Investing in Resilience: Inside Canada’s 2025 Federal Budget

Canada’s 2025 federal budget is a strategic response to the U.S. tariffs that have rocked Canada’s economy since the beginning of this year. As the first federal budget under Prime Minister Mark Carney, Canada Strong lays out his proposal to counter American protectionism and stimulate the Canadian economy. This budget is built on the argument that bold investment today is essential to thrive amid global instability and create long-term growth. The nearly 500-page document offers significant tax incentives and investments in defence and infrastructure, while proposing operational spending cuts and a leaner federal public service.

What’s in the Budget

Canada Strong includes some $141 billion in new spending over the next five years, which will be partially offset by $51.2 billion in operational cuts and other savings (note that all dollar amounts are in Canadian dollars). The projected deficit of $78.3 billion for the 2025-26 fiscal year is lower than some economists had thought, but much higher than what the last Liberal government projected, pre-trade war. The economy is expected to grow by just one percent per year for the next two years, also below 2024 projections.

Budget 2025 is heavy on defence spending, up by $81.8 billion over the next five years. Much of that money will go towards military pay raises, new equipment and infrastructure repairs. Carney has pledged that Canada’s defence expenditures will hit NATO’s target of 2 percent of GDP this year and 5 percent by 2035. The budget further outlines the federal government’s new Defence Industrial Strategy, which will improve access to capital, drive research and innovation, bolster domestic supply chains, and grow critical resource stockpiles. A new Defence Investment Agency will modernize defence procurement and support domestic defence manufacturing.

Infrastructure is also a key focus of the budget, with substantial funding for housing, trade, Arctic transportation infrastructure, and nation-building projects – fast-tracked infrastructure projects of “national importance and significance.” The budget provides guidance and funds to support the newly created Major Projects Office, which will advance and streamline these nation-building projects. The first slate of projects is expected to trigger at least $150 billion in total capital investment.

It is worth noting that beginning this year, Canada’s federal budget cycle will move from the spring to the fall to accommodate better planning for the spring construction season. Moving forward, the main federal budget will be released in the fall and an economic and fiscal update in the spring.

With so much new spending, the budget also makes some sacrifices, notably reducing the federal public service by 40,000 workers over the next five years. The federal government intends to achieve this reduction through attrition and early retirements, saving $1.5 billion by 2031 and $82 million every year thereafter. The size of the federal public service ballooned under former Prime Minister Justin Trudeau, growing by more than 40 percent during his nine years in office.

Budget 2025 rolls back some other Trudeau-era policies, including the consumer carbon tax and a program to plant two billion trees by 2031. However, the budget reaffirms Canada’s commitment to reaching net-zero carbon emissions by 2050 and makes other climate-oriented investments, such as a critical minerals fund to support clean energy projects. Also included in the budget are clean tech tax incentives and a “productivity super-deduction” – a cluster of tax incentives that allow companies to write off their investments in buildings, machinery and equipment more quickly – that can be applied to clean tech.

Canadian Budget 2025 Highlights

Below are several contractor-addressable highlights from Canada’s 2025 federal budget; unless otherwise specified, funding streams span a five-year period:

Artificial Intelligence

• $925.6M to develop large-scale sovereign public AI infrastructure, including the development of a Sovereign Canadian Cloud (sourcing $800M from the Sovereign AI Compute Strategy).
• $25M over six years plus $4.5M ongoing to implement the Artificial Intelligence and Technology Measurement Program (TechStat), which will explore how organizations use AI and its impact on the Canadian economy, workforce and society.
• The Minister of Artificial Intelligence and Digital Innovation will engage with industry to identify new promising AI infrastructure projects and enter into Memoranda of Understanding with those projects.
• The Canada Infrastructure Bank will be enabled to invest in AI infrastructure projects.

Defence

• $20.4B for military recruitment, pay raises and health care.
• $19B to expand defence infrastructure, such as ammunition and training facilities, and for critical repairs.
• $17.9B to expand Canada’s military capabilities, including investments in logistics utility, light utility, and armored vehicles; counter-drone and long-range precision strike capabilities; and domestic ammunition production.
• $10.9B to upgrade digital infrastructure, including cyber defence solutions.
• $6.6B to launch the Defence Industrial Strategy to build up Canada’s sovereign defence capacity:
• $1B to create a Defence and Security Business Mobilization Program to help small- and medium-sized businesses contribute to Canada’s defence capabilities.
• $656.9M to develop and commercialize dual civilian-military technologies. 
• $334.3M to develop and incorporate quantum technology into Canada’s military capabilities.
• $182.6M over three years to establish a sovereign space launch program.
• $30.8M over four years plus $7.7M ongoing to set up the Defence Investment Agency, which will overhaul and streamline Canada’s defence procurement.

Infrastructure

• $51B over ten years plus $3B per year ongoing to launch a Build Communities Strong Fund to support a wide range of infrastructure projects, from community centers to parks to medical schools, across Canada.
• $2B to create the Critical Minerals Sovereign Fund and $50M to support the delivery of this fund.
• $1B to create the Arctic Infrastructure Fund, which will invest in major transportation projects, such as airports, seaports, all-season roads and highways, for dual civilian and military use.
• $213.8M to support the Major Projects Office and the Indigenous Advisory Council (sourcing $19.8M from existing departmental resources).
• $55.2M over four years plus $15.7M ongoing to support safety-related infrastructure projects at airports.
• The Government of Canada will provide Crown corporations with guidance regarding strategic financing framework for nation-building projects.
• The Canada Infrastructure Bank will be enabled to make investments in nation-building projects and have its capital envelope raised from $35B to $45B.
• Launching Build Canada Homes, a new federal agency that will drive investment and public-private cooperation to double the pace of homebuilding.

Procurement

• Implementation of the Buy Canadian Policy:
• $98.2M over five years plus $9.8M ongoing to Public Services and Procurement Canada.
• $7.7M over three years to the Treasury Board Secretariat.
• $79.9M to support the Small and Medium Business Procurement Program.

Public Safety and Border Security

• $2.7B over nine years to replace the Meteorological Service of Canada’s High-Performance Computing solution.
• $1.7B over four years plus $591.9M in 2030-31 and $500.3M ongoing for the Royal Canadian Mounted Police (RCMP) to strengthen its response to transnational organized crimes, financial crimes and money laundering, while enhancing its intelligence and national security capacity. 1,000 new RCMP personnel will be hired.
• $617.7M over five years plus $198.3M ongoing to increase the Canada Border Services Agency’s capacity to detect and intercept illicit goods.
• $55.4M over four years plus $13.4M ongoing to support a new National Public Alerting System.

Tariff Relief and Trade Diversification

• $10B to launch the Large Enterprise Tariff Loan (LETL), a financing facility designed to support otherwise successful Canadian firms negatively affected by actual or potential tariffs and countermeasures.
• $5B over seven years to create the Trade Diversification Corridors Fund, which will invest in the infrastructure that moves Canadian products to global markets.
• $5B over six years for the Strategic Response Fund, a program with flexible terms to help Canadian businesses in all sectors and regions impacted by tariffs. $1B is earmarked for the steel industry.
• $1B over three years for the Regional Tariff Response Initiative.
• $570M over three years to support training and employment assistance for workers impacted by tariffs.
• $50M over five years plus $8M ongoing to implement a new digital job search and application tool and launch an online training platform.

Implications for Contractors

For Canadian-based contractors, Budget 2025 includes several key business development measures. A new Buy Canadian Policy was unveiled, which will prioritize Canadian suppliers and products in federal spending and procurement, with a focus on supporting the steel and softwood lumber sectors. Similarly, the new Defence Industrial Strategy emphasizes building up the Canadian defence manufacturing sector and attracting more Canadian firms. The new Small and Medium Business Procurement Program will also help Canadian suppliers access more federal procurement opportunities by lowering barriers for smaller companies.

On the flip side, U.S. companies may experience some challenges accessing the Canadian market. Budget 2025 not only prioritizes Canadian firms but commits to working with “reliable trading partners,” a category that at the moment does not necessarily include the United States. The budget includes several trade diversification measures, notably with Indo-Pacific and European partners. However, no amount of trade diversification can erase the fact that Canada and the U.S. are neighbors and each other’s largest trading partners. Over 98 percent of Canadian exports are currently exempt from U.S. tariffs through the Canada-U.S.-Mexico Agreement (CUSMA), but sectors such as steel and aluminum, softwood lumber, automotive and energy are still being hammered.

All eyes will be on the upcoming mandatory review of CUSMA in 2026 as well as the U.S. Supreme Court ruling on U.S. President Donald Trump’s use of an emergency law to levy tariffs on Canada and other countries. These outcomes will have major implications for trade relations between Canada and the U.S. and what market access will look like for U.S. suppliers in Canada, and vice versa. There is a fear that if Canada relies too heavily on buying Canadian, U.S. buyers will restrict Canadian companies in retaliation.

While there is still a lot of uncertainty surrounding Canada-U.S. trade relations, what we can be certain of is that Budget 2025 makes bold investments in Canadian defence, infrastructure and innovation. Prime Minister Carney’s first budget is not revolutionary, but it sets a course for Canada to bolster its domestic industries, make generational investments and support long-term growth.