The federal deficit will hit $117 billion by 2035 if nothing changes, estimates the MEI

Montreal, April 8, 2026 – Without course corrections, the current trajectory of public finances could see the return of a situation similar to what we saw in the 1990s, cautions the MEI in an Economic Note published this morning.

“Ottawa’s problem, simply put, is that expenditures will continue to grow faster than revenues for the next decade,” says Trevor Tombe, senior fellow at the MEI and author of the publication. “The longer the government waits to act, the harder the adjustments needed to return to budgetary balance will be.”

The federal government expects to record a deficit of $78.3 billion for the 2025-2026 budget year.

The researcher explains that certain major spending items will increase rapidly in the coming years.

Transfers to seniors, such as the Guaranteed Income Supplement and Old Age Security, for example, are expected to grow by around 4.9 per cent per year over the next decade.

There is also the Carney government’s commitment to increase Canadian defence spending to 3.5 per cent of GDP by 2035, from 2.0 per cent this year. This will require a $100-billion increase in spending, or nearly 10 per cent per year over the next decade.

Meanwhile, federal government revenues are expected to grow by just a little under 4.0 per cent per year, on average, over the next decade, explains the researcher.

In 2035, the federal government would thus record a deficit of around $117 billion, as well as a net debt of $2.4 trillion.

“To bring the federal budget back to balance all while maintaining our projected defence commitments, reforms will be needed,” points out Mr. Tombe. “There are no easy answers, and proceeding with blinders on, as the federal government seems to be doing, will not help.”

The researcher recommends several measures to reduce the deficit:

• Extend the current policy of non-defence direct expenditure reductions until 2035 (deficit reduction of nearly $51 billion).
• Reform the elderly benefits system, such as by raising the age of eligibility or tightening income thresholds (deficit reduction of $19 billion).
• Moderate the growth in provincial transfers (deficit reduction of nearly $6 billion).
• Accelerate reductions in non-defence direct expenses (deficit reduction of around $24 billion).

Even combined, these measures would be insufficient to return to balance.

The researcher thus also recommends revenue-neutral tax reform and a regulatory review in order to increase the competitiveness of the Canadian economy and increase economic growth by half a percentage point.

In a Viewpoint published last year, the MEI recommended an in-depth regulatory review using a series of questions aiming to eliminate superfluous regulation.

“The combination of more sustained economic growth, tax reform to favour competitiveness, and a better, targeted management of spending is the only realistic path back to a balanced budget,” concludes Mr. Tombe.

You can read the MEI Economic Note by clicking here.

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The MEI is an independent public policy think tank with offices in Montreal, Ottawa, and Calgary. Through its publications, media appearances, and advisory services to policymakers, the MEI stimulates public policy debate and reforms based on sound economics and entrepreneurship.

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