(MENAFN- The Conversation) Canada's 2025 federal budget, and those that follow in the coming years, may prove to be the most important since the beginning of the Second World War.

Canada's longstanding, co-dependent economic relationship with the United States has abruptly and involuntarily ended following U.S. President Donald Trump's imposition of tariffs and threats of annexation.

These actions have forced Canada to rethink its economic future and reduce its dependence on the U.S. Canada can no longer assume that 75 per cent of its merchandise exports will go to the U.S. in key sectors like energy and manufacturing, which together accounted for 19 per cent of Canada's GDP in 2023.

No other country accounts for more than five per cent of Canadian exports, and about 45 per cent of foreign direct investment still originates from the U.S. Canada is in an economic war, with national security at risk and thousands of industrial jobs on the line in the immediate future.

How Ottawa responds through an alternative comprehensive economic strategy, beginning with the 2025 federal budget, will determine whether Canada can navigate this new geopolitical and economic reality.

Lessons from history

Canada's history provides guidance on how to deal with a crisis of this scale. Given the isolationism south of the border, the only serious option for Canada is a national industrial policy similar to the one Canada (and the U.S.) had during the Second World War. That policy transformed Canada into a dynamic, advanced industrialized economy that paid dividends for decades

In 1933, the Canadian unemployment rate was 30 per cent, while 20 per cent of the population became dependent on government welfare for survival. The unemployment rate remained above 12 per cent until the start of the Second World War.

Between 1939 and 1945, as Canada restructured its economy for the war effort, gross national product more than doubled, the unemployment rate fell to one per cent and wages grew nearly 70 per cent.

A portrait of William Lyon Mackenzie King in 1942. (Dutch National Archives)

This transformation was driven by William Lyon Mackenzie King's government, which took control of the economy in the form of a publicly funded and a directed supply-side industrial policy. Resources and labour were channelled to produce for the war effort and the core needs of the community.

Twenty-eight Crown corporations were established, factories multiplied, corporate taxes were doubled and excess profits were taxed, generating revenue for these investments.

Canada's 'Golden Age'

The decades that followed the Second World War from the 1940s through to the early 1970s is often referred to as the Canadian“Golden Age.”

It was a time of unprecedented prosperity for Canada, characterized by rapid and stable economic growth, rising living standards, improved health outcomes, education-based upward mobility and Canada's most income-equal period.

The extraordinary debt-to-income ratio that existed at the end of the Second World War (109 per cent) shrank to a fraction (20 per cent) as the Canadian gross domestic product expanded, driven by progressive government supply-side policy.

Public programs were not cut during this period, but expanded as spending for health care, education and welfare grew. The debt rose again as economic growth slowed after Canadian corporate tax rates were reduced by more than 50 per cent between 1960 and 2020, while corporate prerogatives replaced industrial strategy.

The Carney promise

Only weeks after the April 28 federal election, the newly re-minted finance minister, Françoise-Philippe Champagne, indicated that wartime industrial policies were serving as at least a reference point for the Liberal government.

“When I look at 2025, it reminds me of 1945, where C.D. Howe kind of reinvented modern industrial Canada. It's one of these moments in history where we're really rebuilding the nation,” he said.

Finance Minister Francois-Philippe Champagne during a news conference before delivering the federal budget in Ottawa, Nov. 4, 2025. THE CANADIAN PRESS/Adrian Wyld

Champagne was referring to Canada's wartime industry minister, C.D. Howe, who implemented the War Measures Act in 1939 and the War Appropriation Act to rapidly industrialize the Canadian economy. In Howe's words:“If private industry cannot or will not do the job, then the state must step in. The need is too great to wait.”

Today, Canada's current private for-profit sector is a notorious laggard when it comes to research, development and investment compared to its G20 and OECD counterparts. Canadian companies are currently holding $727 billion in cash deposits, a situation once called out by Prime Minister Mark Carney as“dead money.”

The collapse of Canada's corporate-led free trade and deep-integration model with the U.S. has presented a window of opportunity to influence a state-led, national industrial policy.

Does Carney's budget come to the rescue?

The 2025 budget includes several important investment plans, including the new Build Canada Homes agency, science research and development, clean technology manufacturing, transit and health-care infrastructure, and digital transformation programs.

However, the Canada Strong budget remains too small in scale and relies far too much on indirect incentives for private-sector investment. These measures may or may not materialize, given the tariff threats and profit opportunities south of the border.

The budget's claims of generational increases in investment - much of which was announced before budget day - appear to be more optics than anything meaningful.

The only significant new corporate tax measure, the“productivity super-deduction,” is tied directly to investment spending in targeted industries, and is a model supported by many progressive economists.

Canada needs to meet the moment

It's worth remembering that the Mackenzie King government raised corporate taxes to finance direct investment. The higher tax rate corporations paid during the Golden Age were used to fund targeted investments and the expansion of Canada's care economy, which in turn contributed not only to the welfare of the Canadian population, but also productivity growth in the economy.

By contrast, the 2025 budget provides modest increases to total public investment, but does not meet the challenge of the moment, despite the exaggerated narrative of a generational investment in Canada's future.

A greater scale of investment and conditionality imposed on the private sector would make Canada a leader in green energy, sustainable agriculture, green transportation, biotechnology and a resilient and digitized, high valuated economy. Canada is now embroiled in a full scale economic war and needs to respond accordingly.

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