PBO flags a $72B deficit, raising doubts about Ottawa's fiscal path and the mortgage rate outlook
Canada's fiscal position may be significantly weaker than Ottawa has acknowledged. For mortgage professionals advising clients through a year already marked by renewal pressure and rate uncertainty, the latest assessment from the Parliamentary Budget Office (PBO) deserves close attention.
Parliamentary Budget Officer Annette Ryan on Thursday released the June Economic and Fiscal Outlook, projecting the federal deficit for the 2025-26 fiscal year at approximately $72 billion.
That figure sits roughly $5.1 billion above Finance Minister François-Philippe Champagne's April spring update estimate of $66.9 billion.
Across the full forecast period, the PBO expects annual deficits to run $4.6 billion higher on average than Ottawa projected.
The numbers behind the warning
The longer-term trajectory is equally troubling. The PBO projects federal debt will climb to $1.66 trillion by 2030-31, above Ottawa's estimate of $1.629 trillion, with the debt-to-GDP ratio rising to 42.5%, up from 40.7% in 2024-25.
That upward drift in the debt ratio signals a structural loosening of fiscal discipline that the Bank of Canada monitors closely: a government running persistent large deficits can stoke demand-side inflation pressures that monetary policy then has to offset, either through higher rates or, at minimum, through greater caution about cutting.
The PBO attributes the shortfall to lower personal income tax revenues and higher program expenditures than the government assumed in April.
Critically, the office's projections assume that current US tariffs on Canadian goods remain in place throughout the forecast window and that any new trade deal would offer no greater economic benefit than today's arrangement.
That combination – ongoing supply-side cost pressure from tariffs layered over fiscal stimulus from deficit spending – creates a stagflationary mix that would leave the Bank of Canada in a genuinely difficult position.
Cutting rates to support a slowing economy risks stoking inflation; holding or raising them risks deepening the downturn.
The PBO also highlighted a recent International Monetary Fund recommendation that Canada reinstate a debt-to-GDP ratio as its primary fiscal anchor, arguing it would strengthen discipline, transparency and credibility.
If Canada's fiscal credibility comes into question internationally, the consequence is not abstract. Upward pressure on government borrowing costs feeds directly through to bond yields and, ultimately, to fixed mortgage rates, regardless of what the Bank of Canada does with its policy rate.
What it means for the mortgage market
The Bank of Canada has held its overnight rate at 2.25% since October 2025, a pause that has already tested variable-rate borrowers expecting further relief. If the PBO's deficit trajectory materialises, the rate-cut cycle many in the industry were counting on may prove shallower than anticipated.
Five-year Government of Canada bond yields, the key driver of fixed mortgage pricing, are sensitive to fiscal credibility and government borrowing costs. Should those yields drift higher as Canada's debt outlook worsens, fixed-rate pressures could build regardless of where the policy rate sits.
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