Minister Mark Carney has used much of Canada’s fiscal room to begin restructuring the economy in the face of a trade war. Now the question is how much leeway he has left.

The federal government has run large deficits to boost investment, defense, housing and infrastructure. Ongoing tariff disputes with the US have helped him frame that spending as necessary to preserve Canada’s economic sovereignty and national security.

But that argument may be harder to sustain if the trade war eases — if Democrats decide to use their control of Congress to wrest tariff powers back from President Donald Trump, or if he opts to back down on his aggressive threats toward Canada, as some observers anticipate. That would be positive for the Canadian economy, but it would remove one of Carney’s main justifications for borrowing so much money.

For many economists, the country’s weak investment flows and productivity issues are reason enough to use the government’s spending power. Those problems existed before Trump’s second term, after all.

“Global developments may overshadow the budget’s initial reception, but delivery will determine its lasting impact. Fiscal activism has been well signaled and, so far, well received,” Rebekah Young, an economist with Bank of Nova Scotia, wrote in a report to investors. “Canada now needs to lock in that confidence by turning commitments into productive capacity and investable opportunities.”Bank of Canada Governor Tiff Macklem has made similar comments about shifting government spending toward investment.

In September, Carney announced one of the biggest fiscal decisions of his tenure as prime minister. He created a tax write-off that aims to boost investment by giving companies larger incentives to make capital spending outlays sooner. Dubbed the “productivity mega-deduction,” it will cost an estimated C$36 billion ($25.8 billion) over five years and is among the biggest changes to Canadian corporate tax policy in decades.

The government is also spending big elsewhere, doling out support for tariff-affected sectors while keeping in place many initiatives of former Prime Minister Justin Trudeau, including daycare and dental programs. Carney has temporarily dropped federal excise taxes on gasoline and diesel, trimmed income taxes and topped up a federal rebate to offset higher grocery costs.

“We’re getting to the point where there’s so little fiscal room left that the federal government’s going to have to stop saying yes to everything and start saying no to some things,” said Randall Bartlett, deputy chief economist with Desjardins.

Bartlett expects a deficit of about C$60 billion this fiscal year, roughly in line with a government watchdog’s estimate, before it widens to between C$65 billion and C$70 billion annually over the next few years.

It will take time for Carney’s longer bets to pay off. In the meantime, Finance Minister François-Philippe Champagne is trying to cut costs by reducing the size of the public service, but the process isn’t done.

The government has also moved the goalposts. It’s no longer focused on showing a declining debt-to-gross domestic product ratio. Instead, its guardrails are to balance the operating budget — which excludes spending on investment — and to reduce the deficit-to-GDP ratio instead. Canada’s parliamentary budget officer says the latter won’t be met under current plans.

Canada’s biggest export is energy, and government revenue has risen with higher oil prices. But the budget watchdog says that windfall has already been spent, primarily on the corporate tax deduction.

That doesn’t seem to be the electorate’s first choice for the money. In a Nanos Research poll conducted for Bloomberg News, 34% of respondents said the government should use higher oil revenue to reduce the federal deficit, while 32% wanted it invested in social programs. Just 4% answered with the tax write-off.

The poll was conducted from Oct. 31 to Nov. 2, and asked more than 1,000 respondents to give their top two priorities. It carries a margin of error of around 3%, 19 times out of 20.

Interest burdens are rising, too. Private-sector forecasters submitted their estimates over a month ago. At the time, they expected a lower path for short-term interest rates than now appears likely.

Last week, after hiking borrowing costs for the first time in three years, Macklem called the central bank’s investment outlook “conservative.”Speaking to lawmakers this week, he said the government’s recent spending isn’t yet contributing to inflation.

The key question to focus on, Macklem said, is whether budget deficits are being used on measures to improve the country’s long-term economic growth.

Government of Canada 10-year bond yields were about 3.7% on Wednesday. That’s down from a recent peak but still close to the highest level since 2024, and almost 60 basis points higher than at the beginning of March.

Bartlett estimates that if longer-term rates were permanently 50 basis points higher than his forecast, federal debt as a share of the economy would stabilize but not come down. A 100-basis-point increase would put the debt-to-GDP ratio on an unsustainable path, he added.

Nonetheless, Canada is still in a better fiscal position than most of its peers, Bartlett argues.

“I think Canada remains one of the cleanest fiscal dirty shirts in the laundry basket,” he said.