It’s early budget season, and already the bazookas are coming out as Canada’s leaders lock and load for economic war with U.S. President Donald Trump. 

Nova Scotia Premier Tim Houston’s government led with a fiscal plan that swings from an expected surplus of $82.5 million in the current fiscal year to a deficit of almost $900 million in the fiscal year that ends March 31, 2026. There’s no hint of getting back to balance anytime soon. “In the face of global economic uncertainty, Nova Scotia needs to create new opportunities that unlock our potential to increase self-reliance,” the first line of the budget said.  

A few days before Ontario Premier Doug Ford romped to re-election on Thursday, his Progressive Conservative party released a platform packed with $40 billion in new spending measures, including a $5-billion “Protect Ontario Account” that the party said would help “large-scale industrial job creators” adjust to tariffs. The document was silent on what that meant for the deficit and debt. At a campaign stop, Ford said his strategy for a trade war would be similar to how he confronted the COVID-19 crisis. “I’m going to protect the families, protect the businesses, protect jobs,” he said, before Ontarians handed him a third consecutive majority government. 

Houston and Ford were heralds. Also on Thursday, Alberta tabled a budget that forecasts a $5.2-billion deficit to cover a $4-billion contingency reserve and accelerate a planned personal income-tax cut. 

Can we afford it? The short answer is yes. Economists at Desjardins think the provinces could deploy $100 billion and keep their collective debt-to-GDP ratio below 35 per cent. They estimate the federal government has similar fiscal room. Net federal debt is currently about 45 per cent of GDP, compared with more than 100 per cent during the Second World War. 

“This is the giant tempest of rainy days,” RBC chief economist Frances Donald said on stage in Toronto in January. “Whatever room we have should be deployed in this situation.”

Still, there will be resistance to COVID-levels of spending. In October, the International Monetary Fund used its annual meeting to nudge its members to give serious thought to paying off some of the debt they accumulated during the pandemic, warning that fiscal plans at the time were insufficient to “stabilize or reduce debt with high probability for many countries.” 

The Institute of International Finance, an association of the world’s biggest banks and insurers, said last month that global government debt increased to 98.5 per cent of gross domestic product in the fourth quarter, and warned that “bond vigilantes” will be probing for weakness, especially in “countries with highly polarized political landscapes.” Canada’s combined public debt is below the IIF’s global average, but barely; at 93.6 per cent, it’s lower than the U.S. (120.1 per cent), and higher than the euro zone (92.2 per cent) and the United Kingdom (85.4 per cent). 

Conservative Leader Pierre Poilievre, who has led opinion polls for the past two years, has spent much of the time insisting that he will “fix the budget,” albeit without articulating exactly how. And Mark Carney, the Liberal leadership candidate who has narrowed the gap with Poilievre in recent surveys, has pledged to balance the “operating” budget, while maintaining a deficit in spending on capital commitments such as infrastructure. 

The most popular national politicians sense resistance to additional spending, have doubts about racking up more debt, or both. Whatever the reason, their caution is probably warranted. Canada’s reputation as a trustworthy borrower has let it borrow liberally without paying punishing interest rates. 

But as those IIF figures show, Canada’s fiscal advantage isn’t what it used to be. At the same time, we’ve become reliant on foreign bond investors to offset an outflow of Canadian investment in international equities and other assets. More than 40 per cent of Canada’s stock of bonds is held abroad, the most ever, according to Warren Lovely, a managing director and strategist at National Bank. That’s both a blessing and a curse. “Think where we could head if foreign investors sour on Canadian assets as real and perceived risks mount,” Lovely said in a note to his clients. 

That doesn’t mean Canada’s leaders should put their bazookas back in the armory. Quite the opposite. Based on Trump’s initial tariff threats and how Prime Minister Justin Trudeau said he’d respond, the Bank of Canada estimates a prolonged trade war would put Canada’s economy on a growth path that’s about 2.5 per cent below the one it’s on now. Canada’s challenge for the foreseeable future is trying to mitigate that outcome. It’s not the time for austerity. 

But Canada’s generals could do with some cutting-edge guidance technology to maximize effectiveness and to maintain confidence in their aim. 

For that, Scotiabank economists Jean-François Perrault and Rebekah Young, both former Finance officials, have an idea: instead of targeting balanced budgets, they’d target economic growth—specifically, GDP per person, an imperfect measure that nonetheless serves as a rough guide of wealth and is easy to understand. “It would push parties to structure their platforms around a tangible objective, backed by a clear framework for measuring progress, evaluating trade-offs, and managing risks,” they write in a paper published this week. 

Perrault and Young’s note was aimed at Ottawa. They suggest an “ambitious” target of annual per capita GDP growth of two per cent, which they estimate would increase output per person by $5,000 over a four-year mandate and increase aggregate GDP by five per cent relative to the current trend. 

However, achieving that outcome would require a “massive” increase in capital investment in the range of an additional $60 billion per year, according to Perrault and Young. The private sector would have to account for much of that, but not before governments offset the loss of easy access to the U.S. market. 

That means more debt is a necessary condition of battling Trump. Canada can manage, but only if leaders are careful. This isn’t COVID-19. This time there are limits.     

Kevin Carmichael is The Logic’s economics columnist and editor-at-large. He has spent more than two decades covering economics, business and finance for outlets including Bloomberg News, The Globe and Mail and the Financial Post, where he also served as editor-in-chief.