Prime Minister Mark Carney makes an announcement on the Canada Strong Fund, the country's first sovereign wealth fund, in Ottawa on Monday.Justin Tang/The Canadian Press
Christopher Collins is a fellow with the Polycrisis program at the Cascade Institute at Royal Roads University.
When a government running a $67-billion deficit creates a sovereign wealth fund, it raises an important question about opportunity costs. Will the benefits from the fund exceed what the country gives up by not using that money on other priorities? This is a conversation worth having about the new Canada Strong Fund.
The government’s spring economic update set out the architecture for this new fund. Ottawa will provide $25-billion over three years to seed a new Crown corporation that will invest alongside private capital in “strategic Canadian projects and companies.” This fund will have a mandate to deliver “market-rate returns,” and eventually Canadians will be able to buy in directly.
The strategic logic behind the fund is sound. According to a report by Royal Bank of Canada, Canada needs nearly $2-trillion in investment to finance its strategic industries. And in the current age of geoeconomics, a well-designed instrument can help Canada protect our core economic interests in a volatile world.
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The fiscal logic, however, deserves discussion.
Money is fungible. In a country running structural deficits, with a fiscal anchor committing the government to a declining debt-to-GDP ratio, this new fund has an opportunity cost. Every dollar we allocate to the fund is a dollar not used to reduce the deficit.
The government’s own framing implicitly acknowledges this fact. The spring update notes that capital investments will account for 100 per cent of the federal deficit by 2028-29, meaning Ottawa has already chosen to treat new borrowing as investment financing. That is a coherent policy posture, but it does not exempt the Canada Strong Fund from the same question as any other use of borrowed dollars: Will the returns justify the alternative?
Consider the arithmetic. The Government of Canada borrows at yields around 3.3 to 3.8 per cent on longer-term bonds. A fund earning only 6 or 7 per cent – a common long-run return for a sovereign wealth fund – generates a spread that, after costs, the friction of actually deploying capital at scale and any political or policy-driven drag on decision-making, is modest in fiscal terms.
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Households face a smaller version of this choice all the time. A homeowner with a mortgage who buys stocks is betting that those stocks will outperform the mortgage rate. If the bet pays, they build wealth. If it doesn’t, they end up with both the loss on the stocks and a mortgage they could have shrunk. The Canada Strong Fund is that trade, made on behalf of all Canadians.
The spring update also refers to “asset optimization” to grow the fund. Essentially, this is a reallocation of the government’s portfolio: selling some assets (such as airports, which earn rent) to buy others (equity stakes in strategic projects). Whether this is a good trade depends on how the new assets perform, both financially and strategically.
Finally, there is the “additionality” question: If the fund delivers market-rate returns while co-investing with sophisticated private players, it must explain why public capital is necessary in deals that private investors are already willing to price and finance.
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Of course, markets are not perfect. They can misprice projects, undervalue national and economic security considerations, or shy away because of policy or regulatory uncertainty. A well-designed public fund can address these market failures by providing patient capital or helping to de-risk strategic initiatives. To assuage concerns the fund is merely subsidizing projects that might otherwise struggle to attract capital on purely commercial terms, the government must be clear about what unique value public capital adds.
Alternatively, the fund could accept lower returns to achieve its nation-building and economic security objectives. There is nothing wrong with this approach: Globally, many sovereign wealth funds take lower returns to advance strategic objectives. This is one of the reasons why the average 10-year return for these funds, 6.3 per cent, is lower than the 7.9-per-cent return of a classic 60/40 portfolio of stocks and bonds; continuing discussions about an American sovereign wealth fund are explicit about this trade-off. But if the Canada Strong Fund adopts this approach, the “fully commercial” framing will need to be revisited.
The Canada Strong Fund is a serious initiative that deserves serious engagement. But when running a deficit, every allocation to the fund means we are borrowing to invest. This is a defensible choice when the investment case and strategic benefits are strong, the institution is well-built, and the public understands the trade-off. The consultations ahead are the moment to make these explicit. Done well, the fund can become an instrument that justifies the trust placed in it.