Ottawa, ON – As reported by the Hill Times and others, the ongoing trade conflict between Canada and the United States could permanently shrink Canada’s real GDP by approximately two per cent by 2029-30, according to a new report from the Parliamentary Budget Officer (PBO). The federal budget watchdog also projects a $50.1-billion deficit for the 2024-25 fiscal year, an increase of $2.2 billion from the government’s December estimate, though lower than last year’s $61.9-billion deficit.
Economic Impact of Trade War
The tariffs imposed by U.S. President Donald Trump and Canada’s retaliatory measures are expected to have long-term consequences for the Canadian economy. According to the PBO’s March 5 report, these trade policies create “considerable uncertainty regarding breadth, depth, and duration” of their economic impact.
“Our modeling suggests that these policies would permanently reduce Canada’s real GDP by about two per cent over the medium term relative to a scenario without tariffs,” the report states. “The impact could be more or less severe depending on the extent of trade actions and Canada’s response.”
Justin Trudeau responded to the U.S. tariffs with immediate levies of 25 per cent on $30 billion worth of American imports, with an additional $125 billion in goods set to face the same tariff after 21 days. The U.S. also imposed a 10 per cent tariff on Canadian energy exports. However, on March 5, Trump announced a temporary 30-day pause on these levies for Canadian and Mexican automobiles.
Fiscal Projections and Policy Assumptions
The PBO’s economic outlook, released on March 5, outlines Canada’s projected fiscal position under current policies. While the report acknowledges uncertainty surrounding the long-term effects of tariffs, it assumes that revenue from counter-tariffs will be reinvested into the economy through government spending and household transfers. However, these assumptions do not directly factor into future deficit projections due to the evolving nature of the trade dispute.
The report incorporates data up to February 14 and reflects measures announced in the government’s fall 2024 economic statement. It also factors in lower immigration targets introduced in the Liberals’ 2025-27 Immigration Levels Plan, which led the PBO to reduce its GDP outlook for 2025 and 2026 by 0.5 per cent. The government’s revised plan lowers immigration from a previously planned 500,000 permanent residents in 2025 to 395,000, with further reductions to 380,000 in 2026 and 365,000 in 2027.
While decreased immigration may slow economic growth, the report suggests it could also contribute to lower unemployment, forecasting a drop to 5.5 per cent by 2029. Additionally, the PBO projects inflation to average 1.8 per cent between 2026 and 2029, with the Bank of Canada expected to cut its policy rate by 25 basis points to 2.75 per cent in Q2 2025.
Deficit and Debt Projections
The PBO estimates the 2024-25 deficit will reach $50.1 billion, slightly higher than the $48.3 billion forecasted in the government’s December fiscal update. This follows a significant increase in the 2023-24 deficit, which soared to $61.9 billion—over 50 per cent higher than the April 2023 projection of $40 billion.
Despite the current deficit levels, Giroux’s office predicts a downward trajectory in the coming years, with the deficit projected to decline to $24.6 billion by 2029-30. However, this assumes no new government measures are introduced and that existing programs phase out as planned. Should the government implement additional support measures to offset the effects of tariffs, the deficit could increase.
The federal debt-to-GDP ratio is expected to decline from 42.1 per cent in 2023-24 to 39.2 per cent by 2029-30.
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