Carney orders deep cuts ahead of first federal budget amid soaring defense budget

Canadian cabinet ministers have been directed to find billions of dollars in savings over the next three years as Prime Minister Mark Carney’s government prepares for its first federal budget this fall.

Finance Minister François-Philippe Champagne sent letters to all cabinet ministers on Monday(July 7) instructing them to identify "ambitious savings proposals" by the end of summer. The proposals are part of a “comprehensive expenditure review” aimed at reducing day-to-day program spending and reallocating funds to priority investments.

According to the directive, ministers must cut 7.5 percent of program spending in fiscal year 2026–27, followed by 10 percent in 2027–28 and 15 percent in 2028–29. Program spending includes federal departmental operations but excludes transfers to provinces, debt payments, and direct individual benefits such as pensions.


“This review will ensure that new investments are anchored by a new fiscal plan that spends less on government operations,” Champagne wrote in the letter, a copy of which was confirmed by his communications office.

The cuts come as Canada ramps up defense spending, following a pledge at last month’s NATO summit to raise military expenditures to 5 percent of GDP, approximately $150 billion annually within a decade. The move significantly exceeds the Liberal Party's original campaign projections and has led analysts to warn that the country’s deficit could grow larger than expected.

Champagne's second letter to ministers outlined new rules for requesting budget funds. Any new spending must align with one of seven priority areas identified in the government’s mandate letter and be funded, where possible, through internal reallocations.

The review is not intended as a job-cutting exercise, according to Champagne’s office, though public service reductions through attrition are possible. The federal workforce has grown from 257,000 employees in 2015 to nearly 358,000 in 2025.

Transport and Internal Trade Minister Chrystia Freeland told CBC that critical social programs such as childcare, dental care, and transfers to provinces will not be impacted by the cuts.

The government is also exploring the use of artificial intelligence to improve service efficiency, potentially reshaping the public service in the long term.

The 2025 federal budget is expected to be tabled shortly after Parliament resumes in September.