenses (Table 2).
In 2025-26, assuming no new measures are introduced and existing temporary measures sunset as scheduled, the deficit is projected to resume its downward trajectory. We estimate it will fall to $24.6 billion (0.7 per cent of GDP) in 2029-30, as revenues grow faster than nominal GDP but expenses generally track economic growth.
We project the debt service ratio (that is, public debt charges relative to total revenues) to rise to 10.8 per cent in 2024-25 from 10.3 per cent in 2023-24 (Figure 1). The debt service ratio is projected to further increase and reach 11.3 per cent in 2029-30, well above its pre-pandemic record low of 7.0 per cent in 2018-19.
In 2024-25, we expect the federal debt-to-GDP ratio to fall to 41.9 per cent and continue to gradually decline to 39.2 per cent by 2029-30, remaining well above its pre-pandemic level of 31.2 per cent of GDP. The federal debt-to-GDP ratio is projected to be roughly the same, on average, over 2024-25 to 2029-30 compared to our October 2024 outlook.
Finance Canada.
Statistics Canada.
Office of the Parliamentary Budget Officer.
Finance Canada.
Statistics Canada.
Office of the Parliamentary Budget Officer.
Data are in fiscal years (2024 corresponds to fiscal year 2024-25). The projection period covers fiscal years 2024-25 to 2029-30.
Compared to our October 2024 outlook, we project budgetary deficits that are $2.8 billion higher, on average, over 2024-25 to 2029-30. This increase is largely due to new measures announced by the Government that reduce our revenue projection and boost our program expense projection (Table 3).[^8]
Risks and uncertainty
Our outlook provides a baseline projection to help parliamentarians gauge potential economic and fiscal outcomes under current policy settings (that is, a “status quo” baseline). Excluding risks related to the imposition of threatened U.S. tariffs and retaliatory measures, we judge that the risks to our baseline economic and fiscal projections are roughly balanced.
Key Downside risk
Heightened trade uncertainty could weigh more heavily on business investment and household spending than anticipated. If businesses delay expansion plans and households pull back on discretionary spending, economic activity could slow more than expected, leading to weaker job growth and lower overall demand.
Key Upside risk
On the other hand, if interest rates fall further or population growth is higher than projected, household consumption and residential investment could exceed expectations. A stronger-than-expected housing market—fueled by lower borrowing costs—could support economic momentum, while higher population growth could boost consumer demand.
Ripple effects: Assessing the impact of new U.S. tariffs on the Canadian economy
To illustrate the potential impact of global trade actions on our economic and fiscal outlook, we have simulated a downside scenario based on the following policy assumptions:
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The United States imposes permanent 25 per cent tariffs on non-energy goods imports from Canada.[^9] Canadian energy exports to the United States will face a 10 per cent tariff.
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The United States imposes permanent 25 per cent tariffs on imports from Mexico, 10 per cent tariffs on imports from China, and an additional 25 per cent tariff on steel and aluminum imports from other trading partners.
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Canada, Mexico and China retaliate by imposing permanent reciprocal tariffs on goods imports from the United States.
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Tariff revenue is recycled back into the economy via transfers to households and government spending.[^10]
We used the Global Trade Analysis Project (GTAP) database and computable general equilibrium model as well as our macroeconomic model to estimate the impact of these trade actions on Canada’s real GDP. Our modelling suggests that these policies would permanently reduce Canada’s real GDP by about 2 per cent over the medium-term relative to a control scenario in which no tariffs are imposed. There is considerable uncertainty around the potential impacts of tariffs, particularly in the short term.[^11] The impact could also be higher or lower depending on the eventual severity of the trade actions and Canada’s response.
Detailed economic outlook
Statistics Canada.
Statistique Canada.
Statistics Canada.
Statistique Canada.
The unemployment rate and the interest rates (Bank of Canada policy rate, 3-month treasury rate, 10-year government bond rate) are end of period values.
Composition of nominal GDP
Statistics Canada.
Office of the Parliamentary Budget Officer.
Statistics Canada.
Office of the Parliamentary Budget Officer.
Detailed revenue outlook
Finance Canada.
Office of the Parliamentary Budget Officer.
Finance Canada.
Office of the Parliamentary Budget Officer.
Totals may not add due to rounding. Return on investments have been reclassified from Other programs to Net foreign exchange revenues and return on investments.
Detailed expense outlook
Finance Canada.
Office of the Parliamentary Budget Officer.
Finance Canada.
Office of the Parliamentary Budget Officer.
Totals may not add due to rounding.
Employment Insurance Operating Account
Finance Canada.
Office of the Parliamentary Budget Officer.
Finance Canada.
Office of the Parliamentary Budget Officer.
Totals may not add due to rounding. The projection period covers 2024 to 2032.
Direct program expenses
Finance Canada.
Office of the Parliamentary Budget Officer.
Finance Canada.
Office of the Parliamentary Budget Officer.
Totals may not add due to rounding.
Federal debt outlook
Finance Canada.
Office of the Parliamentary Budget Officer.
Finance Canada.
Office of the Parliamentary Budget Officer.
† Borrowing requirements under the Borrowing Authority Act pertain to the sum of Government of Canada and agent Crown corporation market debt. This number may slightly differ from what is reported in the Public Accounts, which incorporates an adjustment for amortized cost. Totals may not add due to rounding.
Comparison to October 2024 outlook
Finance Canada.
Office of the Parliamentary Budget Officer.
Finance Canada.
Office of the Parliamentary Budget Officer.
Totals may not add due to rounding.
Comparison to Fall Economic Statement 2024
Finance Canada.
Office of the Parliamentary Budget Officer.
Finance Canada.
Office of the Parliamentary Budget Officer.
Totals may not add due to rounding.
Communications
Quotes
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As the new federal immigration policies curb population growth, we expect economic activity to slow down in 2025 and 2026. Rising uncertainty surrounding trade actions is also likely to dampen consumer and business spending in the near term. However, lower interest rates are expected to help sustain economic activity, gradually reducing economic slack.
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Under status quo policy, the federal debt-to-GDP ratio is projected to fall over the projection horizon, dropping to 39.2 per cent in 2029-30, but will remain well above its pre-pandemic level of 31.2 per cent of GDP in 2019-20.
Parliamentary Budget Officer