This is from a larger publication, Alternative federal budget 2026-27: Bridge to independence
There was plenty of debate about a technical versus actual recession following the slightly negative real GDP data point from the first quarter of 2026. This misses the broader point that the Canadian economy has been stuck in neutral for four quarters and experienced no real GDP growth since the first quarter of 2025. This is a clear negative result that the federal government needs to tackle head on. The Bank of Canada is unlikely to lower interest rates to aid the housing sector as higher oil prices threaten higher prices outside of just gasoline.
This no-growth situation that Canada is stuck in has clear determinants, the most seemingly obvious one is trade chaos with the United States. Canada’s economic doldrums preceded the trade war. The problem has been decades in the making and is the result of long-term under-investment because of the government’s attempt to rely on “incentives” rather than direct investment.
Most Canadian goods can still enter the U.S. tariff-free, although certain sectors have been hit hard by the abrogation of the free trade agreement between our two countries. The ongoing threats of broader tariffs undermine business confidence and reduce economic growth.
While American tariff policy is well outside of Canada’s control, other factors dragging the GDP down are very much within our control. Much tighter immigration policy led to a decline in the Canadian population. With fewer people comes less economic growth. Per capita GDP the first quarter of 2026 did not decline, meaning that the overall GDP drop is being driven by falling population, not falling economic activity.
Federal government cutbacks and layoffs also play a role in suppressing economic growth. The employment impacts are being acutely felt in the national capital region. Ottawa had the second worst job losses since January 2025 of any CMA in Canada, behind Montreal.
Tax cuts aren’t the answer, direct public investment is
When it comes to slowing productivity in Canada, the corporate sector is quick to propose more corporate tax cuts as a solution. While it is possible for firms to direct the proceeds of lower taxes to productivity enhancing investments (thereby increasing their, and the economy’s, productivity), this is hardly the only use for those proceeds.
Figure 31.1 illustrates the last 35 years of corporate investment, as represented by spending on machinery and equipment and intellectual property. Over this long period, corporate investments have ebbed and flowed. In the past decade, they have remained relatively stable, at roughly six per cent of GDP. However, statutory federal and provincial tax rates have been cut in half over this same period. So, while corporations could have used the windfall from lower corporate taxes on productivity enhancement, they haven’t.
What did rise, substantially, over this period of increasingly lower corporate taxes was how much corporations paid out to their shareholders in dividends. During the period when tax rates were being cut in half, dividends exploded, from five per cent of GDP to 11 per cent by 2010, when corporate tax rates hit their bottom. Once the statutory tax rates remained relatively unchanged post-2010, dividends remain permanently at their new higher level.
One of the major challenges for relying on corporate tax rate reductions to fuel investment is found in Figure 31.3. The fundamental reality is that for Canadian non-financial firms, 80 per cent of after-tax profits are paid out to shareholders as dividends or share buybacks, no matter the tax regime. This ratio can change in volatile times, like the during pandemic, which briefly slashed profits, but in less turbulent times following that period the payouts are remarkably stable. In any tax change that raises corporate after tax profits we should expect 80 per cent of that money to go to shareholders with maybe 20 per cent going to productive investments. That’s a crushing upfront price to pay. Federal government direct investments in productivity enhancements through sectoral investments, education and de-carbonization skip the 80 per cent to wealthy shareholders and devote the entirety of the investment into productivity enhancing capital investments. That’s exactly the route that the AFB takes.
The simple truth is that corporate investment doesn’t chase tax rates, it chases economic growth as shown in Figure 31.4. When times are good, companies invest in their productive capacity, they buy more machinery and equipment and develop more intellectual property. As a result we see an uptick in corporate investment when GDP growth is strong.
When times are tough, companies cut back on their expansion plans and their investments in research. They don’t buy machinery and equipment and they don’t greenlight new research and development that may have longer term payoffs. So if we want more corporate investment, we need stronger economic growth, not tax cuts.
Direct government investment spurs private productivity investments by driving economic growth. Government spending will, necessarily, use private sector providers of goods and services, which provides them with stable sources of income that create the greater certainty necessary for risk-taking and may encourage them towards investment in productive capacity.
Defence spending eats the federal budget
One of the other factors in slower growth has been federal government cutbacks. However, these cutbacks cannot be viewed in isolation. They need to be seen as a shift in government operational spending, not an overall cut—specifically a shift away from almost all departments and towards higher defence spending. The net result is a rapid shift in the distribution of operational spending. Figure 31.5 illustrates what proportion of the federal operational budget is going to defence spending, illustrated by Department of National Defence (DND) and Veterans Affairs (VAC) the two largest components that count towards NATO-eligible defence spending. Prior to the 2025 budget Comprehensive Expenditure Review (CER), DND and VAC made up under 30 per cent of all federal operational spending. However, following the CER, that will rise to 40 per cent.
If the government continues to carve out new defence spending from other departments instead of raising taxes or running a larger deficit to pay for it, the results will become quite stark.
If the federal government retains its commitment to NATO’s two per cent of GDP goal, half of federal operational spending would be in defence by 2035-36. However, the federal government has committed to hitting the NATO goal of 3.5 per cent of GDP.1Utilizing the Parliamentary Budget Office estimates of increases needed to meet the 3.5 per cent NATO target by 2035, but instead of assuming larger deficits, this assumes the amounts are carved out of other departments, as was the case with the Comprehensive Expenditure Review: Katarina Michalyshyn, Fiscal Implications of Meeting NATO’s 5% Commitment, Office of the Parliamentary Budget Officer, February 5, 2026, . This would more fundamentally alter what the federal government does. It would mean over 80 per cent of the operations of the federal government would be military and veterans affairs, a complete inversion of the situation from 2024-25.
The AFB does not believe that turning the federal government into an almost purely military organization is what Canada needs and the AFB charts a different path.
The AFB’s macroeconomic baseline
As with previous years, the AFB takes as its baseline the most recent federal fiscal and macroeconomic data, which in this case was the 2026 spring economic statement, as outlined in Tables 31.1 and 31.2.
In the lead up to this AFB, Canada had a very poor previous 12 months, ending in March 2026, where Canada had no real GDP growth. Of those four quarters, three saw negative or no economic growth and only one showed some growth. The final quarter of 2025 and the first of 2026 put Canada in a technical recession, as the growth was only marginally negative in the first quarter of 2026.
Part of this no-growth year was a result of external factors—including the tariff war with the United States—and, in part, the problem was internal, as Canada shut its doors to international students and several types of foreign workers. Each of these put a drag on growth. Table 31.1 shows some improvement in 2027, with real GDP growth rising to just over one per cent. However, this level of growth remains disappointing. Canada is far from strong economic growth—in 2026 and the near future.
While economic growth for its own sake can be quite dangerous—wars and environmental devastation are great for growth—nor should growth be neglected. As we’ll see below, the AFB shows how we can grow the economy while providing better services, more equity and a manageable deficit.
In Table 31.2, as with previous AFBs, we’re continuing to include the revenue collected by the federal government that’s given up in tax expenditures, otherwise known as legal tax loopholes. The statutory tax liability, or the amounts that the federal government would have collected without tax loopholes, is missing from standard federal budgets. But the foregone revenue amounts are tremendous and deserve much more scrutiny than they receive.
If we look at the personal income tax system first, the federal government would have collected $363 billion in tax revenue in 2027-28. But it gave away $101 billion of it in tax expenditures—almost entirely to Canada’s richest, who receive the lion’s share of tax loopholes. Once we account for the tax breaks provided to Canada’s rich, we get the personal income tax revenue line of $262 billion in 2027-28 that we’d find in standard budget documents. In other words, Canada gave up over a quarter of its personal income tax revenue to tax loopholes.
The situation is much worse if we look at corporate income taxes. Without tax loopholes for corporations, the federal government would have collected $170 billion in 2027-28 for this line item. Instead, it gave away $71 billion. The actual amount collected after the corporate tax loopholes was $99 billion. In other words, four of every 10 cents in corporate income taxes are given away in loopholes.
All told in 2027-28, the federal government is on track to give away $171 billion in personal and corporate tax loopholes, more than twice the size of the federal deficit in that year.
Despite the crushing burden of tax loopholes, the federal government is on track for a deficit of just under two of GDP, which falls over the projection horizon. This is a mid-range value for the deficit, not the lowest but nowhere near the highest—and lower than at any point between 1975 and 1995.
Revenues-to-GDP sit at roughly mid-range, historically speaking—neither as low as they were in the 2010s, but lower than any point between 1986 and 2006.
Program expenditures are similarly at mid-range over the past half century.
Canada’s national debt-to-GDP is five points lower than its recent high during the pandemic, as economic growth grew much faster than debt over the past few years. The national debt-to-GDP was higher in every year between 1984 and 2003, so its present level is roughly mid-range for the past half century.
The AFB plan
The AFB plan starts from the most recent fiscal statistics in Tables 31.1 and 31.2 and adds the aggregation of its programs on top. The full list of AFB items can be found in Table 31.5 at the end of the chapter but can also be found at the end of each chapter.
The AFB would implement over 200 fresh policy ideas. Many of them are expenditures and so the net increase in expenditures under the AFB would be just over $100 billion in 2027-28.
Over 20 AFB policy measures are on the revenue side, and they raise almost the same in 2027-28 as the AFB spends. In other words, the AFB pays for itself. A third of the new AFB revenue comes from closing some of the $171 billion in tax loopholes the federal government forgoes every year.
The net result of the AFB is that the deficit line is almost nil because the AFB pays for its new measures with revenue improvements. The debt-to-GDP ratio also remains the same as in the base case.
While AFB expenditures and revenues are roughly equal, that doesn’t mean that there’s no effect on the economy, in areas like employment. The AFB taxes in areas where the economic multipliers are lower—like on corporations and the wealthy—and spends in areas where multipliers are higher—like support for low-income families and the provision of services like in health care, child care and physical infrastructure. The result is that the AFB creates or maintains over 400,000 jobs by 2030.
Income and poverty impacts of the AFB
When examining the aggregation of budgets, it’s important to look at their impact on the federal governments’ books as well as other effects on inequality and poverty. These effects are rarely included in standard budget analysis, but they are included in the AFB analysis.
In this section, we aggregate the personal tax/transfer items in the AFB, which comprise much of the EI chapter, the Tax chapter (as it relates to individuals), and the Poverty and income security chapter. (Not all measures fully implemented in year one.2Specifically includes: CCB end poverty supplement, the Canada Livable Income, the faster CCB clawback for richer families, the cancellation of the Canada Workers Benefit, the improvements in the CDB and the GIS, providing immigrant seniors with access to OAS/GIS, the change in the capital gains improvement rate, the new millionaires tax bracket, the $500 a week floor in EI benefits, the increased MIE for both benefits and contributions, the 66.6 per cent replacement rate for benefits.) For the purposes of simulating the effects, the full implementation occurs in 2027. Simulations were conducted in SPSD/M glass box.3This analysis is based on Statistics Canada’s Social Policy Simulation Database and Model 34.0. The assumptions and calculations underlying the simulation were prepared by David Macdonald and the responsibility for the use and interpretation of these data is entirely that of the author.
First let’s examine the simulated AFB effects on inequality as measured by 10 equal groups of families, called deciles. The average change, per family, due to AFB measures is illustrated in Figure 31.6. There are new taxes in the AFB and they are targeted at the highest-income earners. As a result, the top decile—or 10 per cent of families making over $257,000 in pre-tax income—would pay almost $5,000 more. But even families near the upper end of the income distribution—in deciles 8 and 9, making between $145,000 and $257,000—would see little overall change due to the AFB measures.
The bottom 70 per cent of families would see an average change in the transfers they receive net of any taxes. The average gain, per family, is roughly $500 and the new AFB supports rise as income falls. The benefit to the poorest 10 per cent of families is substantial: on average, it amounts to almost $5,000 per family. So, the rich do pay more under the AFB, but it results in much better support for the least fortunate Canadians.
The Poverty and income security chapter focuses its new transfers on those who need them most and works towards cutting poverty rates in half by 2030. We can see the benefits of these programs on poverty rates in all age groups, as shown in Figure 31.7. Seniors have a lower poverty rate to begin with, due to important pre-existing supports like OAS, Guaranteed Income Supplement (GIS) and the Canada Pension Plan. These critical programs already put a higher floor on seniors’ incomes than any other age group. But with the additional AFB measures, seniors’ poverty rates fall from nearly six per cent to four per cent, lifting 141,000 seniors out of poverty in 2027. This is largely due to the AFB improvements to the GIS, ameliorating an already important program in reducing senior poverty.
Children and adults have much higher poverty rates. Children under 18 would see their poverty rates under the AFB fall from 11 per cent to seven per cent, lifting 328,000 children out of poverty. The AFB’s end poverty supplement to the CCB is doing the heavy lifting here. It is designed to target families with children in the deepest poverty who are already receiving the CCB and aids them even more. Because poverty is measured at the family level, the CCB supplement is also lifting the parents of those children out of poverty.
We also see the poverty rate for people aged 18 to 64 falls under the AFB, from almost 13 per cent to 10 per cent, lifting 549,000 people out of poverty. The improvements to the Canada Disability Benefit, the CCB supplement and our new Canada Livable Income are all helping low-income adults. But so are measures from the Employment Insurance chapter—like a $500 weekly minimum benefit.
All told, the AFB lifts over a million people out of poverty, if measured by the MBM. Using the CF-LIM AT, a less subjective measure of poverty, the impact of the AFB is similar, where 900,000 people are lifted above that poverty line.
The nature of the income supports mean that some family types are particularly impacted by AFB policies, as shown in Figure 31.8. Those living in married couple families have low poverty rates to begin with. Those with children see a benefit from AFB policies, particularly the CCB supplement. One of the biggest impacts is for single parents with young children, who are mostly single mothers, whose poverty rate would be cut in half, falling from 26 per cent to 13 per cent.
Adults living alone—who are of working age and seniors—also see high poverty rates and see some benefit from AFB programs.
Being counted as living in poverty or not is simply about whether a family makes more or less than a poverty line defined for their family size and location. If a family makes $10 less than their respective poverty line, it is counted as living in poverty. But if the family makes an extra $20 that year, it would no longer be counted as living in poverty, even though their circumstances are similarly dire.
It’s important to look at changes in deep poverty—not just at the poverty rate—to make sure the AFB measures aren’t just barely lifting people above their poverty line yet practically doing very little for them. Here we’re defining deep poverty as living 75 per cent or more below the poverty line.
In this separate measurement, the AFB shows a much bigger impact than on poverty rates generally. The Canadians represented in this graph still live in poverty, but their situation is likely less dire. Figure 31.9 counts the number of people who live in deep poverty.
Without the AFB measures, more than 400,000 Canadian adults live in deep poverty. However, the AFB lifts 358,000 of them out of deep poverty. Those people are still living in poverty, but their situation would be a bit less dire. The AFB’s new Canada Livable Income program for adults and major improvements in the Canada Disability Benefit are what would lift so many adults out of poverty.
Deep poverty isn’t nearly as prevalent for children because the CCB provides a much higher income floor. Nonetheless, the AFB measures lift 14,000 children out of deep poverty. The AFB has almost no impact on deep poverty for seniors, but there are very few seniors who live in these circumstances, given the much higher income floor provided by the GIS, OAS and CPP.
Real progress towards the federal government’s 2030 poverty goal of cutting poverty in half is possible and AFB lays out the initial steps to get there.
Conclusion
The AFB includes 216 policies to improve Canada, as detailed in Table 31.5, but also explained in its 27 chapters. Each policy item has a specific addition to make, but their aggregate impact creates new jobs, improves economic growth and pays for itself. The measures of the AFB also show that big improvements in income inequality are possible, and we can make major strides towards eliminating poverty in Canada. The AFB is a practical guide for how the federal government can make Canada a stronger, fairer and more generous country.
