Retaliatory tariffs padding Canada’s finances as expenses rise

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Canada’s retaliatory tariffs on U.S. goods are partially offsetting weaker revenue from corporate and sales taxes as federal government expenditures continue to rise.

Revenue from customs import duties rose to $2.4 billion in April and May, according to data released Friday by Canada’s Department of Finance. That’s up from $842 million in the same period a year earlier, capturing revenue from retaliatory tariffs that Prime Minister Mark Carney has levied on imports of some US goods.

The proceeds from the tariffs are helping to offset a decrease in corporate income tax and government sales tax revenue, which are down 15% and 17% respectively from a year earlier. That decrease is likely due to slowing economic activity caused by trade uncertainty. Analysts in a Bloomberg survey say Canada’s economy is expected to contract at a 0.4% annualized rate in the second quarter.

Carney’s election campaign platform put expected tariff revenues at about $20 billion this fiscal year, and the prime minister has pledged to redistribute any proceeds to sectors and workers hit hardest by US President Donald Trump’s barrage of trade levies on aluminum, steel and autos.

As the two countries eye a potential trade agreement on August 1, questions are mounting as to whether Carney will proceed with more reciprocal levies should a deal with Trump fail to materialize — so far he’s held off on a dollar-for-dollar response, though some of the country’s provincial leaders have advocated for more aggressive action.

Combined, total federal government revenue in the two months was little changed relative to the same period last fiscal year, holding at around $79.6 billion.

Federal government program expenses are rising, the data show, and are up 4% from the previous fiscal year, totaling $75.8 billion. Employment insurance benefits are 9.1% higher, while operating expenses rose 7.3% to $18.6 billion. Debt charges rose 3.8% to $9.6 billion.

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Earlier this month, Finance Minister Francois-Philippe Champagne tasked cabinet ministers with cutting expenditures in the government and public service. Some departments have warned their employees that the cost reductions could lead to layoffs.

Economists and the country’s Parliamentary Budget Officer have warned that Carney’s infrastructure and defense expenditures are likely to push the federal deficit much deeper this fiscal year. The C.D. Howe Institute expects the fiscal shortfall to total $92.2 billion. In December, the Liberal government had forecast a deficit of $42.2 billion.

Carney has pushed the release of the country’s federal budget to October — it’s typically delivered in the first half of the year. The finance department has issued a debt management strategy, with gross bond and bill issuance set to exceed the COVID-19 pandemic era.

— With assistance from Mario Baker Ramirez.