Federal Budget 2025: Unpacking the New Capital Budgeting Framework

Leading into this budget, the Carney government made much of a new distinction between operational spending and capital spending: between “spending” and “investing”. However, in practice this distinction was mostly optics – and did not reflect any meaningful change in budget accounting and reporting.

The main budget numbers continue to be reported on an accrual accounting basis, which includes an annual deduction for the depreciation of fixed capital assets owned by the government (rather than reporting cash expenses on current capital spending).

In Annex 2, the budget document explains its new “Capital Budgeting Framework,” and presents a set of tables outlining what it calls “capital investment.”

“This framework helps distinguish day-to-day operational spending from capital investment (broadly defined as spending that supports capital formation), allowing the government to identify and prioritise initiatives that deliver long-term economic returns.”

Budget 2025, p. 281.

But this flow is not in fact equivalent to capital spending conventionally understood (in either accounting or economic terms).

This section lists six broad categories of “spending” (including tax expenditures, which are foregone revenue not actual spending) in areas that are argued to promote and facilitate capital investment. The six categories include:

- Capital transfers to other governments or organizations, tied to capital spending by those other agents.
- Capital-focused tax incentives to private agents.
- Amortization of federal capital (the flow of depreciation that still appears in conventional budget reporting, and in fact reflects previous capital spending, not current capital spending).
- Private sector R&D incentives.
- Support to unlock large-scale private sector capital investment (consisting solely of previously announced tax expenditures to support electric battery production).
- Measures to grow the housing stock.

The choice of these categories is utterly arbitrary, and reflects a deep private-sector bias in understanding what constitutes an “investment.” Why is a tax incentive for private-sector R&D considered an “investment,” but public R&D spending (through government, universities, or other public institutions) not? And why is spending on education, and other forms of “human capital”, not considered an investment?

Moreover, the value of the indirect incentives to private actors depends on whether those private firms indeed undertake the expected level of investment. For many reasons (not least including the chaos unleashed by Trump’s tariff policies) that private investment spending may not materialize – in which case the value of these federal incentives (categorized as “investments” in their own right) will shrink.

The main purpose of this capital budgeting framework seems to be to focus public attention on the importance of investment to future growth and prosperity (a laudable goal), and to justify continuing budget deficits on grounds that they are financing “investment” rather than excess “spending”. In this light, the fact that the total apparent expenditure associated with those six categories in 2029-30 ($59.6 billion) exceeds the projected deficit for that year ($56.6 billion) is the basis for the government’s claim that the “operational budget” will be balanced by then. Any remaining deficit will be allegedly due to expenses (including foregone revenues through tax expenditures) associated with those six categories of “investment”.

This is a very arbitrary and unconvincing way to distinguish between government current and capital spending. Other governments (including municipal governments and many provinces) report capital and current spending separately, on more genuine grounds (with capital spending defined more accurately as direct investments in physical or other lasting assets). This approach could even be modified in the federal government’s case to include transfers for direct capital spending by lower levels of government (which constitute a large share of total federal investment measures). But the inclusion of tax expenditures and other indirect incentives for private activity is far-fetched, and seems motivated by a desire to justify those measures as part of a program to boost capital investment. Many of those incentives may indeed be justifiable – but that hardly means they should be considered federal capital spending.

How much capital spending is actually forthcoming from this budget? This is hard to ascertain, given the nebulous nature of the categories and the associated reporting. The first figure shows the total composition of ‘spending’ across the six categories, using 2024-25 as a baseline. This “investment” almost doubles from $32 billion to $60 billion by 2028-29. It grows by a cumulative total of $120 billion over the five years. The increase in the annual flow of this “investment” is worth about 0.75 percentage points of GDP by 2028-29.

Most of that growth in ‘investment’ was already projected to occur on the basis of past announcements and normal growth trajectories. The amounts of new “investment” announced in this budget are much smaller: about $1 billion in new measures this fiscal year (2025-26), and then $8-9 billion per year in the next four years. This represents a cumulative increase in “investment” due to the budget of some $35 billion over the five year forecast period. On average that represents a boost to GDP of at most 0.25% per year.

As explained above, a significant share of this total consists of supports and incentives for private-sector investment-related activity. Those private supports (tax incentives, R&D incentives, and the electric battery program) make up 45% of the total cumulative growth in “investment” spending (compared to the 2024-25 baseline) over the five-year forecast.

However, almost all of that private support had been previously announced. The biggest components were the Clean Economy investment tax credits and the EV battery program (both announced in 2023 or 2024 to match Joe Biden’s IRA incentives, and both of which are supported by most progressive economists and environmental movements). There was surprisingly little new private investment support announced in this budget (and included in this capital investment annex): less than $2 billion in total over five years (mostly for the super-deduction accelerated write-off for certain forms of private investment). These newe measures accounted for just 5% of the total new “investment” spending announced in the budget.

So while the budget’s attempt to reclassify many measures (including tax incentives for the private sector) as federal “investment” is motivated by optics and unconvincing on accounting or economic grounds, there is little new in this budget to criticize about “corporate handouts”. The only significant new corporate tax measure (the super-deduction) is tied directly to investment spending in targeted industries (and is a model supported by many progressive economists).

How much of the announced “capital” spending is genuine? Capital transfers, housing supports, and normal amortization are more genuine public or public-supported investment policies (although there can be devils in the details about some of the transfer and housing programs). Those three categories grow by a cumulative total of $66 billion over the five-year period ($33.5 billion of which is due to new announcements in the budget, mostly the big new capital transfers). That represents a more genuine capital injection of around $13 billion per year on average (or around 0.4% of current GDP): not enough, but not insignificant.

That more genuine flow of new investment, combined with the modest in creases in nominal program spending (corresponding, in effect, to frozen real program spending) makes this overall budget mildly expansionary. Again, this is not enough given the historic challenges facing Canada. It should be criticized for not rising to that challenge, and for prioritizing the wrong things with its spending (such as defense spending). It is less convincing to criticize the budget on general grounds of “austerity”.

Another view on the extent to which the budget delivers a genuine increase in investment spending can be gleaned from its cash-based accounting of net financial requirements facing the government. Table A1.10 of the budget (on p. 251) provides a summary of the net cash requirements of the government, which must be met through new borrowing or other sources of liquidity.

The budget deficit is one cause of cash requirements (adjusted to reflect non-cash charges). Another cause is borrowing required for net acquisition of non-financial assets (that is, lasting capital assets), which in turn equals the government’s direct spending on actual new capital, minus non-cash deductions charged to the budget for depreciation of past capital investments. This flow of net non-financial capital acquisition (roughly equal to gross fixed investment less depreciation) rises from $6 billion in the current fiscal year (2025-26) to $21 billion in 2028-29, indicating an increase in real gross federal investment spending in the order of $15 billion per year (or close to 0.5% of GDP).

For comparison purposes, the total government sector in Canada currently spends about $130 billion per year on gross fixed capital investment. The federal government directly accounts for about 13% of that (ranging between $15-20 billion per year), but also supports fixed capital spending by lower levels of government through those capital transfer programs. Total public investment has been stagnant as a share of GDP (around 4%).

The measures announced in this budget should modestly increase total public investment, and the federal government’s share of it. But this incremental change clearly does not meet the challenge of the moment, despite the exaggerated narrative about it constituting a “generational” investment in Canada’s future. Compared to past nation-building moments and projects (like mobilizing for World War II, building a national railway or the St. Lawrence Seaway, etc.), the capital measures in this budget are small potatoes. The painful irony is that there are plenty of parallel projects that Canada needs (from an east-west-north electricity grid, to high-speed rail, to a genuinely massive housing construction program) that could constitute such a generational investment.

Jim Stanford